Scottish Widows Business Protection Report September 2013

Supporting resilient business plans.

Business protection.

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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

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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%

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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.

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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

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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

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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.

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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

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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).

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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