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What are uninsured working expenses?

At a glance

  • Business Interruption policies are based on the turnover of the business
  • The ability to understand UWEs is a central part of establishing the correct gross profit sum insured
  • We explain what constitutes a UWE and highlight how to set a more accurate gross profit sum

This article counts towards accumulating your annual CII CPD structured learning hours for Emerging Risks.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Identify the insurance implications of different emerging risks.

Visit the CPD Hub to log in and begin accumulating CPD hours.

Uninsured working expenses (UWEs), sometimes referred to as ‘specified working expenses’ or ‘uninsured variable charges’, form a crucial part of the gross profit sum insured calculation.

However, misunderstandings of UWEs are a frequent cause of underinsurance, and can easily result in customers having insufficient business interruption (BI) cover following a loss.

Why are UWEs so important?

As the name suggests, UWEs are costs that customers can choose to exclude from their sum insured. It is therefore generally anticipated that they are costs that would not be incurred following a loss, and would therefore not require cover.

However, misunderstandings over how to approach UWEs commonly lead to costs being excluded that should be kept in, and frequently result in customers being underinsured.

“You need to ensure that any costs that will continue after a loss are met under the policy,” says Graham Herridge, Major Loss Team at Zurich. “It is therefore crucial to never uninsure an expense unless you are certain it will cease in the event of a loss.”

In direct proportion only

UWEs are only those costs that vary in direct proportion with a reduction in turnover. So, if turnover reduces by 30%, that cost will also reduce by 30%.

UWEs commonly include costs such as the purchase of raw materials, packaging and freight. However, it should not be assumed that such costs should always be categorised as UWEs. Each business is unique, and great care should be taken before declaring a cost as a UWE.

For example: It might be assumed that a cake manufacturer’s purchase of sugar is a UWE. However, in order to avoid unexpected fluctuations in purchase costs, a manufacturer might enter into a contract for a regular, long-term sugar supply. In the event of a loss, although there would likely be a fall in production, the manufacturer could still be under an obligation to purchase that sugar, and would want to ensure it has BI insurance to cover that continuing cost.

Consider partial losses

A common error when approaching BI is to only think in terms of total losses. While these scenarios are important, the vast majority of losses are partial.

For example: Consider a factory that sends its products via weekly container shipments. In the event of a total loss, where production ceases completely, it will have no need to incur weekly freight costs, as it has no products to ship. However, in the event of a partial loss, where production has reduced but not ceased, it is likely the same number of weekly container shipments will be needed, even if not every container can be filled. In such scenarios, if freight costs remain fixed, they should not be classified as a UWE.

“A fundamental part of determining a gross profit sum insured is looking at business continuity management, business continuity planning and business impact analysis,” says Ian Dunbar, Risk Engineer at Zurich. “Until you have done those exercises, you cannot truly know what will happen in the event of a loss, and therefore which costs can be specified as UWEs.”

How to calculate gross profit sums insured

Business interruption is recognised as a particularly difficult area, with an estimated 40% of policies thought to be underinsured, by up to 50%.

As a consequence we have introduced the Business Interruption Calculator (BI Calculator), a simple online tool that works through the gross profit calculation, offers detailed guidance on key areas and calculates an appropriate sum insured.

To start using the BI Calculator today, or for more information on anything discussed in this article, please speak to your local Zurich contact.

Image © Getty

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