Keyman Insurance

A few days ago, one of my readers, by name Akeem, made a comment on my article on “this is why you need life insurance.

In his comment, Akeem said, “life insurance and ultimately estate planning is good but our environment is a peculiar one. We copy so many things from developed countries but we fail to follow the rules and regulations. Most insurance companies in Nigeria are like Ponzi schemes, they find an excuse not to pay claims because they are bankrupt. An example is the case of IGI Insurance that cannot pay claims due to the death of its founder.”

One item that stuck with me after reading his comment was the “case of IGI insurance that cannot pay claims due to the death of its founder.” Ordinarily, IGI Insurance is supposed to be a corporate entity that has its own legal personality, which is supposed to be different or distinct from that of the founder. But unfortunately, the death of the founder, according to Akeem, has affected the insurance company and its ability to meet its contractual obligations in claim payment. In business, especially, small businesses, things like this happen. It is one of those risks inherent in businesses — the key man or key person risk.

What is key man risk?

Keyman risk is the risk that a business will be unable to continue its operations if a person responsible for much of the business’s fortunes leaves the company by resignation or death. Research has it that the loss of a key person can deal a big blow to a firm’s finances, reputation and even image. Fortunately, there are ways to deal with or mitigate the risk of the departure of a key person. One of such ways is through keyman insurance.

[READ MORE: These Nigerian Insurance companies are worth under a billion]

What is Keyman insurance? 

Keyman insurance is a type of insurance policy that businesses or companies buy in order to compensate for the financial losses that may result from the death or disability of an important personality of the firm or business.

Keyman Insurance

How keyman insurance works

The way key person or keyman insurance works is that a company buys a life insurance on the key person (like in the case of IGI, on the founder) and the company pays the premium. If that insured key person unexpectedly dies, the company gets the life insurance payment. With that money, the company can keep carrying out its business as if nothing really happened.

Why keyman insurance is important and needed

Key person insurance is important, especially in Nigeria, because many Nigerian companies have gone under after the death of their founders. With key person insurance, many small firms in Nigeria would be able to survive the death of their founders.

Companies should not be allowed to die with their founders. The proceeds from a keyman insurance policy, following the death of the key man, oftentimes, helps a business to take care of immediate or pending business expenses, pay off debts, distribute money to investors, pay claims (in the case of IGI insurance), or keep the business as going concern until the lost key man is replaced. Keyman risk is not peculiar to Nigeria.

[READ MORE: Experts advise on ways to ensure market penetration in insurance sector]

According to a study conducted by Sascha Becker of Warwick University and Hans Hvide of the University of Bergen, “on average, 60% of a company’s sales are lost and 17% of jobs cut after the death of a founder. In addition, companies where the founder dies, have 20% lower survival rates, two years after the death.”

History is replete with data on businesses that went under after the death of their founders, both in Nigeria and elsewhere. It is therefore recommended that companies consider keyman or key person insurance as a way to proactively manage the risk of business loss and failure due to the death of the founders of the business.

How much key person insurance is enough

As each firm is unique, so is its needs.  What is enough for one business may not be for another, therefore, companies should buy key person insurance policies that are proportionate with business need, should the key persons die.

Availability of keyman insurance in Nigeria

A look at the internet shows that some insurance companies in Nigeria offer keyman insurance policies. For example, AXA Mansard and  FBN Insurance companies have advertisements on their websites, stating that they offer keyman insurance protection. According to AXA Mansard Insurance company, “Life happens…,” do not wait for it to happen before you take steps to protect your business. Buy keyman insurance today.

[READ MORE: CBN warns banks against enforcing insurance cover on borrowers]

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