Welcome to this brand new segment where I will be sharing with you stories, tips and advice you can use to build your own financial success.

Let me begin with an all-too-familiar story:

Business owner Mr. Tan is deeply troubled. He has just learnt that his business partner Mr. Cheng collapsed suddenly and passed away from an acute heart attack. The business is highly dependent on Mr. Cheng who runs its day-to-day operations. As the news of Mr. Cheng’s death circulate, many creditors began to press Mr. Tan for payments. At the same time, debtors are also delaying their payments.

 There is no apparent successor in the business to take over its operation, and to make matters worse Mr. Tan does not know enough of the day-to-day running of the business to direct its operation; and he does not have the time to do so. The banks have also withdrawn their facilities to the company. The morale of Mr. Tan’s employees is greatly affected. Although some have worked in the company for many years, there are talks of them resigning before the situation worsens. As for Mr. Tan, not only has he lost a good friend and business partner, he now faces the possibility of both financial and mental collapse.

The above scenario is a regular occurrence in business. However, business owners have a tendency to adopt an “it-will-never-happen-to-me” attitude. Statistics have shown that the number of businesses that fail, far exceeds those that succeed. Indeed, all businessmen never “plan to fail”. They, like Mr. Tan, simply “fail to plan”.

What will happen when a major shareholder or partner in the business dies or become permanently disabled?

Can businesses prosper and continue beyond the lifetime of their founders?

How does one keep key employees in the company till retirement?

These are common questions asked by businessmen but many receive no answers. Often, many businesses fail to include an important factor in their assessment of risks – to insure the business against the untimely demise of key persons. Contingency plans can be drawn up through the use of corporate insurance.

While it may not be possible to prevent these unfortunate events from happening, the provision of corporate insurance will limit the devastating damages of premature death and disability of key employees or owners can cause.

There are many types of corporate risks that can be insured and these include: 

• Loss of Profit Risk;
• Guarantor Risk;
• Business Succession Risk; and
• Retirement Risk.

The advantages of Corporate Risk Management through insurance depend on the types of insurance plan used. Generally, these advantages include:

• paying off debts;
• protecting the interest of the company;
• avoiding forced liquidation or sale of shares to third parties;
• discharging guarantor liabilities;
• buying more time;
• attractive investment returns; and
• retirement benefits to key employees.

In addition, the non-monetary benefits of business insurance should not be underestimated. The provision of keyman insurance, for instance, offers peace of mind to every individual or company that deals with the business being insured. Also, retirement insurance acts as a strong magnet in attracting quality staff and can help to boost staff morale, not to mention lower staff turnover. Indeed, in this competitive business environment, one innovative way of ensuring loyalty is the introduction of retirement benefits for key employees and an alternate provident fund for expatriates.

Keyman Risk

This is the most common type of corporate risk. Keyman Risk insurance is critical in many companies, which rely on one or a few key employees. These are the people whose contribution to the company is vital in its success. The CEO, Managing Director, Chief Accountant and employees with highly specialised skills or knowledge are some of the keymen commonly insured. Keyman Risk insurance insures the company for loss of profits arising from the demise of these keymen. The importance of keyman insurance cannot be underestimated.

To the business owners, keyman insurance is very helpful in the demise of the keyman in:

• avoiding forced sales;
• paying off debts;
• buying time;
• maintaining the same level of profitability; and
• ensuring a smooth and orderly transition.

Guarantor Risk

Most companies require bank loans and overdraft facilities from time to time. While the loans and overdraft can tide over certain financial difficulties or help underwrite business opportunities, there is a potential danger in taking up such financial commitments.

In the unfortunate demise of the chief decision maker (e.g. CEO, Director), most banks will recall the loans. To make matters worse, most of these decision makers are the guarantors for such loans. The usual practice is to pledge the guarantor’s property as collateral to the banks.

With Credit Protection insurance, the liabilities of the company to the bank will be paid through the proceeds from insurance.

Business Succession Risk

In the event of the demise or permanent disability of one of the major shareholders, partners or key employees, many businesses will face the dilemma of either having to liquidate the business or to take on a new partner. In both instances, there will be a major disruption to the business. With proper drafting of a buy-sell agreement funded by insurance, the shareholders or partners can exercise their rights to either buy or sell their business interest upon the retirement, death or disability. Thus, this enables the business to continue without interruption, liquidation or taking on a new partner.

Furthermore, the proceeds from the insurance claims can be used to ensure that the deceased shareholder or partner’s estate receives the full value of his interest in the business without dispute arising from the valuation of the business.

Retirement Risk

Most businesses face the problem of disruptive staff turnovers. Some companies also have contractual retirement gratuity schemes for their employees, and their profitability and cash flow will be affected in the year when employees retire. This phenomenon would be greatly reduced in a company that pays attractive remuneration and also offers retirement benefits for staff that are loyal to the company.

With Retirement Risk managed through insurance, companies can offer their management or long-service staff the benefits of a lump sum gratuity upon retirement. Alternatively, this gratuity payment can also be made in the form of a continuous monthly ‘salary’ using annuity. Both plans offer a very attractive package that may help in reducing staff turnover and can be used as an effective recruitment tool. Best of all, the profitability and cash flow of the company will not be affected in when the employee decides to retire.

Conclusion

The importance of Corporate Risk Management through insurance is illustrated by the case mentioned earlier. What will happen to Mr. Tan? The situation could be very different had he done adequate planning.

In the case of Mr. Tan, had he purchased a keyman insurance on the life of Mr. Cheng, the proceeds from the insurance claims could have been used to pay off creditors, ensure the smooth running of the business and most importantly maintain the same level of profitability for a number of years. It could also have bought some time for Mr. Tan to find and train a suitable replacement.

In addition, if Mr. Tan pays a lump sum as compensation to Mr. Cheng’s family, staff morale in such trying times will be boosted.

While each company may have its unique risks to manage, the interest of the employees, the business and its owners should always be protected. Although some may argue that the purchase of insurance for contingency planning is costly, the benefits of such provisions far outweigh the costs. The success and potential of the business can be wiped out easily in the event of the death of a key person. Far too often, many fail to regard Corporate Risk Management through insurance as an integral part of corporate financial planning. And many more take the gamble of not insuring themselves adequately. Even if the crisis that the insurance sought to cover does not occur, the accumulated cash value of the plan by itself is an attractive investment for the business owners, the company and the employees.

The crisis will surely happen to some. Therefore, it boils down to making a choice of preparing for the crisis now, or be overcome by the crisis when it happens. With corporate risks managed through insurance, it is definitely a win-win situation for all parties concerned.

Are you ready to protect your business from risk? Have a think about it and make the right decision!

Sincerely yours,
Stephen