Human capital protection

In smaller companies there is often a key individual crucial to the success of the organisation. Yet it is these businesses who most often neglect to recognise and insure their most important assets, reports Edmund Tirbutt

Most intermediaries would agree that grabbing the attention of busy company heads to interest them in company-related life and health insurance arrangements is a real challenge. Even once they have decided they need the cover, the small matter of trying to get them to complete paperwork and attend medical examinations can also prove problematic.

Arguably the most thankless task of all can be trying to persuade a company head of the need to undergo underwriting to top up their group risk cover when the amount they are contractually entitled to exceeds the scheme free cover limit – below which underwriting isn’t required.

Steve Herbert, head of benefits strategy at Jelf Group, says: “When heads exceed the limit, intermediaries should be making sure HR departments tell the individual concerned they are not covered above that level and should encourage them to undergo underwriting. In the majority of cases they don’t bother to top up but it’s essential to stress that the benefit is limited to the free cover level. I’ve certainly seen disputes when people have died and haven’t been entitled to the four times salary death in service benefit they thought they were.

“The only way to get them to fill in forms and possibly to attend medicals is to constantly remind them. HR is the most appropriate place to keep reminding as it’s their duty to make sure the heads are covered up to the level detailed in their contract of employment. Intermediaries also need to be aware that an insurer’s group scheme cover may be restricted to postcode event limits and, should this be the case, they need to find another insurer to top up the risk.”

When it comes to business protection, where the cover is written on the life of the company head but the pay-out is for the benefit of the company, tying down busy individuals becomes even more critical because failure to do so could affect the company’s very ability to go on trading.

Advisers may find less demand for key person cover the larger the company is. The heads of the very largest companies tend to delegate a lot and are not always considered indispensible enough to need keyperson cover to protect against their loss of input through death or serious illness.

Similarly, for these organisations, there may be no need to take out shareholder or partnership protection on their lives to enable their fellow directors or partners to buy out their share of the business in the event of their death or incapacity. They may not hold an equity stake and, even if they do have one, the shares may be easy to sell if the company is publicly quoted.

But with SMEs, the story can be completely different. An SME company head may well be in need of both key person cover and shareholder or partnership protection. If a loan is granted as a result of the head’s personal reputation then they may also need to have loan protection cover written on their life, and this may involve personal guarantees. If so, it is important to ensure that cover is written in a way that ensures that the whole loan – as opposed to just a proportion of it – is paid off in the event of them dying or becoming critically ill.

When it comes to company heads appreciating the actual need for business protection cover, experts tend to stress that awareness of the benefits of shareholder or partnership protection lags well behind that of key person cover. Research by Legal & General (see box) has found that only 4 per cent of businesses have shareholder protection in place, pointing to a considerable untapped market.

Peter Chadborn, director of specialist IFA CBK (Colchester), says: “It’s amazing how often business owners will take out key person cover on themselves and other key employees but, more often than not, they seem completely unaware of the need for partnership or shareholder protection.

“However, the fact that it has implications for their families tends to hit a particular nerve and can often get them around to doing something. But it’s never a quick process, especially if there are more than two business partners.”

With all forms of business protection cover, intermediaries must pay serious attention to the insurers they select because subjecting a company head to an incompetent underwriting process is one of the surest ways of losing all their company’s business.

Key questions for intermediaries include whether insurers provide appropriate service level agreements, underwriting websites and helplines. And are they in certain cases willing to go the extra mile and, for example, whisk company heads off to Harley Street for medicals via taxi?

Getting the accountant on board to recognise there’s an issue is very important as they are often the ones who have to arbitrate between aggrieved parties if there is no cover in place

Ed Stuart-Brown, head of protection sales at Friends Provident, says: “The process of writing these larger sums assured is by definition more intense and complex, and you may need an ECG and full medical together with financial underwriting. At this level it is time rather than price that is the precious commodity, and there is tolerance around price of around 10 to 15 per cent according to added value provided by service. It is not a commoditised market and there is a huge differential in terms of quality, so you need to really interrogate the insurers as to the service they are providing.”

If a business has been referred by an accountant or solicitor it can help to use them to chivvy things along and stress how important it is to get the underwriting completed. An accountant’s cooperation can also be important for valuing the business when financial underwriting is involved.

Bhupinder Anand, managing director of central London based specialist IFA Anand Associates, says: “Getting the accountant on board to recognise there’s an issue is very important as they are often the ones who have to arbitrate between aggrieved parties if there is no cover in place. People rarely agree on value because the company head virtually always overvalues the business. So if you get a valuation as part of the underwriting process it can help solve the problem.”
Intermediaries can also greatly increase the chances of things running smoothly by preparing thoroughly for meetings with company heads. One key message is to avoid “salami underwriting” -doing things one slice at a time.

Ian Smart, head of product development and technical support at Bright Grey, says: “You should be able to get most of the information that the financial underwriter will need during the initial appointment when you are considering how much cover to recommend. So make sure you get the last two or three years’ report and accounts, or at least warn them they will be needed if they don’t have them to hand. “You may need details of loan arrangements although, if a loan is with a major bank, the insurer may accept the bank’s underwriting for amounts of up to £1m or £2m. “It’s also always worth knowing what the medical underwriting is likely to involve. Most insurers provide a guide or website detailing when medicals, ECGs, specialist reports or even blood tests are needed.”

Providers tend to suggest that the first meeting should be with someone involved with running the business, even if it isn’t the company head. The second meeting, when the findings should be presented, should be with all the board directors, including the head – with an SME these will normally total only two or three individuals. Once agreement has been reached, arranging 10 minute meetings with individual directors to get them to sign the forms is likely to be far more effective than using the post and having paperwork left sitting around on desks.