Lack of awareness about the business protection market has prompted many advisers to shy away. Peter Madigan looks at what the sector has to offer
Intermediaries operating in the corporate protection market have traditionally focused on the employee benefits sector. Although on the whole employees are still massively under-protected, many employers have heeded the advice offered by intermediaries and taken out private medical insurance (PMI), income protection (IP) or critical illness (CI) plans for their staff. Yet while busines-ses have invested in such schemes to attract and retain high quality employees, very few appear to have taken steps to protect the company itself.
Misleading
Business protection products are designed to safeguard a business in the same way group IP and CI protect employees. The fundamental difference however, is that instead of an individual receiving a payout in the event of a claim, the benefit is paid to the company. Despite the ability of such products to safeguard businesses against financial ruin, they have failed to emulate the sales enjoyed by the employee benefits sector and remain very much on the fringe of most protection advisers' portfolios. Even the most optimistic assessments suggest that no more than 10% of UK companies have business protection in place.
Adviser confusion has been cited as one of the major factors holding the sector back and indeed, even using the term business protection 'products' is somewhat misleading. Such policies are no different from individual life or CI products, it is the beneficiary that differs. The common goal that individual, group and business protection policies all share however, is the intent to mitigate the financial impact of workplace absence. The three main business protection products all revolve around dealing with this.
Key man cover provides a payout to compensate for the lost profits associated with the loss of an employee who is crucial to the profitability of the business. The payout covers the immediate financial impact of the loss of that worker and the cost of recruiting and training a replacement.
Shareholder protection covers businesses in the event that a shareholder dies and his stake in the business is passed onto his estate. This policy provides a sum that allows the remaining shareholders to offer the deceased's family a reasonable price for the shares. By guaranteeing that funds will be available for the acquisition of the late shareholder's stake, the threat of a hostile takeover is lessened.
The third main business protection product is loan protection, a policy that is taken out on the life of a person who is fundamental to the successful running of the business, often the proprietor himself. This product provides a fund for the repayment of any outstanding loans that may be in place in the event of the death of the life assured. Indeed, in some circumstances a lender can insist that such cover is in place before issuing a loan.
While these are the three core policies at the heart of business protection, some providers claim that the market can be subdivided further into two basic purposes. "Business protection breaks down into those products that protect the business and those that protect the profits of the business," says Alison Turner-Holmes, protection marketing manager at Skandia. "Key man cover protects the profits while loan and shareholder protection cover, the business itself. In this sense it may be more appropriate to refer to these products as business preservation policies."
Any diligent employer, particularly at the small business end of the market should seek to protect all the hard work they have put into the establishment of their firm. It is difficult therefore to see why business protection sales have failed to take off. The root of this problem may be that business protection does not actually exist as a market.
Hesitant
"Business protection products are no different from individual products; a life assurance policy is the same policy whether it is paying out to a spouse or to a company," says Bernie Hickman, protection actuary at Legal & General. "This means that all business protection policies are grouped in with all life assurance and income protection policies so it is impossible to know how big the business protection field actually is."
Without independent figures to assess the market's growth, it is easy to see why advisers are hesitant to get involved in business protection. No one knows if the market is expanding or shrinking since there is no data to corroborate an assessment and without this information, many advisers will not trouble themselves to get involved in a sector they regard as something of a gamble.
While such data would go someway toward jolting the sector into life, it is advisers who have to take the final step and begin recommending business protection. Providers have issued literature and run seminars and workshops in the past in an effort to raise awareness, but this push seems to have bypassed perhaps the most important players in the business protection market - the providers themselves. "I do not think it is recorded which providers are active in the business protection market so it is difficult to know who is in and who is not," admits Andrew Cook, product marketing manager for protection products at Standard Life.
Despite assurances regarding the ample commission possibilities to be found in the sector, with no data on how the market is performing, it is understandable why this area is left largely ignored.
While almost all the major providers offer some form of business protection it is unclear which insurer is the market leader. Scottish Equitable Protect and Abbey for Intermediaries are generally regarded as the leading providers, while Legal & General and Skandia are also active players.
Business protection also has a reputation as a time-consuming process that becomes bogged down in underwriting while company accounts have to be examined and general practitioner reports sought. Further complications also arise when application forms are not completed correctly.
Rewards certainly exist for intermediaries who will take the time and effort to get involved in business protection however. "The commission potential of large sum assured policies could be very large, far bigger than anything in the individual market. Unfortunately some advisers just do not want to leave the comfort zone of simply advising on pensions and investments," claims Rod McKie, head of marketing at Scottish Equitable Protect.
Business protection appears to be a victim of bad publicity and poor promotion. Raising awareness about the potential in this market is a step in the right direction but this can only do so much. Until advisers are able to judge the possibilities in the market themselves through independent figures it seems unlikely that they will be willing to take the final step and begin advising on this untapped and potentially very lucrative market.
COVER notes
• Key man, shareholder and loan protection are the three main business protection products.
• Adviser confusion is regarded as one of the major factors holding the business protection sector back.
• Business protection products are no different from individual life or CI products. It is the beneficiary that differs.
