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19 May 2020

Aligning insurance in the Covid-19 environment

As we move down alert levels back to a sense of normality, the economic impact of Covid-19 continues to be significant for many New Zealand businesses. 

One focus for businesses will be streamlining operations by controlling expenses. One such expense is usually insurance. In unique and challenging times it’s important to explore different approaches to managing risk with the goal of reducing cost whilst maintaining essential insurance cover.  

At the core of an effective insurance programme is to enable a business to financially survive any insurable event. This is Crombie Lockwood’s mission statement and our brokers first gain insight from key business stakeholders to tease out the events that might threaten their business.

This process is called risk profiling and once the risk is identified, insurable and uninsurable risks are quantified, then how to best manage them is considered. This assessment should be done against the backdrop of the financial position of the business, risk appetite, geographic spread, bank covenants and contractual requirements.

Options to consider are listed below, with pros and cons for each.

1. First loss limits 

This provides cover to a pre-agreed value or loss limit in the event of a claim, rather than insuring the total value of all property at risk. If a property portfolio has a geographic spread then a limit can be applied to the Probable Maximum Loss for the location/region with the largest amount of consolidated assets. Establishing an adequate loss limit can be done by consolidating all limits in one location/region or through undertaking loss modelling. Allowances will also need to be made for increased limits for:

  • Business interruption 
  • Post loss inflation
  • Multiple events occurring in the policy year 


  • The cover is attractive to more insurers thereby increasing competition and potentially reducing premiums.


  • Lenders often prefer ‘full value’ insurance but this can often be overcome.

2. Increased deductibles

A ’Risk Retention Analysis’ can be used to establish the amount of risk an organisation can comfortably retain in any one financial year without serious disturbance to their balance sheet.


  • Reduced insurance premiums
  • Makes use of the financial strength of an organisation
  • Leads to less reliance on insurance solutions thus less vulnerability to market cycles


  • If there is high claims activity, payment of excesses may increase the total cost of risk management nullifying any upfront cost savings.

3. Management of Fire Service Levy (FSL)

Fire specific limits – structuring a policy to have a lower fire only limit means FSL is only payable on fire loss limit.

Indemnity valuations – there are a number of items that are exempt from FSL. Valuations can be accessed from quantity surveyors to strip out exempt items, particularly for construction policies.  


  • Reduced costs


  • Potentially restricts available cover if not carefully considered

4. Replacement value vs indemnity value

Where the intention is not to replace an asset then it can be insured for its indemnity value.


  • Reduced insurance premiums


  • Indemnification in the event of loss may be insufficient to fully reinstate the asset so careful thought needs to be given when indemnity value is selected.
  • Lenders may not accept insurance for indemnity value 

5. Business interruption

It’s critical that the correct sum insured is selected when arranging cover. For many businesses, income streams may have changed since Covid-19 and there’s no need to pay for insurance based on income that no longer exists. Further premium savings may be gained when considering the length of the indemnity period available to each section of a business interruption policy and possibly splitting these periods.


  • Reduced insurance premiums


  •         Care needs to be taken maintain adequate cover

If you have questions about your insurance cover and options for your business, please contact a broker.

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