Business protection policies are, in essence, survival policies for a company.
Whether the firm is a small, one-person start-up operating from a home office, or a large entity with 200 staff, a new firm or a well-established one, putting some form of cover in place should be business critical.
For many business owners, careful thought is already given to protecting things such as the premises and the contents thereof, the machinery, stock, the intellectual property and the company car or van.
As Johnny Timpson, protection specialist for Scottish Widows, says: “Business owners already protect many of the important assets that are essential to keeping their businesses running smoothly.”
But there is another aspect which business owners are not always considering. “When talking about business protection”, he continues, “we are talking about risk management and solutions, particularly the awareness and management of ownership, loss of profit, liability and people attraction/retention risks.”
This seems such an important list of risks to insure against – so why does there seem to be a lack of thought given to business protection policies, whether these are key person cover or executive income protection?
Recent research carried out by Legal & General through the British Chambers of Commerce, identified a £1.1trn gap in business protection in the UK.
The study found that 61 per cent of business owners felt that the death or critical illness of a business owner would have a serious impact on business, yet only 43 per cent of those asked had any life cover in place.
The survey of more than 500 firms highlighted that 95 per cent of businesses have at least one key individual.
However, the majority of firms admitted they had no contingency plans in place to deal with the death or serious illness of that individual.
A further 39 per cent of respondents believed their business would fold within 18 months following the death or critical illness of a key individual.
This is not merely the flight of fancy of business owners. Figures from the Office for National Statistics have revealed that, in the UK in 2016:
- An estimated 137.3m working days were lost due to sickness or injury.
- This is equivalent to 4.3 days for each worker.
- Groups who experienced the highest rates of sickness absence were women, older workers, those with long-term health conditions, smokers, public health sector workers and those working in the largest organisations (those with 500 or more employees).
- Coughs and colds were the biggest reason for absence, followed by musculo-skeletal and then by mental health and neurological reasons.
The good news is the 137.3m lost days is the lowest recorded since the series began in 1993, when it was at 7.2 days per worker.
The better news is, the loss to the business of having key members of staff signed off work for long periods of time (or indefinitely), can be insured against.
“Businesses of any size face these risks day in, day out, and they can either choose to manage them consciously, by deciding to self-insure or reinsure them, or unconsciously, by ignoring and, by default, self-insuring them,” says Mr Timpson.
The trouble is, self-insuring means the money comes out of the firm’s bottom line – and can that cash flow always keep flowing? What happens when that money for ‘self insuring’ runs out?
Richard Kateley, head of intermediary development for Legal & General, spells it out: “For smaller businesses, the death of an owner or director can have a significant impact on the future of that firm.
“Whether it is the potential loss of revenue, or the cost of finding a replacement, the loss of a key employee for a small-to-medium-sized enterprise can be a potentially disastrous situation, that could end in the business having to cease operations.”
Although the risk of closure might be less in a larger firm, say one with more than 250 employees, there is still a potentially large effect that the death or critical illness of a senior employee can have on the firm.
Mr Kateley adds: “After all, that employee might have owned important business relationships that could be at threat if the person dies or is diagnosed with a critical illness.”
For Tom Conner, director of insurance at Drewberry, the contribution of the key employees to a business should not be underestimated by clients.
He opines: “The loss of that person’s ambition, talents, vision and drive could have a devastating financial impact on a company.”
As Emma Thomson, life office relationship manager for Lifesearch, comments: “It’s about the survival of a business. If you are an acorn (one to two years old), a sapling (two to 10 years) or a mighty oak (more than 10 years), it all still matters.
“Financial protection should always be considered as essential because you are protecting the people that create the business, and in turn the profit and the succession.”
Factors that might lead owners to consider business protection:
There are many different risks facing businesses: the death or illness of an owner, the loss of the main profit-earner; liabilities; talent management and retention.
- Owners and partners: “If a partner or shareholder dies or is diagnosed with a critical illness,” says Mr Timpson, “the surviving owners could lose control of the business.” This could affect control, direction, the future strategy, investment, and the ongoing success of the business.
- Profit: If a business loses a key person who influences revenue, such as a head of marketing or head of sales, then the firm may require a cash injection to replace lost profits and meet additional costs, such as recruiting a replacement.
- Liabilities: Many companies know the value of keeping cash in the bank to cover any potential liabilities, but these are usually the things that have been planned for, such as new equipment or a new role or a looming tax bill. But what happens if the key person who brings in the revenue suddenly dies or is taken severely ill with a critical condition, and the company is still carrying loans or other debt? That cash buffer soon gets eaten away and then investors and creditors can call in the debts. One only has to see programmes such as ‘Can’t Pay? We’ll Take it Away’ to know how easy it is for small companies to slip into debt.
- People: Talent management is a crucial issue – not just in terms of hiring the right candidate but also in retaining and motivating them. Research carried out by Scottish Widows over the past 18 months into employer benefits has revealed that, where employers provide additional benefits in the workplace, people are more likely to be attracted to and remain with that employer.
Mr Timpson adds: “Should the business want to be a more attractive place to work, relevant life cover is a tax-efficient insurance policy, allowing businesses to offer a death-in-service benefit to its employees (including salaried directors).
“It is set up by the company and pays out a tax-free lump sum on the death or diagnosis of a terminal illness, of the person insured.”
There are other potential threats: shareholders in a privately owned company (regardless of the size of the company) may have to use their own personal wealth to buy shares if an owner dies, or risk those shares being tied up in probate.
Debt protection, also is “best practice” for business, regardless of size, says Mr Kateley.
Prevention rather than cure?
While there are insurance solutions to help mitigate the effects of these risks, it is also worthwhile encouraging clients to consider preventative measures, such as enhancing employee benefits packages with wellness and mental health support packages.
These can help individuals and the employer by minimising the risk of long-term absence due to stress or mental health issues; by enhancing employee morale and health; and by helping rehabilitate key staff after an absence due to illness or injury.
“The potentially catastrophic consequences that illness or injury to key people can have on a business is just too big a risk not to plan for,” says Paul Moulton, SME director for Axa PPP Healthcare.
“Yet providing healthcare cover gives employers the peace of mind that comes with knowing their people will get the care they need, in privacy and comfort, and at a time and place that works for them and for the business.”