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Key Person Insurance

Key Person insurance is an insurance policy taken out and paid for by a business which is then able to recoup any financial losses suffered, which may arise due to the death or extended inability of an important member of that business to perform his/her duties. Also known as trauma insurance, it is a standard life insurance policy which protects the business. Should a person who is an income generator die or become incapacitated, then with this cover, the business is compensated by means of a fixed monetary sum specified in the policy, which sum facilitates the continuity of the enterprise. The term of the policy does not extend beyond the usefulness of the individual whose knowledge, creativity and/or skills are critical to the viability or growth of an organisation, and whose loss may cripple it. The compensation amount may go towards financing the search for and training of a successor. (Source: Wikipedia)

Martha Stewart is the founder of Martha Stewart Living Omnimedia. In 2004 Stewart was convicted of charges related to the ImClone insider trading affair. When Stewart was indicted, she stepped down as CEO and Chairwoman of MSLO. Following her release from prison in March 2005, Stewart launched a much-publicized comeback. Some huge corporations have the luxury of having a key person to take charge during a severe but non-threatening illness, such as a non-fatal heart attack. When Roger Deromedi, CEO of Kraft Foods was hospitalised for a severe viral infection, the company’s chairman, Louis Camilleri took temporary charge, with no adverse effects to the company. Robert Robins, a professor emeritus at Tulane University said that a determining factor in planning for key personnel disability issues is the CEO’s personality and work style: is he willing to work with the board and senior management on a transition basis, even if an illness is not terminal but merely prevents him from performing his duties. The end of a career is the same as the end of life to some company leaders. Capitulation will be resisted in every way possible. When a CEO has a hands-on rather than a delegatory style, the situation is much worse. Founder and CEO of Intel, Andy Grove was able to carry on during treatment for life-threatening prostate cancer. He left the company at a time that was suitable to him and the corporation. He was later diagnosed with Parkinson’s Disease.

At SouthWest Airlines, shareholders’ questions about 69 year old Herbert Kelleher’s prostate cancer resulted in his relinquishing his interim presidency and CEO position in 2001, although he retained his chairmanship of the board. In today’s competitive business environment, protecting the value of a star executive is critical. Using markets once reserved for elite athletes and entertainers, carriers such as Lloyds of London have developed products designed to protect a company’s most critical assets. These carriers have the ability to deliver disability benefits up to $100 million for the loss of an individual whose vision, knowledge and experience are critical to a company’s operation and future. Why do so many risk managers ignore this exposure? The due diligence needed to secure life and disability coverage is not part of a risk manager’s culture. They may feel awkward going to the boss and telling him that he may be putting the company at risk because of his lifestyle or his health. It involves personal information and health issues and has the added risk of opening secret doors and having unpleasant news revealed. Fewer than 35% of the corporations that secure key person life insurance, secure the corresponding key person disability coverage.

Obviously there are daredevils like Richard Branson and risk managers are aware of his activities. It is far more likely a key person will succumb to a stroke or cancer or hit by a car, than is that they will be disabled or killed while sky-diving over the Pyrenees. International travel can be hazardous though. In a recent situation, a private equity firm made a significant investment in a defence contractor. Shortly after the investment closed, the company named a new CEO. With hundred of millions of dollars at stake, the private equity firm sought to hedge their investment by acquiring $50 million key person life and disability insurance. As of the day of the request, the insurance adviser had eight business days to secure the insurance before the CEO departed for the middle east, with stops in hotspots such as Iraq and Afghanistan. As a result of the abbreviated time frame, traditional life and disability insurance was not an option. The adviser needed to turn to a speciality underwriter that deals with exceptionally large and complex risks. Within 72 hours, a policy was issued that covered the private equity firm’s loss of the CEO due to an accidental death or disability, as well as a result of acts of war or terrorism. The premium was for $50 million insurance and cost $62,500, covering a 2 week period. Sickness cover was included for certain elements of the insurance policy. Few domestic life and disability insurance carriers possess the ability to underwrite high risk exposures to the world’s hot zones. Unfortunately, many times, risk managers and their insurance advisors do not look beyond traditional channels to secure the needed key person disability coverage for their clients, partly because the cost of key person disability coverage is far greater than the cost of term life coverage. However, the risk is proportionally greater . The impact top CEOs and corporate leaders have on the success of their businesses is almost unfathomable. If you think about how many companies are dependent on one or two individuals, risk managers may need to re-examine how they insure human capital risk.