As sales of endowments continue to fall and the introduction of stakeholder pensions draws closer, m...
As sales of endowments continue to fall and the introduction of stakeholder pensions draws closer, many IFAs are actively seeking new markets to bolster their income stream.
Small business protection is a market with significant potential. To date, sales have been disappointingly low because businesses do not look to protect their key people. But with the ability to save a business in the event of the death or illness of a key person or partner, it is a valuable type of protection with significant room for growth - if this message can be communicated.
Most protection providers report that sales of small business polices have been steady in recent years and few can demonstrate a substantial increase in the number of new plans sold. The number of UK firms who have business protection remains small, and some industry estimates put the figure as low as 5%. But in the United States it is almost considered the norm for small firms to protect their business. Mike Turner, product manager, protection, at Friends Provident, says: "Small business protection is a massively undersold product. For whatever reason, it is not sold in the same quantities as it is in the United States."
Figures released by the Department of Trade and Industry in August 2000 suggest the potential market in the UK is huge. Using the definition of a small business as a firm that employs fewer than 50 people, 99% of the entire business population in the UK is classed in this category
Small business protection products are similar to those sold in the individual market, except they are tailored to the needs of the business rather than the individual. Most providers offer a choice of benefits which pay out on one or more of the following: death, critical illness, permanent total disability or terminal illness. A handful of providers also offer keyperson income protection. In this case, the benefit paid is calculated from either the individual's salary or from their contribution to the net or gross profits of the company.
Under most keyperson products, if the company makes a claim on the death or critical illness of the insured, the policy pays a lump sum to the business to cover loss of profits. This provides a financial cushion to allow the company time to re-adjust.
How the benefit is used is left to the company's discretion but it is usually for one of three things. Firstly, it can be used to repay current loans or debts. Firms frequently rely on banks and venture capitalists for funds, often on the strength of a key person taking a leading role in aproject. If that individual is no longer accessible then lenders will often demand repayment of the loan or seize assets in lieu, which could be damaging to the company. A lump sum from a death or critical illness benefit, or regular repayments from an income protection plan would be used to protect the firm's future.
Secondly, it can be used to protect lost profits. If the driving force behind a company such as a sales director dies or is unable to work then the profits could suffer. The money from the policy can be used to offset the resulting losses until the firm recovers. Finally, benefits can be used towards the cost of recruiting and training a replacement. The sum assured against the loss of the keyperson may be enough to cover the cost of training a replacement or perhaps to offer a 'golden hello' to attract a suitable replacement.
In some cases the cover may be required to cover the loss of a partner or a major shareholder. In this case, the sum assured must be based on the life assured's share in the business. On death, the benefit will be paid to the remaining partners and will be sufficient to buy out the deceased's share in the firm. Without partnership/shareholder protection the stake will be passed on to the family of the deceased partner or shareholder. They may want to play a role in the business or sell it and this could leave the remaining partners unhappy resulting in financial difficulties or even problems of ownership for the business. A customised policy will make the process flow quickly at this potentially stressful time. Ian Smart, marketing technical support manager at Scottish Provident, says: "The family may not even be interested in the business - other than to replace their income - and the other owners may be vulnerable. You have to make sure that no-one is going to take your business away."
Business protection is particularly suited to smaller companies because the responsibility for growth and development lies with fewer people and so the likelihood of having someone else within the firm who can take on all their responsibilities is reduced.
It is also an ideal product for IFAs because it has to be sold, rather than bought. IFAs are well placed to draw attention to the possible financial risks arising from death and critical illness (CI). Smart says: "It is a purely advice-driven market, and there are only a small number of IFAs who concentrate on it. It is not something businesses will call up to ask for directly because they do not recognise the need. It is only with the advice of IFAs that the market will increase."
The advice element is crucial in making companies aware of the importance of this cover. Businesses recognise the importance of protecting against fire and theft but few seem to identify that their bottom line profits may well be damaged if a key member of staff dies or is unable to work.
Directors are the obvious choice for cover but top salesmen, IT experts or those involved in designing and developing new products should also be considered. Ronnie Martin, protection director at Legal & General, says: "IFAs can help to identify who is key. It is useful for advisers to put questions to the company to identify the key individuals in it. They should keep an open mind because it may well be different people each time - it will not always be the managing director. Ask them which individuals would your business miss if they went on holiday?"
Most companies rely on one or two personnel for their leadership or expertise; they are the company's most important assets. However, in smaller companies the key person is often crucial to the success of the business and their loss would be financially damaging because they fulfil the key or several key functions. The loss of the key person could leave orders in mid-negotiation, cause a loss of profits or even damage the firm's credit standing. Sean Murphy, sales and marketing manager at Lutine Assurance, says: "The smaller the company the more susceptible they are to the loss of a key person. IFAs have got to speak to each company to find out what their individual needs are. There is no template to follow - each company and each individual is different."
There is a lot of potential for growth in the small business protection market. Few companies recognise the risks they may face without protection and it is a product where IFAs can add real value. Julia Kiff, press officer at Allied Dunbar, says: "There is an increasing need for business assurance because the number of small businesses is growing. A lot of companies' insurance plans still stem from key things not key individuals, but you really cannot replace a key person as easily as you can say a company car."
Ben Marquand is a staff writer
