Business protection: Expanding advisers’ toolkits

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Business protection: Expanding advisers’ toolkits

Protection policies have not been at the forefront of the adviser agenda in recent years. The pension freedoms are still evolving, defined benefit transfer activity is arguably reaching worrisome levels, and a fresh slew of regulation looms. 

In the background, Brexit negotiations have, thus far, produced little more than question marks for the UK economy and clients’ prospects. As such, it is unsurprising that business protection in particular, regarded as a niche pursuit by advisers with a more holistic approach, has spent little time in the limelight. 

But major workplace changes appear to be driving significant growth in this market, catching the attention of intermediaries seeking new business – or perhaps leading them to consider the option for their own firm.

The total business protection market is difficult to size, but sales for relevant life cover – a policy for individuals that can be paid for by their employer – have proved robust. As Chart 1 shows, total sales came to more than £10.7m in 2016 as a whole.

Observers now believe an increasing number of intermediaries are adding business protection products to their toolkit, with two main changes attributed to the expansion of the market for such offerings. 

First, the number of possible clients has grown as the UK’s working population appears to embrace its entrepreneurial spirit.

A record 5.5m private sector businesses were in existence at the start of 2016, and this trend appears to have continued. In the first half of 2016, nearly 343,000 new businesses registered with Companies House compared with 608,110 for the whole of 2015, which proved to be a record year.

An expansion in the number of business owners creates a greater base of potential corporate clients. At the same time, engagement with advisers from this community appears to be on the rise as a result of another major development: auto-enrolment. 

Opening the door

As Money Management’s annual survey of auto-enrolment notes this month, the workplace pensions scheme now applies to the smallest firms as well as larger operations. Companies with fewer than 30 scheme members, and those without PAYE schemes, have had to begin auto-enrolling employees in the past year.

These changes have a number of consequences, including putting more companies into contact with advisers and potentially opening the door to discussions about other products and services.

“Since auto-enrolment started and it has got down to the smallest firms, that has increased meetings with business owners and helped drive the market,” explains Andy Simmons, a business protection specialist at provider Vitality. 

“Talking [to business directors] about their pension is a way to talk about the other risks to their business. Different types of brokers have been getting involved in business protection. There’s more wealth managers, employee benefits and investment advice firms who are starting to get involved.”

The insurance used by businesses can come in many forms. Relevant life plans, which are not strictly regarded as business protection but are available to employers, are designed to pay a lump sum if the person covered dies or is diagnosed with a terminal illness while in employment.

This plan, paid for by employers, is aimed at firms looking to provide such benefits but who have too few employees to provide a group scheme. It also targets directors who wish to provide their own individual death-in-service benefits in a tax-efficient manner.

Key person protection focuses on the profits of a business that are directly attributable to one or more individuals. Similarly, if disaster struck for a business owner, a shareholder protection policy could provide a lump sum to the remaining owners, allowing them to buy the shares of the covered individual. 

Business loan protection helps a business pay an outstanding overdraft, loan or commercial mortgage in similar circumstances.

As with other forms of insurance, business protection can serve as a safety net or simply provide peace of mind. Victoria Slade, an independent protection expert for advice firm Drewberry Insurance, notes that having protection can, at times, be a way to meet the demands of third parties, including prospective investors. 

“There are reasons people look for key person cover,” she says. “This can be to demonstrate due diligence and ensure business continuity. For some, it’s a stipulation from an investor or lender.”

In an age where online tools can illustrate which products suit a client best, advisers must also work harder to demonstrate their value – for instance, by explaining the different approaches taken by insurers, as well as the complexity of some policies.

“IFAs can’t sell [protection] as a product. They have to sell it on service,” says Jeremy Edwards, of advice business Martin-Redman Partners. 

“We had a client who’s a dentist. Between him and his wife they had nine policies, which did different things in different scenarios. The point is that all insurers aren’t the same and the fine print governs everything.”

Tax tribulations

Other challenges remain for the industry, particularly with regard to the tax treatment of certain policies: notably, relevant life insurance premiums can be viewed as tax deductible for the company paying them.

Some, such as Malcolm Robertson, leader of business and group protection for LifeSearch, believe the industry is still too reliant on the so-called Anderson principles – established in the 1940s – when it comes to assessing business-related tax relief on insurance premiums.

These set out that the person covered must be an employee. In addition to this, the insurance must intend to cover loss-of-profit resulting from the “loss of services” of the employee concerned, and this policy must be either an annual or short-term form of insurance.

Definitions such as ‘short term’ can be open to interpretation, leaving the boundaries unclear. Broader confusion on this front became evident last year after Aviva launched two products offering what was described as a market first: relevant life insurance with the option to add critical illness cover. Some parties, including rival providers, have since questioned whether adding critical illness to employer protection products is allowed within tax rules.

Mr Robertson notes: “If you look at laws and regulations with business protection, you have got the Anderson principles... They need to redefine the rules around business protection.”

Getting engaged

The business protection world is also not immune from the problems facing insurers more generally: a lack of engagement from customers.

In its latest ‘State of the nation’ report on business protection for small and medium-sized enterprises (SMEs), Legal & General found that half of the firms it surveyed did not have key person protection. As Chart 2 indicates, the reasons behind this are varied. But only 30 per cent of respondents had heard of a relevant life plan.

Yet the impact of a disruptive event could be significant for such firms. According to the same research, 92 per cent of SMEs have three owners or fewer. Such businesses would potentially be “most affected in the event of a death or critical illness of a key person, and so key person cover could be an essential product for smaller businesses”, it says.

The difficulty of persuading businesses – and individuals – of the importance of insurance is unlikely to abate. 

As Mr Edwards adds: “Getting engagement is tricky. The most success is after people have had a near miss.”

Such challenges look set to endure. But with advisers coming into contact with more and more business owners, the conversation can at least begin.