Key Person Insurance
The value of an organisation today is increasingly measured in terms of people and intellectual property rather than bricks and mortar, and this value is often resident within a number of key people in the organisation.
Key person insurance is an important component of an organisation's management of risk, and it has become even more important with the predominance of the knowledge economy. Even though an organisation can continue to survive, the sudden loss of a key person due to death or disablement can cause substantial financial damage.
Organisations which have experienced this often say that the loss is not simply that of knowledge or skills, but of market relationships and market perception. Sometimes this loss extends to associated or subsidiary companies in which business relationships have been leveraged to earn revenue from referrals or other synergies.
Key person insurance compensates organisations for the financial loss which they suffer due to the unexpected departure of one or more key people through death or total disablement. Key person insurance policies are owned by the organisation itself, and do not form part of any personal insurance cover which the key employee may have. The proceeds of a key person insurance policy are therefore payable to the organisation. The main types of financial loss which can be suffered by an organisation in these circumstances are:
- Loss of capital value of the business due to the market re-rating its overall value. The extent of the loss is related to the key employee's operational knowledge of the business, their reputation in the market, and the network of business contacts which they have developed;
- Loss of profits due to a reduction in revenues. This impacts on capital value as the level of current and prospective profitability largely determines the value placed on a business by the market;
- The value of management time in responding to the loss, and in recruiting and training a replacement;
- Direct out-of-pocket costs such as recruitment fees, which are typically 15% or more of the total remuneration package of the replacement recruited.
Our Method
National Benefits has developed a particular methodology for assessing the amount of required cover. A comparative analysis is undertaken of projected revenue and expense items over a specific period under a loss scenario, and the potential effect on the organisation's profitability is estimated. As the benefit payable under a policy is in the form of a lump sum, the present value of future income stream losses is calculated, including the direct costs referred to above. The service is completed by selecting an insurer using specialised software which contains up to date data on insurers' premium rates, terms and conditions.
A full policy and administration service is then provided on an ongoing basis.
Further Information
If you feel that your organisation could be at risk from the sudden loss of a key person, or that you could benefit from an independent review and selection process for appropriate cover, please contact us.
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