Graham Newitt examines the attitudes of UK companies to current business protection offerings
For many companies, losing a member of staff is just part of every day life and they quickly recover and move on. Among the UK's small businesses however, the picture could be very different.
A staggering 53% of people questioned for Legal & General's annual Business Intentions survey believe that the loss of a key director or business partner could mean the business closing down completely within a year.
Dependence
The same survey showed that only 47% of key people working for small businesses felt that their company would still be in business after 12 months following the death or critical illness of a key person. Some 38% of people felt that their business would be forced to close down within six months, with 17% saying that their business would fold within one month.
According to the Department for Trade & Industry (DTI), there are just over a million small to medium-sized enterprises (SMEs) in the UK. Business Intentions asked a representative sample of firms employing between two and 50 people about their understanding of business protection insurance and what cover they had.
The results of the study showed that in the average small business, there are only two people who they regard as key to the company's continued existence. In two-thirds of companies these key people would be partners, directors or managing directors. Not surprisingly, when asked what was the biggest contributor to their bottom line, 40% said that people were the most important factor, followed by products with 32%.
The huge dependence placed upon a handful of key people would suggest that key person insurance would be regarded by the UK's small businesses as essential. However, the reality is very different:
• The most common type of protection is to cover a business loan, with just 31% of limited companies saying that they have purchased loan cover.
• The proportion of limited companies that have taken out key person cover to protect themselves against the loss of future profits is slightly lower at 29%.
• The least popular form of cover is director's share protection, with only 20% buying cover, which will enable them to buy out the remaining shares in the event of a director's death.
• In total, 45% of limited companies and 54% of partnerships have no form of business protection at all.
Lack of understanding of the likelihood and consequences of a key person dying or suffering a critical illness can explain why take-up rates are low. However, the survey indicated that there is also confusion about the cost of life cover. When asked to estimate the premium for £500,000 life cover for a 39 year-old non-smoking male for five years, the average estimate was almost three times the actual cost.
From the research it's possible to produce an estimate of the size of the potential market for business protection:
• There are approximately 1.1 million businesses in the UK with 50 or fewer employees according to the DTI.
• The average company has two key employees.
• Around 53% of SMEs have no business protection cover.
The good news for protection advisers is that this means that there are over a million directors or partners without any form of business protection.
The consequences for small businesses if a key person died or suffered a critical illness can be very dramatic. On death, the partner or director's family may have to sell their shares in the business. This could open up the business to control from the deceased's family or, if the shares are sold, even from unwelcome competitors.
Consequences
If a key person suffered a critical illness, then they would still retain a financial interest in the company and would probably still be entitled to receive an income, yet they may no longer be able to contribute to the success of the company.
However the greatest areas of loss can be the intangible skills and knowledge that key employees hold. The removal of factors such as technical expertise, personal business relationships, financial acumen and sales skills can devastate a business. It is the loss of these skills that explains why the survey showed that 53% of firms believe that they would have to close down within a year of the loss of a key member of staff.
Graham Newitt is managing director intermediary solutions at Legal & General
COVER notes
• Although most companies recognise that people are its most important asset, only 29% of companies have key person protection, compared to 31% who have loan protection.
• 53% of businesses believe they would be forced out if business within one year if they lost a key member of staff.
• Over half of SMEs have no business protection at all.
