How many business seminars have you attended where the presenter has asked the question: "What is yo...
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 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 do not hesitate to arrange buildings and contents cover each year, but it is 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 keyperson, yet research shows that 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 fewer than 20 people, it is easy to see that the market for business protection is potentially huge.
One reason for the lack of cover is that these businesses are simply not being targeted. Research has found that 55% of medium-sized businesses without keyperson insurance had never had it recommended to them. 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 keyperson cover. And this area of protection requires specialist independent advice.
A number of opportunities for keyperson 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, keyperson 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. keyperson cover can underpin business continuity.
l Key projects: With keyperson 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 keyperson was lost, this could prove difficult if no cover was in place.
l Expansion plans: Many organisations invest heavily in time and resources 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 keyperson.
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 term assurance for just £20 a month in the first year, rising to £25 a month in year five. Compare this to the cost of salary, pension contributions, company car and the rest.
Identifying risks
Advisers should highlight the risks businesses without cover are running and illustrate how business protection cover can allow them to stay in control should disaster strike.
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. 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, as a result of what has happened, the company has devalued.
Impact on family
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.
This results in a high level of emotion for all parties because the family needs money and income, and the remaining shareholders feel exceptional pressure at a difficult time for trading.
A keyperson need not necessarily be the company's managing director. It could be the finance director as the only one in the business who understands the accounts. Alternatively, it could be an area sales representative who happens to be the only member of staff fluent in the local dialect of a key overseas market. Of course, a replacement will eventually be found, but in the meantime their market share could be snapped up by a competitor, never to be regained.
A gap in a company's business protection could result in profits, projects, clients and development plans being unnecessarily exposed to risk. With a 44% chance that out of three executives only two will survive from age 30 to 65, and against a background where 25% of men will contract a critical illness before they reach 65, a high proportion of companies still continue to live dangerously.
Ideal opportunity
To deliver solutions for clients, company structures need to be considered, legal implications taken into account and taxation issues analysed. The adviser's role therefore remains paramount.
Having spent time identifying the key personnel, advisers will have built up a good relationship with the company and will have a lot of detailed information to hand. This could include financial details such as payroll and staff numbers.
This will present an ideal opportunity for a future appointment to discuss employee benefits, such as executive income protection, pension arrangements or investments.
In the words of Gordon Brown: "Britain has only one truly national resource - the talent and potential of its people." Every firm has unique business protection requirements, whatever their size and activity. Of course, premises and vehicles must be insured, but organisations must not forget that it is people, not premises, that deliver plans. People provide businesses with the key to survival. Organisations are therefore duty bound to insure against their absence and advisers are duty bound to educate businesses about this need.
At a time when IFAs are coming under increasing pressure, business protection is a prime, growing market where financial advice is essential. Advisers can show the value they can add by securing their clients' futures.
Mark Edwards is market manager, IFA personal promotions, at Royal & SunAlliance Life & Pensions
