Business interruption insurance cost: how the sum insured is set
Key takeaways
- The premium is the sum insured multiplied by a rate. Both parts move it.
- The sum insured is insurable gross profit, not turnover or net profit, scaled for the indemnity period.
- The rate tracks the property rate: construction, fire protection, occupancy and claims history.
- An understated gross profit cuts every claim in proportion through average.
How the sum insured is set
Insurable gross profit differs from accounting gross profit. It is turnover, adjusted for stock movement, less only the costs that stop when trading stops. Those costs are called uninsured or specified working expenses. Purchases of raw materials and freight outward are typical examples. Rent, salaries, loan interest and depreciation continue during a shutdown, so they stay inside insurable gross profit.
The calculation runs in 4 steps:
- Take the last financial year's turnover.
- Deduct specified working expenses, adjusting purchases for opening and closing stock.
- Project the figure forward to the end of the policy year and through the indemnity period, allowing for growth.
- Multiply by the indemnity period in months divided by 12.
| Driver | Effect on the sum insured |
|---|---|
| Turnover | Higher turnover raises it |
| Specified working expenses | More expenses treated as uninsured lowers it |
| Expected growth | Projecting growth raises it |
| Indemnity period | A longer period multiplies it |
| Additional cover, such as increased cost of working | Adds a separate limit |
The choice of indemnity period is the largest single decision. The existing article on the business interruption indemnity period sets out how to size it.
What sets the premium
The rate depends on the same factors as the property policy, plus factors specific to recovery time.
Building construction and occupancy
Non-combustible buildings with fire separation carry lower rates. Food processing, plastics and woodworking carry higher ones.
Fire protection
Sprinklers, detection and maintained hose reels reduce the chance a fire spreads. Insurers rate their presence and service records.
Indemnity period
Longer periods raise the sum insured directly. Some insurers apply a lower rate per month for longer periods, because later months carry less of the risk.
Single site or multiple sites
A business with one site loses everything in one fire. A business with production spread across sites can shift work, which shortens the interruption.
Supplier and customer dependency
Extensions covering suppliers' or customers' premises add premium. The more concentrated the dependency, the higher the charge.
Time excess
A time excess removes the first hours or days of loss. A longer time excess lowers the premium.
Claims history and market conditions
Singapore property insurance claims rose 60.5% in 2025, while property premiums grew 4.1% to S$864.1 million. The General Insurance Association attributes the rise to more fire incidents and several large losses. Business interruption rates follow the property market.
Underinsurance and average on business interruption
Most gross profit wordings carry an average provision. The insurer compares the sum insured with the gross profit the business would have earned in the year following the damage. If the sum insured is lower, the claim is reduced in proportion.
The principle is statutory in marine insurance. Section 81 of the Marine Insurance Act 1906 states that an assured insured below value is its own insurer for the balance. Property and business interruption wordings carry the same rule by contract.
Three practices reduce the risk:
- Base the sum insured on projected gross profit, not last year's accounts.
- Recalculate when the business wins or loses a major contract mid-year.
- Ask whether the insurer offers a declaration-linked basis, where the business declares actual gross profit after the year and the premium is adjusted.
Worked examples
Example 1: food manufacturer, single factory. Turnover S$20 million, insurable gross profit S$6 million a year. The production line uses imported machinery with long lead times, so the indemnity period is 24 months. The sum insured is S$12 million. Food processing occupancy and a single site move its rate upward. Sprinklers and a documented maintenance programme move it down.
Example 2: trading company, leased strata unit. Turnover S$8 million, insurable gross profit S$1.5 million. Stock is held at a third-party warehouse, and the office can relocate within weeks. A 12-month indemnity period gives a sum insured of S$1.5 million. Under the Building Maintenance and Strata Management Act, the management corporation insures the building. The tenant's business interruption policy responds to its own loss of gross profit after insured damage. A customers' or suppliers' extension covering the warehouse is the main addition that moves its price.
Example 3: clinic group, 3 locations. Insurable gross profit S$4 million across 3 sites. Fit-out and medical equipment take months to replace, but patients can be redirected to the other 2 clinics. An 18-month indemnity period gives a sum insured of S$6 million. Multiple sites reduce the expected length of a loss. Increased cost of working, to fund temporary premises and extra staff hours, adds a separate limit.
These examples show how the sum insured is built. They do not indicate a premium.
Figures checked 14 November 2026.
Frequently asked questions
Is the BI premium a percentage of gross profit?
The premium is a rate applied to the gross profit sum insured. The rate is set by the insurer from the property risk, the indemnity period and the extensions chosen. It is not a fixed market percentage.
Why does a 24-month indemnity period cost more than 12?
The sum insured doubles, because it covers 2 years of gross profit. The rate per month may be lower for the longer period, so the premium need not double. The business pays for cover it will use only in a severe loss.
What is increased cost of working?
It pays extra costs incurred to keep trading after insured damage, such as renting temporary premises or paying overtime. The cost must reduce the loss of gross profit. Most policies include it within the gross profit sum insured, with an option to buy an additional limit.
Does BI pay if my supplier's premises burn, not mine?
Only if the policy includes a suppliers' premises extension. The standard cover responds to damage at the insured's own premises. The extension names the suppliers or sets a limit for unnamed ones.
Sources
General information only, not advice on any particular policy. Cover depends on the policy wording and the insurer's terms.