Business protection. Supporting resilient business plans. Scottish Widows Business Protection Report September 2013
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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 3
100 80 60 40 20 0 100 80 60 40 20 0 16% 13% 13% Business protection landscape 58% Introduction 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? 63% 63% 37% 37% 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. Partner 58% Company Owner/Founder 13% 13% 16% Board Director Senior Manager 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 3% More than two years 7% Between one and two years 16% Between six months and one year 13% Between three months and six months 7% Key to percentage (%) of employees Just me (35%) 2-9 (41%) 10-49 (11%) 50-249 (7%) 250-999 (3%) 1000 + (3%) 7% Less than three months 4
100 80 60 40 20 0 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. 63% Public liability 48% Buildings 32% Office equipment e.g. photocopier, pc, printer 14% Critical illness cover on partner/directors life 8% Key person cover critical illness 54% Contents 51% Employers li 26% Consequent insurance fo 21% Life cover 10% Key person 10% Life cover fo e.g. death in Motor vehicle 17% 39% None of these 18% Yes, we do have 63% Public liability 54% Contents 63% insurance Public in liability place for this 54% Contents 48% Buildings 51% Employers liability 48% Buildings 51% Employers liability 26% Consequential loss e.g. loss of p 32% Office equipment e.g. 26% Consequential loss e.g. loss of profit insurance following a fire, flood photocopier, pc, printer 32% Office equipment e.g. insurance following a fire, flood etc photocopier, pc, printer 21% Life cover on partner/directo 14% Critical illness cover on partner/directors life 21% Life cover on partner/directors life 14% 10% Key person cover death Critical illness cover on partner/directors life 10% Key person cover death 8% Key person cover 10% Life cover for your staff 8% Key person cover critical illness 10% Life cover for your staff e.g. death in service critical illness e.g. death in service 2% 80% Motor vehicle 39% Yes we do have insurance Motor vehicle No, 39% we do not None of these 18% in place but it has not been have insurance None in of these 18% reviewed for over 5 years place for this Part 4. Recommendations Part 3. The safety net 45% of businesses would expect to survive in the event of losing a key team member. 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. 17% 13% 15% Strong chance 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 Small chance 5
100 80 60 40 20 0 100 80 60 40 20 0 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. 63% 37% 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 6
16% 11% Expect to see an improvement in the 13% economy in 2013. 31% UK adult population failing to save. 13% 57% Individuals believe that they are saving less now than two years 58% ago. Diagram 2: Which of these best describes your role within the organisation? Diagram 4: What was the turnover of your company in the last financial year? Please give your best estimate if you are unsure. 3% Senior Manager 2% Senior Manager Senior Manager 58% Company Owner/Founder 5 % 1 % 25 million or more 15, 000,000 24,999,999 7% 11% Senior Manager Board Director 13% 13% 16% Partner Board Director Senior Manager 4 % 14 % Diagram 3: How many employees are there in the Partner organisation you work for? Please include employees working at all locations within the UK. Company Owner/ Founder 5,000,000 14,999,999 500,000 4,999,999 14 % 31% 125,000 499,999 15,000 124,999 15% 4 % 0 14,999 First year of trading 3% 2% 2% 7% Key to percentage (%) of employees Just me (35%) 2-9 (41%) 10-49 (11%) 50-249 (7%) 250-999 (3%) 1000 + (3%) 11% 41% 7
Part 1. Dependence on key individuals. 60 80 100 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. 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. 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. Company Owner/ Founder 67% Board Director 15% Partner 17% Senior Manager 12% 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. CLOSED OPEN GONE FISHING Partner 55% Business would not survive 46% Business would survive with alteration to strategy 17% Would simply replace the key person Partner 13% Spread the work across employees 8% Dip into financial reserves 4% Cut costs 4% Do nothing it would survive anyway 10% Haven t considered this Board Director 8% Haven t thought of what would happen 2% Don t know Company Owner/ Founder 8
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? 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 The business model had to be reviewed in 34% of cases and 30% had to recruit a replacement. 3% More than two years 7% Between one and two years 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. 16% Between six months and one year 13% Between three months and six months All whose business has experienced the death of a key employee Loss of expertise 55% Loss of revenue 44% Had to re-think business model 34% Psychological impact on staff 34% % respondents 7% Less than three months 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. Had to recruit replacement 30% Low staff morale 22% Had to extend/increase bank or director loans 6% Had to involve solicitors 6% 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. 9
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. 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. 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. 10
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 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. All who can think of an employee whose loss would seriously impact their business 17% Yes, we do have insurance in place for this 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. 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. 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 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. 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. 11
100 80 60 40 20 0 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? Diagram 9: 45% of businesses would expect to survive in the event of losing a key team member. 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. 17% 13% 15% 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 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. 12
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). 63% Public liability 48% Buildings 32% Office equipment e.g. photocopier, pc, printer 14% Critical illness cover on partner/directors life 8% Key person cover critical illness 54% Contents 51% Employers liability 26% Consequential loss e.g. loss of profit insurance following a fire, flood etc 21% Life cover on partner/directors life 10% Key person cover death 10% Life cover for your staff e.g. death in service Motor vehicle 39% None of these 18% 13
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. 14
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: Strong chance 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 Small chance 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. 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? 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. 15
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