A guide to insuring the key people in a business, from Greg Moss, chartered financial planner and SME business expert at accountancy firm Old Mill.
Ever since Steve Jobs, co-founder of technology giant Apple, resigned as chief executive in a public letter, analysts have been speculating about whether the company will ever be the same again.
When shares in the company dropped more than 5 per cent in reaction to the news of his departure, it showed that Jobs, who saved Apple from near bankruptcy in the 1990s and transformed it into the tech giant it is today, was more than just a CEO, he was vital to the company’s success.
Apple is certainly not alone in having one person on whom the business relies, and it is a strange quirk that businesses are more likely to insure their tables and chairs than the people who drive their growth and profitability:
Recent research by the Institute of Directors and British Chamber of Commerce, in conjunction with Legal & General, finds that the key person insurance ‘gap’, which is the difference between cover in place and identified risks, remains persistently high at over £1.1 trillion.
Of limited companies surveyed, 95 per cent identified at least one key person, without whom the business would be in jeopardy, with 39 per cent of those saying they would not survive for more than 18 months without that key individual.
So what should companies do to avoid a Steve Jobs Apple situation? Keyperson insurance should be considered.
If a senior member of staff dies or becomes seriously ill, it can be a massive blow for any business. Not only is there the emotional upset of losing such a key figure, but the loss can also harm the finances of the business.
Unfortunately, the former is something that companies have to come to terms with, but risk of the latter can be minimised
Businesses need to think about how the loss of a key person could affect them and then look at insuring the business against financial losses that would arise from the death or extended incapacity of that person.
Death is obviously the main risk, but it is also important to consider that serious illness can also be a big risk, and create even larger liabilities over the longer term.
Following a death, at least the scale of the problem is known immediately, and succession plans can be put in motion. But with a serious or long-term illness, like in Steve Jobs’ case, businesses often feel an obligation to provide for the person affected, particularly if they are a founder or major equity holder.
In this situation, businesses face the same shock to profitability/costs of replacement squeeze as with a key person’s death with the added pressure of funding continuing payments to the individual, generally for an uncertain period.
The key questions employers need to ask themselves here are, what their plans would be in the event of the long-term illness of a senior staff member, what the formal sick pay arrangements are and, most importantly, is there a mechanism in place to fund this liability?
The benefit of having room to manoeuvre in this difficult situation can be enormous – to have the means to support a senior member of the team through illness without compromising profitability is a win-win scenario.
