Encountering risk is an inescapable part of what it means to run a business.

And while this makes for an uncomfortable truth for people at the more cautious end of the spectrum, for many entrepreneurs it is precisely this dynamic that unlocks the possibility of growth.

Just ask Richard Branson, founder of the Virgin empire, who says the luckiest people and businesses are “those that are prepared to take the greatest risks”.

But if risk taking is acknowledged as an underlying factor in commercial success, it is equally important to consider how it can be managed and how its potential impact can be minimised for a business to optimise its operational resilience.

Business continuity

Insurance is, of course, a key element in this equation, and many businesses will ensure they have cover in place against tangible sources of disruption to business continuity. Typical priorities include policies to protect against theft or physical damage to premises, whether from fire, flood or even civil unrest, further to employer’s liability, public liability and professional indemnity insurances.

And with companies this year having to contend with everything from record-level flood risk to riot damage, the importance of these measures is clear. Indeed, insurers paid out £81 million in weather-damage claims in the second quarter of 2024 alone.

Not all risks present themselves as such clear and present dangers, however. For example, the loss of someone who is integral to the successful running of a business can also have an unexpectedly significant and sometimes swift impact, particularly in the case of small and medium sized enterprises (SMEs).

Key person cover

Beyond the obvious emotional effect felt by colleagues, there are certain situations where such a loss will also directly affect a company financially if the person in question holds a position that is integral to commercial success. But here, insurance can also play its part in offering a business protection in the form of key person cover.

This type of policy is taken out as insurance against the death or serious illness of a key employee, which could be a founder or an influential senior team member. It typically takes the form of term assurance, with the potential to include critical illness cover, and any payout is made to the benefit of the business.

In unfortunate circumstances, key person cover can provide valuable support to answer any existing financial commitments while helping avoid the potentially damaging impact on trade, income and profits that can be triggered by such a loss.

It can also be used to cover more immediate and potentially unexpected investment, such as the ongoing recruitment costs associated with finding and training a suitable replacement.

Help in hard times

Key person insurance is not the only form of protection that businesses can take against the death or serious illness of important members of the team. Partnership protection, for example, can help business partnerships plan for the potentially disruptive consequences of such a scenario, where remaining partners are not given automatic rights on a deceased partner’s assets.

In the interests of business continuity, partnership protection provides the means for companies to make provisions for such an event by agreeing a price for the deceased’s share of the business, ensuring a difficult situation can be resolved swiftly for all parties involved.

Separately, shareholder protection affords similar support in the event of the death of a shareholder in a private limited company. By default, the deceased’s shares form part of their estate, potentially creating complications for the business. However, a share-purchase plan can be established to agree the terms for the deceased’s shareholding to be bought out for a fair value.

Concern over cover levels

The value of policies such as this is clear, and experienced individuals might well have seen the impact that the death or serious illness of a key person can have on a business. Despite this, however, an estimated 37% of businesses do not have such cover in place.

Moreover, in the turbulent conditions of recent years, there are concerns that companies are cutting back on insurances as a result. Research has shown that 86% of SMEs who are considering cancelling a policy or switching provider said the decision was driven at least in part by the financially challenging conditions caused by the cost-of-living crisis.

And in its Risk Insights Report, insurer Aviva estimates that as many as half of UK businesses are underinsured.

All the while it is business as usual, this might be an understandable position to adopt. But in truth, there is no escaping the risks, both visible and hidden, that can impact on your business at any given time.

While you might not always be able to control them, you can define them, understand them, and protect yourself against them, establishing a level of resilience to underpin future growth.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.