Protecting Your Business: The Importance of Key Person Insurance in Risk Management

Protecting Your Business: The Importance of Key Person Insurance in Risk Management

The loss of a key person in a business - whether it's a founder, top executive, or uniquely skilled employee can have a profound impact on operations, revenue, and long-term stability. 

These individuals often drive strategy, maintain vital client relationships, and possess irreplaceable expertise. Their sudden absence can create uncertainty, disrupt workflow, and even jeopardise the company's future.

Key person insurance offers a financial safety net in such situations, providing funds that can be used to cover lost income, recruit and train replacements, reassure stakeholders, and help the business navigate a difficult transition with greater resilience.

Australians Are Heavily Under Insured

A survey of SMEs across 20 industries revealed that 20% of respondents expressed concern about the potential loss of a key person in their business. Yet, only 2% had key person insurance, indicating that most businesses are underinsured. This highlights a significant gap in risk management that could leave many businesses vulnerable to unexpected losses.

The Essential Elements of a Robust Key Person Insurance Strategy

Identifying your Risks

1. Addressing the Risk Management Gap and Identifying Critical Vulnerabilities

Closing gaps in risk management begins with a comprehensive assessment of potential threats to business continuity. This process ensures that organisations are better prepared to respond to disruptions before they occur.

Effective risk identification requires a close evaluation of the specific weaknesses within an organisation’s industry and operational structure. Different sectors face different types of exposure, making a tailored approach essential.

2. Industry-Specific impacts

In knowledge-intensive industries such as technology and finance, the sudden departure of a key employee can result in a significant loss of intellectual capital. The expertise and institutional knowledge they carry may not be easily replaced.

3. Impact on Client Relationships

For client-facing roles, such as relationship managers, losing a trusted team member can have direct consequences for customer loyalty. Their departure may weaken established client relationships, ultimately affecting retention and revenue.

Implementing a Key Person Insurance Risk Management Strategy

Planning

A Key Person Insurance strategy involves identifying critical employees, assessing the financial impact of their loss, and securing appropriate coverage (such as life, disability, or illness insurance) to protect the business. This strategy should be coordinated with your insurance advisor, integrated into business continuity plans, clearly documented, and reviewed regularly for updates.

Individualised advice and implementation

The policy should be tailored to meet the specific needs of the business. This may include aligning Key Person Insurance with other forms of protection, such as business interruption coverage or succession planning strategies.

On-going reviews

Key Person Insurance requires regular review to stay aligned with the business’s changing needs. Update coverage amounts and insured individuals as roles evolve and ensure the policy fits the overall risk and financial strategy.

Work closely with your advisor to adapt the policy to new risks or business goals. Regular communication helps keep the insurance effective and relevant.

The Importance of Business Continuity

Key person insurance is crucial for business success because it helps protect a company financially from the loss of an individual whose skills, knowledge, or leadership are vital to the business’s operations and profitability.

The right insurance policy can ensure the business continues to operate smoothly without interruption, giving the company time to adjust and reorganise after losing a crucial team member.

Contact Leanna Katsikaris from our Kelly+Partners Private Wealth insurance division today to learn more about our key person insurance strategies. leanna.katsikaris@kellypartnerswealth.com.au

Source: Insurance News Australia. (2022, April 26). BizCover finds gap between SME risk awareness, cover.