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The key facts for small firms

SMEs insure their material assets but often neglect to cover key staff adequately.

The business protection market continues to be underdeveloped area in the UK. The need for cover is easy to establish but why is the call to action harder?

As an individual, what is the first thing that you look to protect? For most, it is typically material possessions such as cars, houses, special items and so on but not intangibles such as their health. However, without good health, the material possessions do not look so important.

The same applies to many businesses. They seek to protect what is visible – buildings, machinery and supplies – while the lifeblood of the company, the workforce and key employees, are left unprotected. If a key employee were to die, would the buildings, machinery and supplies seem so important?

Legal & General’s research indicates that there are, on average, two key employees who are vital to the long-term and short-term future of the typical SME.

Companies can move sites, order new supplies and machinery but can they replace the knowledge and contacts of key personnel to keep trading successfully at short notice? How would the business cope with the shortfall in income while they hire and train a new employee.

There are around 1.2 million small businesses – those with fewer than 100 employees – according to Government statistics and these control over 837bn of turnover.

L&G’s research indicates that 48 per cent of these companies had no key employee cover. This creates a market of over one million uninsured key emp-loyees who are vital to the future of small companies. This represents a significant market for IFAs before we add in the other kinds of business protection and many of the 52 per cent who have some cover are unlikely to be fully insured.

How can we approach this market? There are three kinds of cover, each of which is undersold in the business protection market.

Possibly the most important is protection for key employees – an individual whose particular skill, knowledge, leadership and/or experience contribute towards the company’s continuing financial success. If a keyperson dies, the implications for the business can be dramatic and have a drastic effect on its future success – sales may slump and stakeholder confidence may melt away – so there is a clear need for cover.

There is also a need for protection for business loans. This is related to the loss of someone whose death would adversely affect the company’s performance and the loans. If the loans are not covered, this could lead to a withdrawal of the loan or an inc- rease in the interest rate, which could have severe consequences for an SME.

Finally, there is protection for shareholders or partnerships. The shareholders (or partners) take out cover so that if a shareholder (or partner) dies, then the surviving shareholders (or partners) can buy the deceased’s share of the business, ensuring business continuity and minimising disruption.

The opportunities are clear so why is there such underinsurance of SMEs?

The first challenge is on how complicated is the business to sell? The products used are the same as for individual clients – term, critical illness, whole of life and income protection.

The key element is not the product but the use of trusts and life of another to ensure the benefits are paid in the appropriate manner. A number of providers have technical teams who can help in this area.

The second issue is getting the customer – busy individuals and multiple parties – through the application process.

Some providers have recognised that the needs of these customers and their cover are different and they have created high sum assured processes. An important benefit of this process is active pipeline management so agents are aware of any additional information required and can keep the client informed.

With providers creating support and processes to help agents writing the business and with such an underinsured market,the time may have come to put business protection higher on the priority list.

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