Scribd Logo
Upload

Welcome to Scribd!

  • 326 views

    LOP Calculation

    Uploaded by

    pradeeprajendran1988
    This document outlines the 5 step process for calculating a claim for loss of profit under an insurance policy: 1. Calculate the gross profit ratio using prior year net profit and insured standing charges. 2. Calculate any shortage in sales during the disruption period by comparing to prior year sales trends. 3. Determine the loss of profit by applying the gross profit ratio to the shortage in sales. 4. Calculate the total claim amount by adding increased costs of working and subtracting any savings in standing charges from the loss of profit. 5. Apply an average clause to determine the final claim amount if the policy is subject to average insurance.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd

    LOP Calculation

    Uploaded by

    pradeeprajendran1988
    326 views5 pages
    This document outlines the 5 step process for calculating a claim for loss of profit under an insurance policy: 1. Calculate the gross profit ratio using prior year net profit and insured standing charges. 2. Calculate any shortage in sales during the disruption period by comparing to prior year sales trends. 3. Determine the loss of profit by applying the gross profit ratio to the shortage in sales. 4. Calculate the total claim amount by adding increased costs of working and subtracting any savings in standing charges from the loss of profit. 5. Apply an average clause to determine the final claim amount if the policy is subject to average insurance.

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document outlines the 5 step process for calculating a claim for loss of profit under an insurance policy: 1. Calculate the gross profit ratio using prior year net profit and insured standing charges. 2. Calculate any shortage in sales during the disruption period by comparing to prior year sales trends. 3. Determine the loss of profit by applying the gross profit ratio to the shortage in sales. 4. Calculate the total claim amount by adding increased costs of working and subtracting any savings in standing charges from the loss of profit. 5. Apply an average clause to determine the final claim amount if the policy is subject to average insurance.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    326 views5 pages

    LOP Calculation

    Uploaded by

    pradeeprajendran1988
    This document outlines the 5 step process for calculating a claim for loss of profit under an insurance policy: 1. Calculate the gross profit ratio using prior year net profit and insured standing charges. 2. Calculate any shortage in sales during the disruption period by comparing to prior year sales trends. 3. Determine the loss of profit by applying the gross profit ratio to the shortage in sales. 4. Calculate the total claim amount by adding increased costs of working and subtracting any savings in standing charges from the loss of profit. 5. Apply an average clause to determine the final claim amount if the policy is subject to average insurance.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 5

    Ist step Calculate gross profit ratio:As the starting point of this procedure you have to determine the

    value of gross profit because loss of profit is easy to calculate by multiplying Gross profit with short of sale in that disturbance period . Net profit (+) Insured standing Charges of last year ------------------------------------Gross profit of last year ------------------------------------Gross profit ratio = Gross profit / sale of last year X 100 xxxx xxxx xxxx

    2nd step Calculate shortage in sale due to loss of fire Actual sale of same period of loss xxxx

    Add any increase in the end of sale (+) xxxx -----------------------------------------------xxxxx Less actual sale in dislocation period (-) xxxx -------------------------------------------------Shortage of sale in dislocation period xxxx

    ==================================

    3rd step

    Calculation of loss of profit

    Loss of profit = shortage of sale X G.P. rate / 100

    4th Step

    Total amount for claim of loss of profit

    Loss of gross profit Add increase in cost of working (+) --------------------------------------------xxxx Less saving in standing charges --------------------------------------------Amount of claim xxxx

    xxxx xxxx

    ===================================

    5th step

    Apply average clause

    Amount of claim = policy value / amount to be insured

    Important notes

    1. We will use of only less rate from following rates for calculating correct amount of loss pf profit Net profit + Insured standing charges of last accounting year -------------------------------------------------------------------------- X 100 Sale for the last accounting year

    Or Policy value / sale of 12 months immediately proceeding fire as adjusted for trend .

    2. The Indemnity period or dislocation period which will small, that period will be fixed for calculation of claim . 3. We will calculate loss of sale on the base of future trend of sale. 4. Insured standing charges means all expenses which are mentioned in the policy of loss of profit. Businessman wants to get these expenses in the case of mishappening. We can make its list

    Traveling expenses Rent, rate and taxes not related with profit of business Advertising Interest on debentures and loans. Auditors fee Salaries of permanent staff Directors fee Salaries of permanent staff Wages of skilled workers All not described expenses must not more than 5% of described standing expenses .

    Explanation with example

    From the following information, find out the claim under loss of profit policy :2007 net profit for the year $ 10000 2007- Standing charges insured $ 6000 $ sales for 2007 $ 160000 Date of fire 1.1.2008 Period of dislocation 3 months Sales from 1.12007 to 31.3.2007 $ 54000 Sales from 1.1.2008 to 31.3.2008 $ 19400 Indemnity period 6 months Policy subject to average clause $ 11000 Trend in annual sales 10% increase Solution

    Ist step Calculation of gross profit ratio Net profit + Insured standing charges of last yea ----------------------------------------------------------- X 100 Sale of last year

    10000+6000 ---------------------- X 100 160000 = 10% 2nd step Shortage of sale Last years sale from 1.12007 to 31.3.2007 $ 54000 Add 10% for upward trend $ 5400--------------------------------------------------$ 59400 Less actual sale during dislocation period $ 19400----------------------------------------------------Shortage of sale $ 40000=====================================

    3rd step Calculate of loss of profit Loss of sale X G.P. rate /100 40000 X 10/100 = 4000 4th step Total amount for claim of loss of profit Loss of gross profit 4000 Add increase in cost of working (+) nil Less saving in standing charges nil Amount of claim $4000 5th step Average clause

    Since the policy is subject to average clause, it is necessary to find out whether expected profit of the current year was fully insured or not . Expected sale for current year Last year sale $ 160000 Add :Increase in current year 10% = $ 16000-------------------------------------------Total sale of current year = 176000--------------------------------------------Profit rate 10% The profit of current year = 176000 X 10% = $17600 But we take the policy of $ 11000 This is a case of under insurance. It means insurance company pays $ 110 of every $ 176 loss Claim = insurance policy / insurable profit X profit lost = 11000 / 17600 X 4000 = $ 2500 So , amount of claim would be $ 2500

    You might also like