business protection. supporting resilient business...
TRANSCRIPT
Scottish Widows Business Protection Report September 2013
Supporting resilient business plans.
Business protection.
3
Contents.
Introduction 6-7
Part 1. Dependence on key individuals. 8-9
Part 2. Why the need is as great as ever. 10-11
Part 3. The safety net. 12-13
Part 4. Recommendations. 14-15
4
Business protection landscapeIntroduction
Which of the following best describes your involvement with financial and legal decision making within the company/organisation where you usually work? Please select one answer.
Which of these best describes your role within the
organisation?
I am solely responsible for some or all of the financial/
legal decision making, within my organisation
I am jointly responsible for some or all of the financial/
legal decision making, within my organisation
How many employees are there in the organisation you work for? Please include employees working at all locations within the UK.
Company Owner/ Founder
35%
2%
Partner
Board Director
41%
11%
7% Senior Manager
2%
3%
Senior Manager
Senior Manager
Key to percentage (%) of employees
2 - 9 (41%)Just me (35%) 10 - 49 (11%)
50 - 249 (7%) 250 - 999 (3%) 1000 + (3%)
13%
16%
13%
58%
PartnerSenior Manager
Board Director
Company Owner/Founder58%
13% 13%16%
Part 1. Dependence on key individuals
How long do you think it would take the business to return to the same level of profitability/efficiency after the loss of a key person?
54% The business would
not recover
7% Less than
three months
16% Between six months
and one year
7% Between one and two years
3% More than two years
13% Between three months
and six months
0
20
40
60
80
100
63% 37%0
20
40
60
80
100
63% 37%
5
None of these 18%
26% Consequential loss e.g. loss of profit insurance following a fire, flood etc
63% Public liability
51% Employers liability
10% Life cover for your staffe.g. death in service
32% Office equipment e.g.
8% Key person cover –
10% Key person cover – death14% Critical illness cover –
21% Life cover – on partner/directors life
Motor vehicle 39%
54% Contents
48% Buildings
on partner/directors life
critical illness
photocopier, pc, printer
Part 2. Why the need is as great as ever
Does your business have insurance in place to protect against financial costs associated with losing key people (e.g. loss of revenue, cost of recruiting a replacement)? Please note, this does not include death in service cover.
What type(s) of insurance, if any, does your business
currently have in place? Selecting all that apply.
Part 3. The safety net
45% of businesses would expect to survive in the event of losing a key team member.
0
20
40
60
80
100
would simply replace the individual in
question
would spread the work across the remaining
employees
would pursue options such
as cutting costs and dipping into
the business’s cash reserves
17% 13% 15%
17%Yes, we do have
insurance in place for this
2%Yes we do have insurance in place but it has not been reviewed for over 5 years
80%No, we do not
have insurance in place for this
Strong chance
Small chance
Part 4. Recommendations
In analysing the risks posed to a business there’s often a difficulty in balancing two different types of events: those that will probably occur at some point but with relatively little impact on the business; and those that are less likely to happen but have a serious impact on its future.
None of these 18%
26% Consequential loss e.g. loss of profit insurance following a fire, flood etc
63% Public liability
51% Employers liability
10% Life cover for your staffe.g. death in service
32% Office equipment e.g.
8% Key person cover –
10% Key person cover – death14% Critical illness cover –
21% Life cover – on partner/directors life
Motor vehicle 39%
54% Contents
48% Buildings
on partner/directors life
critical illness
photocopier, pc, printer
None of these 18%
26% Consequential loss e.g. loss of profit insurance following a fire, flood etc
63% Public liability
51% Employers liability
10% Life cover for your staffe.g. death in service
32% Office equipment e.g.
8% Key person cover –
10% Key person cover – death14% Critical illness cover –
21% Life cover – on partner/directors life
Motor vehicle 39%
54% Contents
48% Buildings
on partner/directors life
critical illness
photocopier, pc, printer
6
Introduction.
Welcome to the 2013 Scottish Widows UK Business Protection Report, building on previous biennial publications in 2009 and 2011.
The report is based on research commissioned from YouGov aimed at exploring the profit, liquidity and succession risks posed to UK businesses in the event of a key person within the organisation falling ill, being incapacitated for the long-term or dying. We also sought to find out more about the way in which firms are preparing – or not – for that contingency.
Small and medium-sized businesses are operating in a challenging environment amid ongoing economic uncertainty, although some more hopeful economic indicators have emerged recently.
We surveyed a representative sample of more than 500 businesses across the UK. Of the individual respondents, 63% had sole responsibility for some or all of the financial and legal decisions made within the organisation, with the remainder being jointly responsible.
Almost six in 10 were business owners or founders, while 13% were partners, another 13% were directors and the rest described themselves as senior managers.
Three quarters were sole traders or employed no more than nine people, with just over half the businesses questioned being family run. Only 7% employed 250 or more people and more than half posted turnover in the last financial year of less than £500,000.
With such small teams predominant within this business demographic, it becomes apparent quickly how the loss, either temporary or permanent, of just one member of staff can have an overwhelming impact on an organisation’s ability to operate and maintain continuity of business.
The research produced a series of eye-catching and even alarming findings. For example:
• More than three quarters of businesses would struggle to survive or would see profitability and liquidity affected if they lost one or more key people to illness, long-term incapacity or death
• Less than a fifth of those firms have insurance in place to protect against the loss of a key person
• More than half say they have never considered the impact on their business of this happening
• More than six in 10 businesses have liabilities they have to cover, including loans
For most businesses the current priorities are delivering on promises to, and having good relations with customers.
Diagram 1: Which of the following best describes your involvement with financial and legal decision making within the company/organisation where you usually work? Please select one answer.
I am solely responsible for some or all of the financial/
legal decision making, within my organisation
I am jointly responsible for some or all of the financial/
legal decision making, within my organisation
0
20
40
60
80
100
63% 37%0
20
40
60
80
100
63% 37%
7
Diagram 2: Which of these best describes your role within the organisation?
Diagram 3: How many employees are there in the organisation you work for? Please include employees working at all locations within the UK.
Diagram 4: What was the turnover of your company in the last financial year? Please give your best estimate if you are unsure.
Expect to see an improvement in the economy in 2013.
UK adult population failing to save.
11%
31%
57% Individuals believe that they are saving less now than two years ago.
11%Expect to see an improvement in the economy in 2013.
31% UK adult population failing to save.
57%Individuals believe that they are saving less now than two years ago.
Senior Manager2%
Senior Manager3%
Senior Manager
Senior Manager7%
Partner
Board Director11%
Company Owner/Founder35%
41%
5%
£25 million or more
1%
£15, 000,000 – £24,999,999
4%
£5,000,000 – 14,999,999
14%
£500,000 – £4,999,999
£125,000 – £499,999
14% 31%
£15,000 – £124,999
£0 – £14,999
15% 4%
First year of trading
£25 million or more £15, 000,000 – £24,999,999
£5,000,000 – 14,999,999 £500,000 – £4,999,999
£125,000 – £499,999 £15,000 – £124,999
£0 – £14,999 First year of trading
5 %
15% 4 %
31%
4 %
14 %
14 %
1 %
13%
16%
13%
58%
PartnerSenior Manager
Board Director
Company Owner/Founder58%
13% 13%16%
Company Owner/ Founder
35%
2%
Partner
Board Director
41%
11%
7% Senior Manager
2%
3%
Senior Manager
Senior Manager
Key to percentage (%) of employees
2 - 9 (41%)Just me (35%) 10 - 49 (11%)
50 - 249 (7%) 250 - 999 (3%) 1000 + (3%)
Part 1. Dependence on key individuals.
Small and medium-sized businesses often rely heavily on one or a small number of individuals, usually a founder, owner, partner or director. Without them both the day-to-day running of the business and its long-term future may be seriously compromised.
However, 80% of businesses have no insurance in place to protect against financial costs associated with losing key people, meaning they would be exposed to significant financial difficulties in the event of this happening. Of those, almost three quarters are an owner, founder, partner or all three.
Diagram 5: Which of the following roles best describe the individuals whose loss you believe would seriously impact the profitability/survival of the business? Please select all that apply.
Their importance is underlined by the fears expressed as to how their absence would affect the business.
For the majority it would be the end of the road: asked if they would survive the loss of a key person, 55% of respondents said they would not be able to.
Just 4% were confident that there would be no threat to the company’s survival. Asked how long it would take to return to the same level of profitability or efficiency after the loss of a key person, 54% said they would never recover, while 11% estimated that it would take at least a year.
Diagram 6: How do you think your business would survive the loss of a key person? Please select all that apply.
8
We found that 77% of organisations have at least one person whose loss through death, illness or long-term incapacity would have serious implications for the survival or profitability of the business.
Partner
Board Director
Partner
Company Owner/Founder
Senior Manager
020
4060
80100
Board Director
Partner
Senior Manager
Company Owner/Founder
67%
15%
17%
12%
55% Business would not survive
46% Business would survive with alteration to strategy
CLOSED
OPEN
GONEFISHING
4% Do nothing it would survive anyway
4% Cut costs
8% Dip into financial reserves
13% Spread the work across employees
17% Would simply replace the key person
10% Haven’t considered this
8% Haven’t thought of what would happen
2% Don’t know
9
Diagram 7: How long do you think it would take the business to return to the same level of profitability/efficiency after the loss of a key person?
A large number of respondents identified all of the above as possible consequences – yet just one in five companies has insurance in place to protect against them.
This may partly reflect the relatively low likelihood of such an eventuality, with 86% of the firms surveyed never having experienced the loss of a key employee to death, illness or long-term incapacity. But while the chances of it happening would appear to be slim, the level of detriment where it does occur is considerable.
The business model had to be reviewed in 34% of cases and 30% had to recruit a replacement.
Table 1: You said that your business has experienced the death, critical illness or long term incapacity of a key person, partner or director whose absence seriously impacted on the business. How did this impact on your business? Please select all that apply.
There can be less tangible consequences for a business too, with 34% of respondents referring to the psychological impact on their staff of losing a key person.
All whose business has experienced the death of a key employee
% respondents
Loss of expertise 55%
Loss of revenue 44%
Had to re-think business model 34%
Psychological impact on staff 34%
Had to recruit replacement 30%
Low staff morale 22%
Had to extend/increase bank or director loans
6%
Had to involve solicitors 6%
Of the 14% that have been impacted, 44% said they suffered a loss of revenue and 55% were affected by the loss of expertise.
54% The business would
not recover
7% Less than
three months
16% Between six months
and one year
7% Between one and two years
3% More than two years
13% Between three months
and six months
10
Part 2. Why the need is as great as ever.
In an often tough and sometimes uncertain environment businesses may be especially focused on their core priorities.
The results were almost identical when it came to
insuring against a key person suffering a critical illness
or long-term incapacity. Yet our findings confirmed that
the loss of certain individuals could significantly impair
their ability to deliver to customers or cover their costs.
Of course some firms do have plans in place to ensure
they are protected in such instances even where there
is no insurance. But while more than three quarters said
the loss of a key person would threaten their profitability
or even their very existence, eight in 10 have no insurance
in place to fall back on should that happen.
Of the remainder, 19% do have insurance (not
including death-in-service cover), 2% of whom
said they hadn’t reviewed it for at least five years.
The other 1% admitted they didn’t know if they
had insurance or not.
In that sense it’s unsurprising that 68% of respondents identified ‘delivering on commitments and promises to customers’ as the most important aspect of their business, while 60% cited ‘having good relations with customers’. Top of the list for 32% of firms was the need to cover their fixed overheads. In contrast, insuring against the death of a key person was picked out by just 3% as their biggest priority.
11
Diagram 8: Does your business have insurance in place
to protect against financial costs associated with
losing key people (e.g. loss of revenue, cost of
recruiting a replacement)? Please note, this does not
include death in service cover.
The current constrained economic environment has done little to change this, with 46% of respondents saying the climate hadn’t increased their need for business protection.
One in six firms said they were adequately covered, a quarter hadn’t thought about it and 5% were aware of the need but prepared to risk not having insurance. Of those who had become more aware of the need for protection, 4% said they had taken action and 3% intend to do so.
The main reason given for not having some form of business protection insurance was a perceived lack of value (37%), although more than three in 10 gave the perceived or known expense of insurance as their biggest objection.
If the economic downturn hasn’t affected attitudes towards business protection insurance, it does appear to have left more firms with costs to cover, increasing
their financial vulnerability.
One in six firms said they were adequately covered, a quarter hadn’t thought about it and 5% were aware of the need but prepared to risk not having insurance.
Since our last survey the number of respondents with liabilities (such as business loans, mortgages and overdrafts) has risen from 34% to 42%. However a third of those firms with liabilities have no plans in place should they lose a key person.
All who can think of an employee whose loss would seriously impact their business
17%Yes, we do have
insurance in place for this
2%Yes we do have insurance in place but it has not been reviewed for over 5 years
80%No, we do not
have insurance in place for this
12
Part 3. The safety net.
So what are businesses doing to protect against the implications of losing a senior member to death, illness or incapacity?
Of the 45% that would expect to survive in the event of losing a key team member, 17% would simply replace the individual in question and 13% would spread the work across the remaining employees. Others would pursue options such as cutting costs and dipping into the business’s cash reserves.
In other words, firms are self-insuring by putting often piecemeal measures in place to cover eventualities. That 8% admitted they had never considered whether they would survive suggests a good number of firms are more vulnerable than they might anticipate.
Of those that are legal partnerships, more than a third revealed that there is nothing in their partnership agreement setting out what would happen to the business if one partner were to die, fall ill or become incapacitated.
Two thirds of limited companies quizzed admitted they didn’t know what was in their ‘articles of association’, with just 24% having some form of agreement in place for death, illness and incapacity.
The partnerships and limited companies that have provision in place for the loss of a key employee are most likely to fall back on business reserves (19%) or the sale of assets (15%) or personal reserves (10%). Life cover and critical illness cover was in place at 15% and 14% of those businesses respectively.
Diagram 9: 45% of businesses would expect to survive in the event of losing a key team member.
Businesses with liabilities and that do have a plan to cover them if a key person were to die or be unable to work would use their life cover (17%), fall back on their cash reserves (12%) or sell the business or its assets. A small number would dip into their personal savings or sell their own assets.
Businesses do take steps to insure against some eventualities. They are considerably more likely to insure their office equipment (32%, up from 27% in 2011), buildings (48%) and contents (54%) than cover the risk of losing a key individual.
0
20
40
60
80
100
would simply replace the individual in
question
would spread the work across the remaining
employees
would pursue options such
as cutting costs and dipping into the business’s cash reserves
17% 13% 15%
13
None of these 18%
26% Consequential loss e.g. loss of profit insurance following a fire, flood etc
63% Public liability
51% Employers liability
10% Life cover for your staffe.g. death in service
32% Office equipment e.g.
8% Key person cover –
10% Key person cover – death14% Critical illness cover –
21% Life cover – on partner/directors life
Motor vehicle 39%
54% Contents
48% Buildings
on partner/directors life
critical illness
photocopier, pc, printer
Just 10% said they had insured against the death of a key person – up from 6% in our previous survey two years ago – and 8% against them falling seriously ill, up from 4% in 2011. The modest increase in the number of businesses taking out insurance that would pay out if a key person were to die or become seriously ill does indicate that some firms are considering the implications of various eventualities. But with a greater increase in the number of firms insuring office equipment it may be unwise to read much into the improved take-up of life and critical illness policies.
Such a discrepancy is understandable when bearing in mind that there’s a greater chance of a photocopier breaking down or the premises being damaged than of certain people dying, suffering a critical illness or being incapacitated for a period. As we have seen, however, of these events it is the loss of a key person that has the greatest ramifications for a business, often putting its very future at risk.
Diagram 10: What type(s) of insurance, if any, does your business currently have in place? (Selecting all that apply).
14
Part 4. Recommendations.
There continues to be an alarming mismatch between the harm potentially caused to businesses (and the wider economy) by the loss of a key person and the steps being taken to mitigate against that outcome.
While the vast majority of firms would struggle to survive or would suffer a hit to profitability if this were to happen, very few have insurance covering that eventuality.
In many cases it would seem that businesses underestimate their vulnerability; more often it appears that protecting
against the loss of a key employee simply isn’t a priority.
Put it into perspective
Owners and directors focusing on day-to-day challenges
can often find the bigger picture obscured.
In a tough business climate making sure all the office
equipment is working may seem an urgent priority.
A broken photocopier or computer can cause significant
short-term disruption, which is why a large number of
firms insure their office equipment.
However, the majority would be in far greater
difficulty in both the short and long-term if they were to
lose one or more of their key employees. The following
points are pertinent for owners and directors considering
where protecting key people fits into their wider
business plan.
15
Risk assessment
In analysing the risks posed to a business there’s often a difficulty in balancing two different types of events: those that will probably occur at some point but with relatively little impact on the business; and those that are less likely to happen but have a serious impact on its future.
Diagram 11:
On stepping back from the day-to-day rigours of running
a business it’s often clearer to see how it may not be
possible to meet the stated priorities – such as delivering
on promises to customers – if a key individual were taken
out of the equation.
Additional benefits
The financial case for having cover in place doesn’t stop
there, with business protection insurance offering other
advantages that support the wider priorities.
One example is the tax relief that may be available on
business protection cover, depending on the type of
business, which can help reduce the cost of premiums.
Advice is essential in identifying and taking up this
opportunity, but the ability to cut tax is an attractive
proposition at any time, let alone in the current business
climate. Add to that the knowledge that the business is
secure in the event of a key person’s death, illness or
incapacity, and the value of business protection
insurance is clear.
Securing the future
While insurance is rarely a priority, its absence can be the
biggest single risk to the profitability and even the very
existence of a business. In tough times, the security of
knowing a company would not be at threat due to the
loss of a key person is vital.
Delivering on commitments and
promises to customers is rightly a
top priority for business owners and
directors. Insuring premises and the
equipment that keeps it going is also
very important.
Can any of that be achieved, however, if
the survival of the business were at threat
due to the loss of one central figure?
Strong chance
Small chance
Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0845 608 0371. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 191517 (www.fca.org.uk/firms/systems-reporting/register).48964 08/13