Despite a low profile, business protection can handsomely reward intermediaries who are prepared to dip a toe in the water, says Peter Madigan
On the whole, advisers have traditionally steered clear of the business protection market. The sector has a notorious reputation as being hard to penetrate with a lot of work involved and a distinct possibility that the whole effort may eventually be for nothing, as clients lose patience with the underwriting process or decide against taking out cover because of cost.
Without any hard figures to rely on, it is only anecdotally that the sector can suggest business protection products have a higher non-completion rate than other products. Whether this is the case or not, the fact that these products have such a reputation in the adviser community means that regardless of the true picture, advisers are still reluctant to get involved.
Neglected market
Despite its weak profile, business protection presents advisers with almost unparalleled sales opportunities since the market is so neglected. Providers are at pains to stress that the problems facing the market are not unassailable and can be overcome by simply maintaining a dialogue with the intermediary throughout the application and underwriting process
"One of the biggest problems that we see in the business protection market is application forms being filled out incorrectly," says Sue Wilkinson, head of life and health propositions at Abbey for Intermediaries. "Brokers could do more to ensure that they are filled in correctly but providers have their part to play as well. On receiving the application, providers should sort the problem out straight away," she says.
The much vaunted claim that just 10% of businesses are sufficiently protected suggests that this market presents a great prospect for advisers who may be experiencing a prolonged period of disappointing sales in the employee benefits sector. Although this argument has been made several times before, in recent years a number of developments have made business protection look like a much more attractive proposition.
Figures released by the Department of Trade and Industry (DTI) reveal that 500 new small businesses start up every day in the UK. With all this potential new business flooding into the market, advisers could have a field day assessing the financial needs of these new small companies.
"The emphasis should really be on businesses of less than 100 employees, as these companies will obviously feel the loss of an individual far more keenly than larger businesses," says Bernie Hickman, protection actuary at Legal & General. With estimates from the DTI suggesting that firms with less than 100 employees account for 99.6% of all UK businesses, the potential at this end of the market is vast indeed.
New start-up businesses often seek advice to set up a basic employee benefits scheme, often just a simple pension plan. These introductions are crucial as they present advisers with the perfect opportunity to introduce business protection products. According to the DTI, 12,000 business insolvencies are recorded every year, with just 50% of new companies still trading three years after they are established. Armed with these alarming statistics, advisers can offer first-time businessmen products that can mitigate the risk that unlimited liability presents not just to their business, but also their home.
While cross-selling business protection with other products is undoubtedly a good introduction, some providers are frustrated that such policies cannot be sought in isolation. "It should be the other way around with bosses approaching intermediaries to protect the business first and foremost and once this is in place the adviser should then recommend the pension plan," claims Rod McKie, head of marketing at Scottish Equitable Protect. Advisers however, claim that such thinking is naive and unrealistic.
Complexity
"The first problem is that business protection is perceived to be quite expensive and secondly, cold calling with these products is very difficult," says Iain Henshall, employee benefits consultant at Towry Law. "Really, the only way in, is through dropping business protection into the conversation during the initial review of a company's financial needs."
As well as new start-up firms, there are also possibilities for new business from companies that have recently de-merged or undergone a management buyout. In addition, firms that have a strong dependency on specialist workers, such as scientific technology companies, can also be considered as prime candidates for business protection.
Another opportunity that may emerge to propel the business protection market is the recent drop in the mortgage-related term assurance sector. "The housing market is growing at a slower rate than it has done for several years and this could lead to a drop in the popularity of term assurance products," says Hickman. "Mortgage-related policies have really been at the core of the protection industry for some time now so any drop in housing activity could drive advisers to look for alternative products. This could present an opportunity for business protection."
While mortgage-related term assurance sales have certainly stuttered of late, it seems somewhat simplistic to imagine that advisers will simply shift focus from the straightforward individual market to the relatively complex world of business protection.
The sales opportunities available in the business protection market are considerable. The success of the employee benefits sector seems to indicate that employers need to be told just how vulnerable their business is before they start thinking about investing in such cover.
However, while employers need to be told what business protection is, advisers need to be told what business protection is not, by dispelling the myths concerning the complexity of the financial underwriting process.
At first glance business protection would appear to be a field that advisers would be itching to get involved in. With substantial commission potential, more than 90% of the market uninsured and 500 potential new clients appearing every day, the market should have proved irresistible to intermediaries. There can be no doubt that the prospects for sales are promising if not unprecedented.
"IFAs simply think it is too complicated to get involved in business protection but the reality is that there are big commissions to be had for those who are willing to get involved," says Andrew Cook, product marketing manager for protection products at Standard Life. "You will have to sell an awful lot of pension business to make up the commission you could get from a single large business protection policy."
It appears all that is required is an adviser who is willing to take the first step and plunge into the business protection market. For anyone brave enough to do so, the rewards look plentiful.
Case Study
Des and Trevor are partners in Premiership Ltd, a company that gives advice on football-related issues. They have distinct jobs with separate sets of contacts that are vital to the successful running of the business. The directors have invested significant amounts of their own capital in the company and have limited financial resources outside of the business. They are both married, although their spouses have no involvement in the business.
Tragically, Trevor is killed in a car accident one night. Fortunately, Premiership Ltd. has business protection in place to cover the future survival of the business and guarantee that Trevor's family is able to convert the capital in the business into liquid assets.
Their key man cover is to the tune of £150,000 and provides not only a sum to cushion the financial impact of Trevor's death but also a fund with which to recruit and train a replacement. Although the loss of Trevor, with his excellent contacts, will be a major setback for the business, at least the cash will lessen the blow and provide some measure of short-term security for Des.
While the business is safe in the short-term, Trevor's wife, Jane, is concerned that all her husband's wealth is locked into his business. In addition, with most of the family savings invested in the company and Trevor's monthly income no longer there to count on, Jane fears that young twins Katie and Jessica may go hungry.
Thankfully, Des and Trevor were shrewd enough to realise that should one of them die, as well as securing the future of Premiership Ltd, the surviving partner would also have to purchase the deceased's shares to retain control of the business. They took out £300,000 of shareholder protection with which Des can both resume full control of the business he worked so hard to establish and ensure that Jane gets a decent price for Trevor's half of the business.
COVER notes
• 500 new small businesses start up every day presenting intermediaries with unprecedented sales opportunities for business protection.
• Small to medium size enterprises, new firms and de-merged companies provide intermediaries with the best sales potential.
• Providers feel that bad publicity has prevented intermediaries taking advantage of the lucrative commission potential in the business protection sector.
