Blog Question on Insuring Wages Separately
Greetings and salutations!
I was wondering if I could run a question by you concerning the BI calculator you so kindly provide.
I run a BI Fundamentals workshop internally here, and go through the process of calculating insurable gross profit, dual basis payroll etc. At the end I go to your calculator [BIcalculator.com], put in the same figures, and voila! The same result.
The example I use in the workshop includes payroll in the gross profit item. After the workshop, I offer another case study for people to do in their own time, and one of my recent participants did it both manually and through your calculator, and got a different result. I have duplicated his work, and through a few trials, I have determined that the difference is due to the timing of the deduction of payroll from the GP item.
I have attached my calculation, which is laid out as I was originally taught ‘way back when’, and the PDF document I obtained through your calculator. It seems that your calculator deducts uninsured working expenses other than payroll, adds on the specified trend, and then deducts the payroll amount, thus including a higher dollar figure for the trend. I have always deducted the payroll as one of the uninsured working expenses, and then trended the figure net of payroll. I have also included a PDF calculation on the same values, but covering 100% of payroll, which lead me to the answer to the difference in our results.
I would be very grateful if you could explain to me the reasons behind the method you use, as I may need to amend my workshop,
Tina [surname and email provided]
In a nutshell if the business were to grow at, say, 10% and payroll at 2%, then by moving Pay-Roll out and insuring it separately, the Insured will miss out on the efficiency gain that they will make by curtailing the cost of Pay-Roll to a lower growth rate, rather than over all turnover.
This is missed in all other calculators that I know of and in most text books and was only uncovered by LMI during our handling of claims where Pay-Roll was not fully insured.
This was one of the reasons I developed LMI BIcalculator.com, to correct the inherent mistake and ensure that the correct sum insured/declared value was calculated. I spell the whole issue in both my book on Business Interruption, (the blue book) or the ISR (the green book).
The same issue can arise with any expense that is insured separately where the expense increases at a different rate to the grow in the business.