Business protection gap widens to £1.3 trillion says L&G

UK businesses currently have a £1.35 trillion shortfall in business protection, with their level of underinsurance rising 18 per cent in four years, according to L&G research.

The insurer found a decrease in key person protection of just over £21 billion and a significant increase in the shareholder protection gap of over £255 billion.

The biggest factor to account for the increase in the protection gap is the growth in the number of limited companies and partnerships without cover, which now stands at 1.3 million, up 100,000 from 2008.

The research found businesses have changed they way they are structuring their debt and managing day-to-day cash flow issues. L&G’s 2008 research showed that bank based loans made up 30 per cent of all corporate debt but this has now reduced to 16 per cent as banks restricted investment in businesses and business owners have worked to pay off outstanding debt.

But the research shows a significant rise in the proportion of alternative forms of debt, including overdrafts and regular credit card used, from 21 per cent in 2011 to 41 per cent today, of the total debt held. Clearly this is a more expensive way of funding debt.

Figures from insolvency trade body R3 show that 1 in 10 companies in the UK are only able to pay the interest on their debts but not reduce the debt itself.

The study also revealed that over half of all corporate debt remains unprotected, an increase of 19 per cent on 2011. L&G says this increased reliance on short-term debt like credit cards and overdrafts shows the precarious position many businesses could be in if something unexpected happened to an owner or other key person.

The research also found almost 70 per cent of businesses had no plans in place to be able to repay balances on director loan accounts to a deceased estate in the event of death.

The study also found 31 per cent of business owners surveyed take assessing and managing business risk very seriously to ensure that they have an appropriate level of insurance cover. Yet 50 per cent say that whilst business risk is important, they don’t always feel they need to be insured for everything, with 30 per cent of business owners saying they didn’t have any insurance cover in place in the event of a key person within the business dying or becoming terminally or critically ill, because they either hadn’t even considered it, hadn’t got round to it or because they were too busy to evaluate it.

The findings come as Legal & General and Unbiased, the professional adviser search, launch a campaign to raise awareness of business protection issues. The ‘Every Business Matters campaign aims to examine attitudes to business protection, highlight the gaps in the business protection market and raise awareness of key issues such as the financial impact of a key worker and where businesses are most at risk without cover.

Legal & General head of specialist protection Clare Harrop says: “Since 2009 Legal & General have worked with other associations to bring advisers an insight into where the gaps lie in the corporate market and how to work with business owners to help them realise their human capital vulnerabilities.  Businesses have always had to adapt to survive but recent economic pressures have meant that the pace of change has sped up significantly and as a result UK businesses are holding more un-indemnified risk than ever.

The aim of Our ‘Every Business Matters’ campaign is to raise awareness and gives opportunities for advisers to discuss the importance and need for cover with their clients. As a key provider in the protection industry it’s our aim to support Britain’s businesses in closing the business protection gap.”

Business Protection Gap      

2009

2011

2013

Corporate Debt

£294,640,152,281

£264,790,868,450

£223,604,063,103

Shareholder Protection

£424,001,720,178

£427,977,312,753

£683,711,169,935

Key person – Profit

£425,265,134,444

£460,371,704,508

£439,180,978,564