The personal touch

There is no shortage of permutations when it comes to underwriting a small business protection policy. However, in recent years, insurers have made great improvements in making the underwriting process as easy as possible.

The majority of small businesses either operate as sole traders, limited companies or partnerships. Small company protection normally encompasses life assurance, critical illness (CI) policies and/or income protection (IP). Policies can either be for a key person, protecting the firm from the loss of an essential worker, or share/partnership protection, protecting a person's share in the company from outsiders.

Depending on the insurance products taken out, there will be a requirement for medical examinations and detailed company financial information that will kick in at varying levels of protection. Typically CI policies will require detailed medical and financial examination at a lower level of protection than a life policy.

In terms of sole traders the underwriting process is usually simple. This is because sole traders tend to insure for smaller amounts: £150,000 to £250,000 is considered the normal range. This simplifies the process, as they would fall below the automatic medical evidence requirement. As sole traders by definition trade alone the protection needed would also be the more simple key person insurance.

Matt Rann, head of underwriting and claims at Scottish Equitable Protect, says: 'As long as the proposal form is clean ' the person has not had a heart attack, diabetes or cancer or similar ' then the medical side will go through very quickly, without a medical. In terms of financial underwriting then it does not kick in at this sort of level. From experience I would say it is rare to find a sole trader policy that goes above £500,000, which might just get into the realms of financial underwriting for critical illness, but certainly not for life.'

In the case of partnerships the sums insured tend to be larger and generally range between £250,000 and £1m. This automatically brings the business into the realms of medical and financial underwriting.

Rann says: 'The limits we are talking about are £800,000 for life and £500,000 for critical illness for triggering financial underwriting. Automatic medical limits are around the £400,000 to £500,000 level for somebody up to the age of 45. As long as there is no medical impairment then these things can all go through exceedingly quickly.'

Scottish Equitable's figures are fairly standard. For comparison purposes Standard Life triggers financial verification at £1m for life and £500,000 for CI cover, with medical limits between £500,000 and £600,000, according to the product.

Partnerships

The information needed by the insurer from the adviser when underwriting a partnership will vary depending on the type of insurance taken out.

Gary Hubschid, leader ' underwriting planning and control at Royal & SunAlliance, explains: 'The underwriting depends on whether you are looking at key person or partnership protection. For a key person you want to know how important that person is to the partnership, but for partnership protection we need to assess the value of that person's share in the partnership.'

It is worth mentioning at this stage that the various permutations of legal arrangement for small business insurance, trusts and single or double option agreements, have no effect on underwriting. The process of underwriting assesses the person being insured ' the financial arrangements of a policy's beneficiaries is a separate matter.

Small limited companies

Small limited companies are generally insuring for similar amounts as partnerships, and again the underwriting requirements are similar, and the limits tend to be the same for automatic financial and medical evidence to trigger. Small limited company protection is one of the least developed markets for small business protection.

Rann says: 'We genuinely believe that the market for small limited company insurance is very underdeveloped. It is just not happening between small businesses and financial advisers when it comes to ensuring adequate cover.'

For a small limited company the protection products are normally based around key person insurance, but may also be configured as a share protection policy, keeping the role of management and ownership held by only a few individuals.

From a share protection point of view, the key question is what is the value of the company? In terms of the key person cover, the sum assured would be based on the loss that would occur on the death of the individual. If it was the managing director or a key sales person the sum assured could potentially be based on a multiple of gross or net profit.

A common policy format issued by insurers underwrites company loans, where either the bank may want some company insurance on the back of a large loan, or the company itself may think it prudent to insure the value of the loan, in case a key individual is lost. So again, the underwriter would look at the amount and complications of any loss to ensure the loan is covered.

Some insurers, such as Standard Life have products that avoid the process being repeated for every loan. Gerry Warner marketing development manager for protection products at Standard Life, says: 'We have a business assurance option. We recognise that the underwriting can be a bit onerous at the outset, so if there is to be further insurance requirements, perhaps due to company borrowing, then cover can be topped up without any underwriting, in certain circumstances. We also offer temporary cover on business loans while the underwriting process is underway.'

Making it easier

In terms of the small business market the adviser can help to ease the process. Before meeting a client IFAs can often phone an underwriting helpline in order to understand exactly what the insurance company will require by way of underwriting. This allows the adviser to manage the expectations of their client up front.

This is a method insurers have learnt works well through past experience. Warner says: 'As a company, in the past we tended to get in information from the client, look at it and then ask for more. This was frustrating and quite off putting for the client, so what we like to do is assess the client's needs up front and discuss them with the IFA so they can go to the client and tell them more definitively what they need to do. This enables the IFA to set out clients' expectations from the outset.'

Hubschid agrees: 'It is very much a partnership. We rely on IFAs to get disclosure and to explain the products. We have an underwriting helpline for any issues an IFA may have concerning medical or financial aspects. This is so that when we have the information in we need not bother the client or the IFA again.'

However, advisers must, according to insurers, check the information they are required to gather is not already available.

Hubschid explains: 'In situations where we need accounts or other information the IFA may have irrelevant data, that has been provided for other purposes. So often we would not need further information. This information is often out there, but we do not get to see it as much as we would like to. The situation is similar medically. Many executives have regular screenings or company medicals. We have a question on our form asking for them to be enclosed if they exist, but I cannot remember the last time I saw anything come in from a customer showing a medical.'

It is common for insurers to offer services such as medicals at the client's work place and for larger policies there may be the option of having the underwriter visit the client.

Rann says: 'At levels of around £700,000 and above, the underwriter will visit the client with the intermediary and underwrite the financial side on the spot, avoiding all the little complications. We will do the same if the case is unusual in some way.'

A running theme with insurers is that small business protection is a sorely under-developed sector. To their credit, the insurers realise this is in part due ' in the past ' to not making the process as understandable or simple as it could be. Many small companies are unaware of the risks caused by neglecting this type of insurance, and it offers many opportunities for advisers.

As Warner says: 'This is an area that can be steeped in mystery but it is lucrative. If an IFA can get this right for key people, for example, then who is to say they are not opening doors to offering financial services for the company as a whole?'

Paul Robertson is a staff writer