Who is a Key Person for Keyman Insurance?

An organisation's key people fulfill many different job descriptions, all of them hard to replace. They can include anyone from the managing director to working directors, financial controllers, computer programmers, specialist engineers, sales managers and other employees with expert skills. Which is why keyman insurance is so important.

As an example from the sporting arena, many international football clubs insure their star players against illness, injury and incapacity, with the club paying the premium and pocketing any benefit. And though most small businesses operate on a much smaller scale than the English Premier League, the temporary or permanent loss of a key person in a team of two or three senior individuals is likely to be just as sharply felt. Indeed, the smaller the enterprise, the more likely it is to be dependant on one or a few key persons - which is why keyman insurance is vital.

Keyman insurance & corporate business

Likewise, at the big end of town, the unplanned loss of a chief executive officer (CEO) has a direct influence on a company's share price, according to the UK Investors in People report prepared by the Centre for Economics and Business Research.

The study, which analysed movements in share prices between May 2002 and May 2005 for UK companies with at least one change in CEO, found that those with unplanned successions (ie where no replacement was immediately announced to the markets) saw their share prices fall by 2.1% more than their peers with planned succession processes (1).

A tale of two companies - one has keyman insurance

Businesses that are especially vulnerable to key person risk include those whose owners are 'the face of the company' and those whose principals are indispensable, either by virtue of their unique skills/expertise or extraordinary (and often undocumented) input.

The following two case studies from the US demonstrate the difference keyman insurance can make to a business's survival following the death of a key person who's also a company principal.

Mindworks was a successful computer and technical company until its founder and managing director, Bob Dingfield, died suddenly two years ago of a heart attack at age 58. Former employee Mark Crowe says that while Mindworks had been a strong business before Dingfield's death, the company's lack of contingency planning and absence of key person insurance spelt the death knell for the business.

"We figured replacing him would take three people, an instructor, a network administrator and a business manager," Crowe told a local newspaper after the company's demise (2). "And there just wasn't the capital (to hire them)"

In stark contrast Kumin Associates, a high-profile US architectural firm with 25-plus employees, is still going strong two years after the death of its principal and namesake, Jon Kumin, following a six-month battle with cancer. Charles Banister, who joined Kumin Associates in 1984 and has since stepped into Kumin's shoes as CEO and principal owner, says restructuring the company and letting clients know the team was still there was the biggest challenge. "We had keyman insurance."

Banister told Alaska Business Monthly. "That helped quite a bit." (3)

Kumin's Marketing Manager Louise Gire says the company had to overcome a lot of client concerns following the death of its principal. "There were a lot of challenges because of the (uncertainties, such as fears) that Kumin Associates was shutting its doors, merging with other firms, or in financial trouble," says Gire. "Jon was the face of the business. Because of this, people, clients, made the assumption that he was in his office doing drawings. It has always been a team effort. Jon was more involved in managing the business as opposed to managing individual problems." (3)

References:
1 Why small firms look to insure top staff, Evening Times, 25/10/2005
2 Irrepressible Dingfield was irreplaceable, The Arizona Republic, 19/7/2007
3 Succession planning: how small businesses can prepare for the unexpected before it happens, Alaska Business Monthly, 1/10/2006

Source: Zurich 2008

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June 2010