How many business seminars have you attended where the presenter has asked the question "what is you...
How many business seminars have you attended where the presenter has asked the question "what is your organisation's greatest resource?"
By far the most popular answer is "its people" but how many companies honestly practice what they preach? How many truly appreciate the value that people - their skills, knowledge and experience - add to the balance sheet?
Some 95% of companies don't hesitate to arrange buildings and contents cover each year but it's a significantly smaller number that arranges cover against the loss of key staff. Most large organisations do operate some sort of succession planning as insurance against the loss of key people through ill health, disability or death.
This is despite the fact that they are not generally dependent upon just one or two individuals to deliver profits and future growth. For larger organisations, that delivery is usually spread across a large number of individuals. In stark contrast, most small- and medium-sized businesses would be greatly affected by the loss of a key person, yet research shows less than a third of businesses in this sector currently have protection against the loss of a key member of staff.
When you consider that 96% of companies in the UK employ less than 20 people it's easy to see that the market for business protection is potentially huge.
One reason for the lack of cover is these businesses are simply not being targeted. Research undertaken by Royal & SunAlliance found that 55% of medium-sized businesses without key person insurance had never had it recommended to them. And in smaller companies, where the risk is even greater, this figure increased to 75%.
It falls to the financial services industry to educate businesses about the risks of operating without key person cover. This specialist area of protection requires specialist independent advice. A number of opportunities for key person cover exist and advisers should highlight these in meetings with business clients:
l Compensation for loss of profits - In the same way that businesses arrange loss of profits cover with a general insurance adviser, key person cover can be arranged to insure against loss of profits through illness, disability or death of a key employee.
l Secure business continuity - Permanent loss or even a temporary absence could seriously affect trading opportunities for a company. Key person cover can underpin business continuity.
l Key projects - With key person cover the absence or loss of a project leader need not inhibit the final delivery of important business projects.
l Capital and lending - Cover can provide cashflow to continue repayments on any loans or capital injections, allowing organisations to build up and retain a high credit status. If a key person was lost, this could prove difficult if no cover was in place.
l Expansion plans - Many organisations invest heavily in time and resource to develop or expand into new areas. Cover could ensure these expansion plans are not put at risk by the loss or absence of a key person.
The cost of cover may be much lower than your clients think and this is where the need for ongoing advice from a professional is vital.
For example, a business could insure a 39-year-old non-smoker for £250,000 cover under a progressively priced term assurance, for just £20.00 a month in the first year, rising to £25.00 a month in year five. Compare this to the cost of salary, pension contributions, company car and the rest.
Advisers should highlight the risks businesses without cover are exposing themselves to. They should then illustrate how business protection cover can allow them to stay in control should disaster strike. Advisers should highlight the risks and immediate consequences for a business if it were to lose a key employee. The risks identified should include:
l The inability to supply goods or services
l Time away from the business and costs incurred in recruitment
l Tightening of approach by creditors
l Drop in turnover, sales and profit
l Inability to meet contractual obligations
l Increased work pressures for remaining employees
One or all of these could lead to devastating consequences for the business, resulting in:
l Loss of customer confidence
l Loss of credit status
l Possibility of litigation and, in worse case scenarios, liquidation
l Fall in market share
l Loss of confidence in staff left to cope without their driving force in the business
Cover may only actually be required for a short space of time. For example to cover a special overseas project which hinges on one person. Alternatively the sum assured may be needed to cover the cost of recruiting and training a successor. The best protection plans are in fact flexible, so that as the business changes, so can the cover.
Sums assured will depend on individual circumstances. For example, cover may be required for a share buy back in the event of a key executive's death. This will avoid complex legal wrangling at the worst possible time.
Otherwise, if the aforementioned executive was a majority shareholder and insufficient cover was in place, the company could be sold above the heads of the remaining partners and shareholders.
Also, the business could find itself in financial trouble as it is likely that it would have lost a key driver in the company. Additionally, those remaining might wish to sell their holdings but find that, because of what has happened, the company has devalued. Then there is the family of the deceased or critically ill shareholder to consider. Their income would be immediately affected and in a large number of cases they would have little or no knowledge of running the business.
There are likely to be no dividends payable, they would have little power in the business and if able to find a buyer at all, the price would be unlikely to live up to earlier expectations.
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