Gross Profit Basis

Why it matters for underwriting

The declared gross profit margin fixes exactly what a business interruption policy is designed to indemnify, and a mismatch between the declared margin and the insured’s actual cost and revenue structure is one of the most common sources of underinsurance in BI claims. Underwriters need the margin to judge whether the sum insured genuinely reflects the exposure, to size the maximum probable indemnity relative to turnover, and to compare pricing consistently across accounts that operate on different profitability structures within the same industry.

Capturing the attribute and evidence

Proposal forms ask for the gross profit margin over the last one to three financial years and how the insured defines gross profit in its own accounting – typically turnover less uninsured working expenses, or net profit plus standing charges, following the standard definitions used in most BI wordings. Underwriters corroborate the declared figure against audited financial statements, management accounts and the insured’s own sum insured calculation worksheet, checking that historic trading results and any forecast growth over the indemnity period have been properly reflected.

Effect on coverage, premium and conditions

A clearly documented, plausible margin that is regularly updated against current accounts supports standard terms and a fair, comparable premium rate. An outdated, unsupported or implausibly high margin increases the risk of underinsurance and can trigger average/proportionate-condition clauses at claim stage, a loading to reflect calculation uncertainty, or a condition requiring an independent accountant’s certificate before renewal.

Mitigation measures

Insurers and brokers typically recommend an annual review of the declared margin against the latest audited accounts, use of a declaration-linked or index-linked basis to avoid drift between renewals, and periodic involvement of the insured’s accountant or a specialist loss-of-profits adviser to confirm the calculation basis remains appropriate as the business evolves.