The Importance of Good Advice
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The earthquakes in Christchurch have provided a greater understanding in the wider community regarding the vital role that insurance plays in the economy. Insurance not only helps with the economic recovery of a region following a huge natural disaster, but also encourages economic development and growth.
The recent spate of natural disasters has thrown fresh light on the issue of underinsurance and inadequate cover for businesses, not to mention personal insurance. A recent survey conducted by a Cigna Insurance found that 36.4 per cent of New Zealanders have no life insurance, with the figure split evenly between those who believe they should have cover but don't and those who believe they don't need it at all.
In an earlier column I talked about the importance of not just renewing your insurance, but reviewing your insurance. It is very important to keep your insurance broker up to date with any changes in your circumstances. If you review your insurances each year there will be a much reduced chance of problems rearing their ugly heads at claim time.
One thing that is clear is the real value that a broker can add for a client and clients have this need more than ever now. Why? Because a broker gives advice... it is so very important to get the right cover in place through receiving the right advice.
Insurance is not just about price. We are hearing a lot about online offerings in the media at the moment. The success of these sites relies on keeping the offering simple, and there lies the danger.
Cover is bought on price, an explanation of the extent of the cover is too hard to do and too hard to understand. When a claim occurs they are not there to help present the claim or to manage expectations.
One way to make sure that you have the right cover is to meet with your insurance broker annually – businesses that use a broker are more likely to be properly covered than those that don't use a broker. There is a key role for a broker to play in educating and advising about the different risks faced and the solutions available.
Is your business checklist complete?
Besides ticking off your business essentials – premises, bank, accountant, transport and tools – have you remembered to protect your most valuable asset, your ability to earn? What would you do if you were unable to work because of sickness or injury? Who would pay the bills, provide for your family and keep the business going?
Life is full of risks and pitfalls – and business especially so. Succeeding in any given venture is challenging enough, without having to worry about the unexpected consequences of illness, injury, death or natural disasters.
Most people are aware of the need to insure against property loss or damage, but what about the threat to your most valuable human resource – you, and the people who are vital to the continuing success of your business? The loss or temporary loss of key personnel can have a dramatic effect on any business, and can even be terminal.
The first step in putting together your protection plan is to identify with your broker the risks that your business could face. Most of us will take steps to protect the obvious, such as plant, office equipment and intellectual property - it is very important to get this cover right.
People themselves are often the most important asset for a business, and their loss, temporarily or permanently can have a huge impact. This type of protection is often overlooked.
The most common risks to a business
• You're the boss
It's your name on that commercial loan agreement and you're ultimately responsible for ensuring your business commitments are met.
• Covering your costs
You may have been struck down by illness, injury, or your business affected by a natural disaster, but you will still need to ensure that your ongoing business expenses are met, and your debtors paid. Business continuity can be essential if you're to keep your customers happy, and your reputation intact. Making sure it is 'business as usual' will also help pay your mortgage and monthly bills at home, and preserve your family's lifestyle.
• Relying on others
Most businesses have key personnel with special skills or knowledge, without whom the business may struggle to operate effectively, or even survive at all.
• Lack of planning
Without a proper insurance plan, the future of your company might well be at stake. Have you got a succession plan in place? This can help make sure your wishes for the future of your company and assets can be followed through, leaving your family and your business debt-free, and providing financial resources for your chosen successor if they need the funds to purchase the shareholding left by your departure.
Every business has three areas of vulnerability.
1. Business debt
Nothing can cripple, or even sink, a business faster than the inability to pay loan instalments, tax bills, rent, salaries and suppliers.
Consider your financial obligations to:
• Financiers
• IRD
• Landlord
• Staff
• Creditors
• Suppliers
• Personal Guarantees
2. Business continuity
Productivity can be seriously disrupted when a key person becomes seriously ill, has an accident or dies.
You need to think about:
• Buying in employees
• Replacing profit
• Holding market share
• Contractual commitments
• Customer confidence
• Supplier confidence
3. Business owners
Death or disability can force change on your ownership structure, making it necessary to draw on cash reserves and assets. It is vital to formalize any shareholder/partnership cover through a buy/sell agreement to ensure capital is distributed as agreed.
How would you eliminate ownership issues?
• Use cash
• Sell some assets
• Get a loan from the bank
• Pre-arrange funding
Business continuity is essential for keeping your customers happy, paying your bills, and preserving your family's lifestyle.
Finding or training a suitable replacement can be both expensive and inconvenient. In the longer term, without a proper succession plan, the future of your company might well be at stake.
If you're serious about success, receiving "best advice" and attending to your insurance needs is an important part of business planning.
Mike Garner
PIC Insurance Brokers
