The business protection market offers a wealth of opportunity for advisers looking to grow their client base. Brian Kerry explains
The business protection market in the UK remains largely untapped. Historically, advisers have concentrated on more traditional areas in the individual savings and protection markets and in the corporate sector, the focus has generally been on pensions and income protection.
However, there are two main areas in the business protection market that advisers should be focussing on - key person protection and ownership protection. The level of key person protection can vary depending on whether the requirement is within a company or partnership, but it is designed to protect the bottom line. Sole traders can also take measures to afford themselves a degree of cover while methods of ownership protection also vary between companies and partnerships.
Traditionally in the business protection sector, key person insurance has been, on some occasions, driven by the finance provider such as a bank or venture capitalist company to protect their investments. It has not however, been discussed as a matter of course with most business clients.
The amount and duration of cover required by a company will vary depending on a number of factors - including size, type of business, ability to fund the cover and Inland Revenue regulations. Cost may also vary with a number of factors including age, amount of cover, health of the assured and occupation.
The lack of penetration in the market therefore offers huge potential to advisers. Any intermediaries operating in the corporate sector will no doubt have a number of opportunities within their existing client base to obtain additional income and provide a valuable protection and enhanced service to their clients. At a time when the traditional investment market has reduced, this must be seen as a means of protecting and enhancing the profitability of advisers.
Dependency
In terms of protection, a small partnership may have only a few key persons to protect but the value of each may be disproportionate. For example, one of the partners, or indeed other staff members, may control the relationship with a major client who provides the bulk of the income and business of the partnership. Should they die, the business would be severely disadvantaged, possibly to the point of failure, as the client may be lost.
Most business relationships, especially in the service sector, where many partnerships operate such as accountants, solicitors, architects and insurers, are built through personal connections. While the business may plan to resolve the dependency, it would be sensible to obtain some protection against the early demise or long-term illness of the relevant person.
Advisers should therefore be looking at service sector clients to see if this situation exists and be offering solutions. Take, for example, a media, marketing and graphic design partnership where the two main clients - contributing approximately £3 million per year in fee income - were clients because of a certain designer, who was not a partner or manager. When the designer unfortunately died in a motorbike accident, both clients subsequently transferred their business to a competitor.
Key people who are involved in particularly dangerous pastimes may also be worth considering. There may be two key people who have an equal impact on the bottom line of the business but one is a fit 30 year-old, who is teetotal, non-smoking, lives next door to the office and does not go out in his spare time.
The other however, may be a 50 year-old, overweight smoker whose hobbies are pot-holing and skydiving. He also cycles to work along a busy dual carriageway and is often hungover in the morning. While these are extreme examples, it may be that the risk looks much less to one than the other and although the cost may be prohibitively high it is worth considering each individual's lifestyle as there is generally not a limitless pot to pay premiums from.
Profitability
Obvious candidates for cover would be important sport stars where a non-appearance could affect revenue and profitability. Large and smaller limited companies have a duty to protect the business and would be possibly exposed to actions against them, had they not reviewed this eventually and taken appropriate action. Similar situations would arise in respect of films and the entertainment industry.
Advisers therefore need to understand how a business generates a revenue to ascertain the importance of individuals and any negative effects on profitability that may occur were they not around.
Shareholder or ownership protection is a more complicated area and there are a number of crucial factors that need to be considered. The main consideration is who owns the business and to whom does the business owe money, as this may affect its ability to function in the future.
An example of this is in the case of a small firm of architects, where there are two senior and two junior partners. In this case, two senior partners had built up significant capital accounts over a period of eight years - one at £450,000 and the other at £250,000. When the owner of the £450,000 account died, the other partners suddenly had to repay this amount to his estate. The business could not afford to do this and did not survive. Shareholder protection was one way of coping with this problem.
Losing control
Nothing is more frightening to a director than losing control of his business, yet this is exactly what can happen. For example, consider what happens should one director die. Without the money for the other directors to purchase his shares, control of those shares will remain with the spouse. The spouse may need to sell to someone else in order to raise capital, or may maintain control and re-marry. Neither is an acceptable risk to the remaining directors.
Large limited companies and possibly alternative investment market (AIM) listed companies do not have the problem of the dependency on one or a small number of individuals as the shares are openly traded and this situation does not arise. To many smaller companies and partnerships however, it is a major consideration and therefore has great potential for advisers to explore, as it is largely untapped.
There are a number of options for a company to protect itself although the two most widely used are share purchase by the company or by a trust. As there may be several important or significant shareholders, it is likely that the cost of insuring them may vary widely, due to age, health and lifestyle and also the amount of cover required as the extent of the shareholding may differ.
For example, two friends may have started a business on a 50/50 basis. Over a period of time however, their children are given shares and the number of shareholders is increased. The percentages will also differ as the two founders may not have the same number of children or even want them to be involved. Other parties may have been offered a share in the business to achieve expansion or as a reward so there may be an increased number of significant shareholders of varying ages holding different percentages.
In order to cope with this equitably, there is an ability to equalise the premiums. Similarly, partnership widely uses two types of arrangement, either individual purchase or automatic accrual and again there is the ability to equalise premium.
The main opportunity for these elements of protection is therefore the smaller family owned non-listed companies and partnerships. Advisers will note the overlap with a large potential market for key person cover. Many partnership and smaller companies operate in the service sector where individual relationships are so important, as are opportunities for both areas of business protection.
The responsibilities of directors are always increasing, and protecting the business is always going to be paramount to any shareholder or stakeholders interest. Therefore the area of business protection cannot be ignored. It would be prudent to investigate and assess this type of cover and its exposure to prevent future problems.
Brian Kerry is branch director at Towry Law Insurance Brokers
Cover notes
• The business protection market offers huge growth potential for advisers looking at boosting their income.
• Advisers should use their existing client base to grow their book of business.
• The amount and cost of cover is dependent on the size and needs of each business.
