Business interruption: how to estimate a realistic compensation period for your SME

Introduction

Business interruption: how to estimate a realistic compensation period for your SME

The duration of business interruption insurance coverage is a key factor in protecting your company against the financial consequences of a disaster that disrupts your operations. Too short, and you risk losing money; too long, and your premium will increase without a corresponding improvement in protection. By the end of this article, you will be able to determine a rational coverage period , document it, and monitor it over time , with concrete benchmarks for your SME in French-speaking Switzerland.

What is the compensation period in business interruption insurance?

Definition

The compensation period (often called the indemnity period or Maximum Indemnity Period – MIP ) is the period during which the insurer will pay compensation for loss of revenue and fixed costs after a covered loss, from the event until the return to a normal level of activity or until the expiry of the period chosen in the contract.

What this period covers

During this phase, the insurance may cover:

• loss of revenue or gross margin;

• fixed costs continue despite the shutdown (salaries, rents, etc.);

• the additional costs incurred to limit the duration of the interruption.

Why choosing the right duration is essential for an SME

Risk of underinsurance

If the chosen duration is too short, a company may not be reimbursed for persistent losses once the period has expired, despite a fragile recovery situation.

Impact on the premium

A longer duration generally increases the insurance premium because the insurer commits to a longer payment period.

Step-by-step method for estimating a realistic duration

1) Analyze your disaster scenarios

Map the critical events that could cause a lasting disruption to your business: major breakdown, fire, flood, supply chain disruption. Define a realistic recovery plan for each scenario: shutdown, partial resumption, return to full capacity.

2) Quantify your points of dependence

Identify your key dependencies (strategic suppliers, infrastructure, concentrated customers): the more fragile they are, the longer the recovery may take . This prolongs the potential period of business interruption.

3) Measure your fixed and variable costs

Analyze your monthly fixed costs (salaries, rent, debts) and your usual revenue fluctuations . This will help you anticipate the financial recovery threshold .

4) Define the pragmatic recovery horizon

Based on the previous steps, establish an estimate of the recovery period for each scenario. Compare it to the standard durations offered in insurance (often 12, 18, 24, 36 months , sometimes more depending on the insurers and the needs): this is what is called the Maximum Indemnity Period .

5) Choosing with arbitration

Decide on a realistic duration based on:

• your most likely scenarios ;

• your financial capacity to withstand a period without income ;

• the additional cost of the premium for a longer period.

This choice must be documented and revisable .

Mini case study: manufacturing plant

An industrial SME anticipates that a major interruption (critical machine failure) could take up to 18–24 months to restore a complete production line (repairs, approvals, testing). Based on this, management decides to target a 24-month compensation period, documented by a projected recovery plan, rather than the standard 12-month option, in order to reduce the risk of underinsurance.

Mini case study: seasonal retail

A highly seasonal business recognizes that its off-season represents almost six months a year and that a loss during the low season can prolong the return to normal beyond a single quarter. By modeling this situation, the team decides on an 18-month compensation period , including a full season, to avoid an incomplete financial shortfall.

Guidelines and checklist for estimating the duration of compensation

| Step | Question to be solved | Data to be documented |

| Claims Analysis | What Types of Protracted Claims? | List of Major Risks & Estimated Recovery Time |

| Critical Dependencies | Who are your key suppliers? | Supplier mapping & impact scenarios |

| Operational recovery | Minimum time to return to 80–100%? | Recovery plan by scenario |

| Financial capacity | How many months of available cash? | Fixed cost & gross margin table |

| Cost arbitration | What is the premium surcharge for 12 vs 24 vs 36 months? | Insurer quotes by duration |

Common mistakes and how to avoid them

Underestimating the complexity of the recovery

Do not rely solely on the assumption of quick repairs: factor in regulatory or logistical delays .

Forget about external dependencies

Failing to take into account strategic suppliers or customers lengthens the actual recovery time.

Choose a default duration

Standard durations (12 months) may not be suitable for your situation.

Questions to ask your insurer/broker

1. What is the maximum compensation period offered in our contracts?

2. How does the duration affect the amount of the premium ?

3. Which loss scenarios are explicitly covered within the compensation period?

4. Are there any conditions for resuming activity that trigger compensation?

5. Can the current contract period be extended ?

6. What exclusions affect the actual duration of compensation?

7. How does the insurer value the lost gross margin ?

8. What documentary evidence is required to validate a prolonged shutdown period?

9. Are there any advance payments of compensation available before the final expert assessment?

10. How is seasonality taken into account in the compensation period?

Conclusion

Estimating a realistic business interruption indemnity period is not simply a matter of choosing a standard, but a structured decision based on scenarios, costs, your dependencies, and your financial capacity. A well-documented period not only protects you against underinsurance, but also provides you with a management tool for business continuity. The next step is to regularly review your analysis and incorporate these benchmarks into your discussions with your insurer or broker, in line with your risk management strategy.