Different organisations hold different
views on what
“assets” mean. Ask any
accountant and they will probably
tell you that
“assets = liabilities + owners’ equity”. Many
business
owners adopt the view that “
assets = customers + more customers + even
more customers”. However, should we not take “assets” to mean “anything
that is of value”?
From small firms to large companies, almost
every business undertakes some form of insurance of their physical
assets such as manufacturing facilities, plants, machinery, stock
inventories, and office premises, helping to mitigate potential
financial losses that arise from natural and manmade disasters. So, this
begs the question,
why is it that 27% of companies have office
equipment protection but only 13% have key man insurance of any kind?
In other words,
while companies understand
how important their key men are, their behaviour suggests that they deem
their office equipment to be more important.
Who should be regarded a key person?
Very few companies cover themselves against
the loss of their most important assets, the
“key executives” of the
company i.e. the person(s) at the helm who provide financial and
strategic direction to their businesses, as well as individuals who hold
special relationships with clients or contacts – in other words,
individuals whose presence in the business is integral to its continued
success.
The key to determining if an executive is a key person rests in asking a few key questions:
| • |
Will the business be seriously impaired without him/her? |
| • |
Does he or she have unique skills that would be very hard to obtain in the industry? |
| • |
Does he or she have a special role or relationship with regard to a few key, large accounts? |
| • |
Will his or her absence from the company affect its stability in any way? |
|
27% of companies have office equipment protection but only 13% have key man insurance of any kind.
|
What are the risks?
Several facts illustrate the risks quite readily:
| • |
In a scenario with four key male
employees, there is a 29% chance that one of them will die before
retirement and a 68% chance one will suffer a critical illness. |
| • |
70% of entrepreneur-owned businesses do not survive their founder. |
| • |
65% of companies in a recent survey
felt that the death of a senior employee would have severe impact upon
their business, while 57% felt that if a key employee were to be off
work due to health reasons for half a year, their business would be
seriously affected. However, just under a fifth of senior employees had
actually purchased cover. | | |
The above illustrate the likelihood of
health risks faced by a company’s key men, and despite understanding the
risk and potential financial losses, they do nothing to purchase cover
for them; while more often they continue to protect their photocopier.
When is key person insurance warranted?
What kind of business should have key man
protection as part of their overall risk and insurance programme? Large
corporations have many stakeholders who contribute to the stability of
the business; smaller companies rely even more on their key managers –
the business can easily fail without them.
In the unfortunate
event that the key person really does succumb to illness or injury and
is unable to perform his duties, the business can use the payout from
the policy for the following:
| 1. |
maintain the daily operations of the business; |
| 2. |
assure stakeholders of business stability by having a smooth transition, using the money to find a suitable replacement; |
| 3. |
ensure that customers continue to be satisfied with products and services; |
| 4. |
protect goodwill and supplement profits suffered from the event. |
|
Key person insurance
ensures the stability and profitability of the business, by insuring
against short run capacity and the possibility of losing key employees.
|
The bottom line
Taking up key person insurance cover makes
perfect sense for businesses whatever the scale; it ensures the
stability and profitability of the business, by insuring against short
run capacity and the possibility of losing key employees. It is a
cost-effective method of protecting your business as well as its
stakeholders.
Most companies purchase cover for their
office equipment. It is ironical that they do not purchase cover for
their key talent, the company’s most valuable asset.
