Looking after the VIPs

The small business market is an important and significant part of the wider business community. It is estimated that 96% of the 2.7 million businesses in the UK employ less than 20 staff. When a business relies on the skills and talents of a few key staff, the message is simple ' a successful business needs to protect itself from the financial implications of losing the staff that generate the real profit for the business. From an adviser's perspective therefore, the small to medium enterprise (SME) market is potentially a valuable one when considering protection and in particular income protection (IP).

So why is IP so important? A recent report from the Chartered Institute of Personnel Development on sickness absence shows the cost of workplace absence rose by 7% in 2001. With an average cost of absence of £487 per employee, this represents a total cost to the UK economy of £12bn.

A recent survey conducted by Continental Research on behalf of Swiss Life reveals one in three employers recognise the long-term absence of employees has a detrimental impact on their business. This is also borne out by a survey of small firms run by the Forum of Private Business, which revealed employee absence due to sickness has had a serious impact on 27% of small firms.

What is perhaps more alarming is that despite this knowledge, few firms do anything about protecting the ongoing future of the business by taking out appropriate insurance. For SMEs the issue is not just about the cost of lost days but the potential impact on the survival of the business. Many of these businesses will have thought of some risks that face them by taking out insurance to protect the premises, equipment and legal obligations as an employer. Even if they are aware the business relies on the skills of a few staff, many owners are unlikely to have taken it further and implemented keyperson insurance.

Top priority

It can be argued that IP is more important for the business than, for example, life protection as it is reported that an individual is 12 times more likely to suffer long-term sickness than to die before retirement age. The most common causes for short-term absence are, as expected, minor illnesses such as colds, flu and headaches. The causes of longer term absence ' four weeks or more ' depend upon the type of occupation as detailed in table one. Again, the message is simple ' there is a quantifiable need for IP.

Two common IP solutions for small businesses include keyperson insurance and what is known as executive IP ' basically a one-man group scheme. There is sometimes confusion about what each of these products covers is designed to do. Table two (see page 23) highlights the key differences in these two approaches.

It can be seen that the two products are fundamentally different animals providing different benefits for different business needs. Keyperson insurance is about providing funds to the business to keep it going ' protecting profits and the future financial stability of the business. Executive IP is a scheme designed to provide key staff with an income to protect their lifestyle in the event of long-term sickness.

Small businesses are naturally concerned with managing their finances, with a view to growing the business and maximising profit. One common complaint is that additional insurances such as IP are an added expense. However, this attitude can end up costing the business more in the long term.

Rehabilitation

In addition to providing the financial assistance if the employee or key person becomes sick for the long term, an insurer can also provide help with absence management and rehabilitation. Providing the claim is notified early, most insurers can provide active case management ' it is a well-documented fact that rehabilitation is most effective when there is early intervention ideally before sickness absence reaches three months.

Some insurers may also have access to a range of additional services such as counselling and rehabilitation specialists as well as considering private treatment where this would facilitate a speedier return to work. This approach is invaluable for key staff especially where the skills of the person are in high demand and finding a replacement could prove difficult. An IP plan gives access to a wide range of services post-claim to get valuable staff back to work as soon as possible and therefore contributes to the future of the business.

Using an example from an employer-sponsored arrangement, it is possible to show a modest premium could potentially secure claim benefits totalling around £900,000. Based on a male company director, non-smoker aged 35 next birthday with an IP benefit totalling £23,843 per annum ' including pension and National Insurance contributions ' to age 60, the cost would be £33.07 per month. If the executive claims within a year of outset and never returns to work, the total amount of benefit that could be paid out would be £900,000 ' assuming escalation in line with RPI at 5%. Because the pension contributions are also insured, the pension fund would continue to grow to produce a fund of £267,000 ' based on 6% per annum growth.

For advisers looking to tap into this market, there are many ways to identify suitable prospects. Existing clients with executive pension schemes or small self-administered pension schemes or partnership or share protection arrangements can provide good leads for IP cover. New leads can be generated from a wide range of sources such as local business directories, contact with the local chamber of commerce, or through buying a list from a reputable list provider.

It is also important to remember that in most cases setting up keyperson protection and employer-sponsored arrangements will be done by the owners of the business as most will not be large enough to support a human resource department. The business needs to be clear about what it is trying to achieve and the key sales messages will need to be relevant for the decision-maker and demonstrate an impact on the bottom line for the client. Understanding the financial dynamics of the potential client is important and much information can be gleaned from preparatory analysis of documents such as the balance sheet and profit and loss accounts contained in the report and accounts.

Small businesses should be looking to protect their most valuable human assets and advisers have an important role to play in advising on how IP can help.

Rosalind Pearson is research and planning manager at Swiss Life (UK)