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Is ‘Key Person Risk’ a problem in your business?

Alongside insuring your tangible business assets, like plant, stock and machinery – have you ever considered how much a loss it would be for your business to lose a key person?

13/03/2023 · 3 minute read

Although most businesses claim that their greatest asset is their people, for many, their insurance spend is only reflective of tangible assets such as plant, stock and machinery.

Your people are the resource responsible for generating profit, and losing them can create a huge risk to your business. The death or permanent disability of a Key Person can have a significant impact upon the continued success of a business. Internal succession planning and knowledge sharing, alongside a proactive and well thought out approach to risk, including financial risk transfer such as insurance, can assist in developing your people risk strategy. The recent Mercer Marsh Benefits Five Pillars of People Risk Report showed that 67% of respondents deemed it likely that a Key Person risk would affect their business within the next 3 years, and 55% stated that the loss of a Key Person would have a high impact on their business. It is clear that Key Person risks are high on the agenda for many New Zealand businesses.

Who is a Key Person?

The term Key Person refers to an employee, shareholder, supplier, distributor, scientist or other person whose contribution to the success of the business is significant. Without this person, the profitability of the business could be affected. The Key Person has a wealth of skills, specialist knowledge or experience, which cannot easily be replaced. It is their drive, vision and knowledge that is a major contributor to the success of the organisation.

The impact of Key Person illness or death

The impact of ill health or the loss of a Key Person on a small to medium enterprise (SME) is significant, with impacts including:

  • Severe financial consequences
  • Inability to replace the specialised expertise
  • Loss of training, company culture and “know how”
  • Loss of credit approval
  • Competitors taking advantage of intellectual property loss in your business
  • Increased costs to attract and retain a replacement staff member

By initiating a risk transfer approach to Key Person risks, your business can better manage risks by:

1. Protecting profit or revenue streams:  In the event of the death or disablement of a Key Person, cash is received, which can cushion the loss of profitability until a suitable replacement can be found. This ensures that revenue streams are not jeopardised by extended under-resourcing.

2. Protecting external indebtedness or funding: Funding is regarded as a scarce resource and is usually finitely allocated to a business enterprise. Sudden and unplanned expenses, or a prolonged disruption, can place significant strain on the allocation of funding. Projects may have to be discontinued and staff reallocated with the resulting stress from makeshift provisions.

Mercer Marsh Benefits (MMB) can work with various stakeholders across organisations to complement and extend the people risk management capabilities our clients already have. If you would like to learn more, speak to your broker at MMB or contact us here.

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The Five Pillars of People Risk Report

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