Companies running their businesses in the UAE with no insurance coverage for key individuals, those substantially contributing to the organization’s success, are putting themselves at risk for major financial losses, industry experts have warned.
Key man and shareholder insurance is a corporate-owned life insurance that protects the interests of a business by providing an organization the financial compensation it requires to continue operating should a valuable employee pass away or suffer a permanent total disability.
Experts say shareholder insurance policies are especially important for Small and Medium Enterprises (SMEs), in which the owner and founder typically plays a significant role in the profitability of the business.
“If a company does not have a succession plan, what will often happen is the business will suddenly fall into the hands of an investor or relative, who does not necessarily have the skillset or perhaps an interest in running the company. This can have devastating consequences on the business, and in the worst case it could shut down,” said Duncan Crerar, Head of Employee Benefits at Nexus.
“In a scenario like this, shareholder protection will give the company the money it needs to buy out the investor or relative and find a new partner, so that it can sustain itself. In the UAE, where SMEs set the foundation of the country’s economy, such protection is critical.”
According to Dubai SME, 95 per cent of enterprises in the emirate are SMEs. SMEs also account for 40 per cent of Dubai’s GDP, 42 per cent of the emirate’s workforce, and 60 per cent of the UAE’s overall GDP.
Little information is available on the percentage of SMEs who implement key person protection policies; however international figures have demonstrated how small businesses are considerably dependent on just a few key people for their success and viability.
In a 2007 survey of small businesses conducted by the National Association of Insurance Commissioners in the US, 71 per cent said that they were “very dependent” on only one or two key people. However the same study found that among these small businesses, only 22 per cent had key person life insurance and 15 per cent had key person disability insurance, with 7 per cent of businesses having both types of coverage.
In a larger enterprise or corporation, the same type of policy would cover individuals who are responsible for delivering the most significant contributions to the company.
“These are valuable individuals who strategically or intellectually drive revenue streams, either through their network of contacts or unique skillsets. In this case, key man insurance can protect company profits by compensating the business should you lose income and revenue caused by that person’s absence,” Mr Crerar said.
“It can cover the costs resulting from loss of revenue, loss of intellectual capital, downtime, and the training and recruitment fees associated with replacing that person. Normally, depending upon their specialism, it can cost anywhere between 6 and 18 months of that persons income just to replace them.”
Despite the clear benefits of key person insurance, a lack of awareness coupled with the transient nature of many businesses is leaving numerous companies in the UAE unprotected.
“Although you will find these schemes in place at many multi-national organisations, there is still not enough awareness among SMEs, and that is when these policies really matter,” said Mr Crerar. “Some of these businesses have multimillion-dollar turnovers, but have no protection against losing valuable individuals, whose absence changes everything in a heart-beat.
“If you own a company of 100 people and you are the business, you are the owner and the driving force bringing in the deals, and something were to happen to you, the business could fail and all of a sudden you have 100 people with no place to go. It is not only for the purpose of safeguarding profits, but also for protecting all employees in that company, that business owners must consider and face these matters.”
This lack of awareness can be seen globally, Mr Crerar said, however a number of factors that contribute to this trend are unique to the UAE and the region. These include an insufficient understanding of how the policies work, as well as the temptation of short-term wins.
“What tends to happen is when SMEs first start up, the owners are busy getting off the ground and cannot afford to put in all the nuts and bolts,” Mr Crerar said. “But as the business starts to grow, they have the responsibility of safeguarding it and its employees from such an unfortunate incident. It is finding the right time to make that investment that businesses often struggle with.”
There is no hard and fast formula for calculating how much a key person is worth, but insurance companies will generally look at a number of factors, including share holder agreements, company valuations, contributions to revenue, value of intellectual capital, and cost of replacement.