Employee wages represent a significant expense for most businesses, and can become a major cause of underinsurance in the event of a loss.
When calculating gross profit sum insured, businesses need to decide whether or not to subtract employee wages – and if so, to what extent. Getting it wrong could have a substantial bearing on the adequacy of that business’s gross profit sum insured.
Tackling wage roll misunderstandings
When calculating gross profit, accountants will usually subtract employee wages to arrive at a final figure. However, for insurance purposes, the significance of wage roll needs to be determined before deciding whether or not to subtract it. This difference in approach is a regular source of underinsurance.
Where does wage roll fit in?
Depending on the nature of your customer’s business, a proportion of their wage roll might constitute an uninsured working expense (UWE).
By declaring a UWE, you are stating that those wages will not continue following a loss, and therefore do not require insurance. If they do continue, you could find your company is significantly underinsured.
UWEs are a crucial part of the gross profit sum insured calculation and must be approached with great care to avoid underinsurance.
Delving deeper into wage roll
Most businesses will have a range of employees, each with varying degrees of importance to their on-going operations.
The question of whether to subtract wage roll is therefore not black and white, but requires careful consider to what would happen to those different categories of employees immediately after a loss.
Some employees may be let go, but others may be crucial to the business’s recovery. Determining which fall under each category is an essential exercise for establishing an adequate gross profit sum insured and minimising underinsurance.
Consider partial losses
When considering which wages would cease in the event of a loss, businesses need to consider both partial and total losses.
Partial losses are much more common, and neglecting to consider these scenarios is a common cause of underinsurance.
Which wages would cease?
- A wage should only be considered a UWE if your business is certain it is a cost that will cease in the event of a loss. There are a number of factors that will influence this, for example:
- How crucial these particular workers are to the business
- Employee contractual terms – Can workers be released straight away and at no cost, or is the business obliged to give notice or issue redundancy payments? If so, these costs will need to remain covered
- How easy will it be to recruit staff of the same quality? Former employees may go to work for competitors or find other careers. Potential difficulties in future recruitment could make it more beneficial to retain staff in the short term
- A catastrophe may lead to adverse publicity particularly if employees are seen to be struggling financially due to inadequate wage roll cover
- Has the business invested significantly in training, so that it would be uneconomical to recruit and train new staff?
- Would letting workers go put a strain on future workplace relations that the business may wish to avoid?
How to calculate gross profit sum insured
Business interruption is recognised as a particularly difficult area for brokers and customers alike, with an estimated 40% of policies thought to be underinsured, by up to 50%.
Please contact Ashleigh Mackay and Associates for a no obligation business insurance quotation on 01689 861122