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Risk Management: Business Owners
- 1. Business Risk What Keeps You Up at Night? A Risk Management Seminar for Business Owners Al Straub Northwestern Mutual Financial Network Northwestern Mutual Life Insurance Company Milwaukee, WI
- 2. Am I taking good enough care of my employees? Some of my competitors are beefing up their benefits package. What if one of my top guns decides to leave? Losing a key employee could send me back to square one. 9:42 pm
- 3. Outsourcing the design of our new product line makes economic sense. But what if the quality isn’t up to snuff? The last thing I need is a lawsuit from some unhappy customer. 12:59 am
- 4. I could use some time off. But if I can just take my business to the next level, I’ll be able to relax – maybe even steal a whole week away with my family. In the meantime, what if something happens and I can’t work? How will I meet the payroll? The rent? My other expenses? 3:31 am
- 5. There has to be an easier way to protect my business… my employees… my family… my future.
- 6. Purpose • Get acquainted with other business owners • Address some of the business risks that keep you up at night.
- 7. • Identify and prioritize goals and concerns. • Understand risk management strategies. • Access to a complimentary follow-up consultation. Take-aways for YOU
- 8. I want your feedback, too… • Speaker and workshop evaluation • Complimentary consultation offer Let’s begin…
- 9. An Integrated Approach You shouldn’t accept a “one-size-fits-all” approach. Business Owner Estate and Business Succession Planning Personal Planning Business Planning Employee Benefits Risk management
- 10. Without a strategy for managing risk, a lifetime of work and dreams can be lost in a flash. Getting a Handle on Risk
- 11. True or False? Some of the biggest risks to your business are the ones that are less obvious.
- 12. Protecting Your Whole Business You have more to protect than you may think.
- 13. Planning for the Unexpected Consider transferring a risk when the dollar value of your potential losses are more than you can comfortably bear. When it comes to protecting your business you have two choices: • You can retain the risks or • You can transfer them
- 14. Two Ways to Protect Your Business Ask yourself: Is self funding worth the financial risk? ? Self insuring a risk or Assigning it to an insurance company
- 15. A Proactive Approach to Risk Management Pays Source: The University of Southern California’s Marshall School of Business as described in The Proactive Position: Business Vision, Fall 2007. A sound risk management strategy can increase your business’s chances of success. Companies proactively managing risk Companies reactive in managing risk Return on assets Business lifespan Incidence of “trouble events” 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
- 16. Risk Management – The Facts Are you protecting your most valuable assets? • 84% of businesses own property/casualty, almost all of which is business liability • 23% of businesses carry individual business life insurance on a key employee • 8% of businesses carry disability coverage on a key employee • 4% of businesses have disability overhead coverage
- 17. Covering Your Bases Liability insurance can protect your ability to do business. Business Liability Insurance Property Insurance
- 18. Business Liability Insurance Key Person Coverage Property Insurance Covering Your Bases Key Person Coverage can help you protect your human capital.
- 19. Which is the Greater Risk? Odds of Long-Term Disability vs. Death 2.7 to 1 2.8 to 1 S & P 500 Treasury Bills 3.5 to 1 3.3 to 1 Disabilities Deaths 2.2 to 1 Source: Disability Insurance Resource Center Your chances of becoming disabled are greater than you may think. 3727 42 47 52 Age
- 20. Claims Approved 2004-2006 75% of disabilities are caused by illness. By Medical Cause of Disability* *Number of claims approved by a cause of disability as a percentage of the total number of claims approved for the period 2004-2006 with Northwestern Mutual. Infectious Diseases 2% Malignant Tumors 17% Mental Disorders/ Substance Abuse 12% Nervous System 10% Heart/Circulatory 9% Digestive System 2% Musculoskeletal 35% Injuries Excluding Musculoskeletal 3% Other 10%
- 21. A Lifeline for Your Business Key person insurance is purchased by your business for your business Key Person Insurance can help you: • Provide a tax-deductible benefit to the key employee’s family; • Replace lost profits and overhead; • Recruit, hire and train a replacement for a lost key employee; and • Assure customers and creditors of business continuity.
- 22. Covering Your Bases Business Overhead Protection can be a financial lifeline in times of uncertainty or crisis. Business Liability Insurance Key Person Coverage Business Overhead Protection Property Insurance
- 23. Evolving to Meet Your Changing Business Needs Your risk management strategy should have the flexibility to grow along with your business. startup growth maturity transfer risk management Protect against business liability Protect business from loss of owners or key employees employee benefits business succession personal planning Expanded protection against loss of owners and key employees Expanded protection against loss of owners and key employees Review/transfer protection plans Group medical plan* Group life insurance* Group disability Group benefits Basic retirement plans Selective retirement and benefit programs Employee benefit communication programs Selective disability protection Long-term care insurance Selective retirement/ benefit programs Review/transfer protection plans• Group Disability • Group Dental* • Additional group benefits • Voluntary group products Buy-sell agreement Review buy-sell agreement Exit strategy Protect income stream Protect family Retirement plan Review personal needs for owners Review personal needs for owners Estate planning Review personal plans for owners Review estate plans
- 24. An Integrated Approach for You and Your Business You and your business deserve a personalized approach. Business Owner Estate and Business Succession Planning Personal Planning Business Planning Employee Benefits Risk management • Estate needs • Trust Services • Liquidity planning • Exit strategies • Group employee benefits • Retirement solutions • Benefits for select employees • Employer-sponsored benefits • Liability coverage • Protect business from loss of owners or key employees • Retirement income • Education funding • Asset and income protection • Investment services
- 25. The Role of an Advisor – The Facts Do you have an advisor who understands your needs? • Business Owners tend to seek advice of professionals - 66% prefer one advisor for both personal and business needs - 48% have a Primary Financial Advisor • Top three advisors: - Accountant - Financial Representative - Lawyer
- 26. •Ask friends, business associates or financial professionals •Does the advisor understand your business? •Does the advisor ask questions or just make assumptions? •Can the advisor provide you with personal and business advice? •Does the advisor have access to other specialized advisors? Finding an Advisor Look for an advisor who can bring together all the expertise you need.
- 27. Behind Every Great Professional is a Network of Specialists It takes teamwork to answer your business planning needs.
- 28. •The Northwestern Mutual Financial Network •One stop power house of expert guidance •Collaborating with your CPA, Attorney, banker and others Expert Guidance You have access to a network of financial specialists to meet your unique needs.
- 29. •What risk concerns keep you up at night? •Are you protecting your physical, people and business assets? •Do you have a strategy that can grow along with your business? •Do you have access to a knowledgeable, trusted advisor? Let’s Review No time like NOW to begin the review process and get the help you need, so……You can sleep better at night.
- 30. I Want Your Feedback Lastly, Thank you and sleep tight!
- 31. For the first time in a long time, I feel confident about the future. I know what I need to do to protect my family and my business. And I know where to go to get the support I need. Bring on the competition. I’m ready to win! 6:15 am
- 32. The Northwestern Mutual Financial NetworkTM is a marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, its affiliates and subsidiaries. The products and services referenced are offered and sold only by appropriately appointed and licensed entities and Financial Representatives. Each Financial Representative is a licensed insurance agent and represents one or more, but not necessarily all, of the entities shown. The Northwestern Mutual Life Insurance Company (Northwestern Mutual), Milwaukee, WI (life insurance, disability insurance and annuities) is neither a registered investment advisor nor a registered broker- dealer. Strategic Employee Benefit ServicesTM is a nationwide group marketing program providing specialized services in the employee benefit arena exclusively through the Northwestern Mutual Financial NetworkTM . Securities are offered through Northwestern Mutual Investment Services, LLC, member NASD and SIPC. 1-866-664-7737. Russell Investment Group is a registered trade name of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide. Frank Russell Company is a subsidiary of Northwestern Mutual. Northwestern Mutual Wealth Management Company, Milwaukee, WI, a wholly-owned company of The Northwestern Mutual Life Insurance Company, is a limited purpose federal savings bank and registered investment adviser. Long-term care insurance is offered through Northwestern Long Term Care Insurance Company, a subsidiary of The Northwestern Mutual Life Insurance Company, Milwaukee, WI. This policy is intended to be a tax-qualified long-term care contract. This material is produced for the marketing and solicitation of insurance. The Todd Organization is the marketing name for Todd Consulting, Inc., which is affiliated with Northwestern Mutual, and provides and administers executive benefit plans. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a contract and fund prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money. Disclosures
Notas do Editor
- Slide #1 What keeps you up at night?
- Slide #2
- Welcome. I’m [NAME]. Thank you for taking time from your busy schedule to meet today. I promise not to waste your time. As a business owner myself, I’m sensitive to the challenges we face running our businesses. And one of those challenges is living with the uncertainty of doing business. That’s why I invited you here. Today, I’d like to share with you some thoughts on risk – and why a sound protection plan is crucial to the long-term success of any business. My goal? To help business owners and executives, like you, sleep better at night knowing that you’ve covered your financial security needs both for your business and yourself.
- During the next 30 – 40 minutes, I’m going to share with you some risk management strategies that may be of interest to you and your business. By risk management, I mean more than just life insurance – we’re going to explore a variety of tools that can help you protect your business against the kinds of risks that can potentially derail even the best run business. I want to be respectful of your time, so I’m not going to go into too much depth on any one of them. If you find you want more information or want to consult with me on your particular business need, you’ll have the opportunity to request a complimentary follow-up consultation after today’s workshop.
- One of the handouts at your place is a speaker and workshop evaluation form. Following the workshop today, I would appreciate your feedback on the value of the information I presented. If you’d like a complimentary follow-up consultation, please check the “yes” box indicating so. If you check the “no” box, I will honor your decision and not contact you. However, if you decide later that you’d like to visit about your needs, my contact information is on your handout.
- At Northwestern Mutual, we believe there are four basic interrelated financial areas for your business to consider and frankly, to protect. 1. The first is risk management –the steps you take to protect your business from unforeseen events. 2. The second financial area is employee benefits – the various plans that make it possible for you to recruit and retain employees who can help your business grow and compete. 3. The third financial area is business succession planning – the exit strategies you may need to someday convert your business into an asset you can sell or pass on; and finally 4. The fourth financial area is your personal needs – in other words, the financial security of your family and your future. The challenge in talking about these four areas is two-fold: First, each financial area is interdependent – which is why I use an integrated approach to helping business owners meet these critical needs. Second, each business is different. Based on the type and size of yours, and its stage of development relative to the business life cycle, you will have different issues and needs than the person sitting next to you. That’s why I believe there isn’t a one-size-fits-all approach to achieving financial security. Today, we’re going to focus on risk management because, if you’re like many entrepreneurs, protecting your business is a chief concern. In fact, nearly 90 percent of business owners surveyed in a recent study said that they worried about keeping their business safe and secure.1 So let’s get started. 1The Pulse of American Businesses, 2005. The Network of City Business Journal.
- A man walking across your parking lot slips and falls, injuring himself… A customer sues you for an error made by one of your employees… Your business partner has a car accident and can’t work for six weeks. In business, “stuff” happens. But a lifetime of work and dreams can be lost in a few minutes if you don’t have a plan for dealing with these and other unforeseen events. But how do you know where to start? If your business is going to thrive and grow, you’ve got to identify and assess the risks you face and then develop methods for dealing with them.
- But what exactly do you need to protect? As you think about your business, what keeps you up at night? I’d like you to turn to page 2 in your handout. Here you’ll see a brief worksheet. It’ll take you just a few minutes to complete this exercise but business owners who have attended my workshops tell me that this alone was worth their time and participation. All you have to do is read each statement and then put a true or false next to it. Ready for self discovery? Take a few minutes a complete the exercise.
- Is everyone finished? What are some of the themes that jumped out at you? [Allow time to discuss results of worksheet] As business owners we do a good job of moving our businesses forward. In the process, however, many of us fail to protect all that we’ve built. Risk management is the process by which you fortify your business against unexpected and potentially devastating events. But risk management means more than simply protecting your physical assets - your property, machinery, office space, furniture and equipment. It means protecting everything that has value to your business with a range of strategies that can help ensure your business continues, even if you or one of your key employees can’t.
- So how do you plan for the future while preparing for the unexpected? When it comes to protecting your business, you have two choices. 1. You can retain the risks – in other words, you can “self insure” by setting aside money to cover unforeseen events on your own, or 2. You can transfer the risks to another party such as an insurance company. When does it make sense to retain the risks? It makes sense to self-insure when the probability of loss is low or when the dollar value of those potential losses is manageable. Is there an area of your business where you feel comfortable self-insuring? When does it make sense to transfer the risk? When the probability of an event occurring is low but the results are potentially devastating.
- This distinction is an important one, so let’s talk a little more about it. Many employers offer some type of health insurance coverage. But did you know that about half of American workers with health coverage are in plans that are fully or partially funded by their employers?2 It’s easy to understand why some companies decide to self insure. Health insurance costs are skyrocketing and so are the regulations that govern them. Self-insurance is one way businesses can control benefits and costs. That’s because self-insured plans are exempt from state regulation, including mandated benefits and premium taxes and consumer protection regulations. In practical terms, companies that self insure create a special fund for health claims. They literally pay each claim as it’s incurred – instead of paying an annual premium with a traditional health plan. And typically, those companies contract with a third party administrator or an insurance company to set up the plan and administer claims. So these self-funded plans are virtually indistinguishable to employees from a fully funded plan. But here’s the big difference: Companies that self insure assume the risk of unpredictable medical claims. They also live with certainty that their claims costs will fluctuate from year to year. Is self funding worth the financial risk? You have to ask yourself: What would happen if your business experienced a few unanticipated illnesses or injuries? Unplanned health expenses can literally threaten the financial stability of even the best run company. One way to protect these events is to transfer all or part of the risk to an insurance company. And in fact, many companies with self-funded plans actually purchase “stop loss” insurance – coverage that reimburses the business for health claims above a specified dollar level. Others choose to let an insurer bear the full risk of health claims for their employees. 2Nancy Hatch Woodward, Is Self-Funded Health a Path for Small Firms, HR Magazine, August 2006.
- The point is, some business owners look at risk management from a defensive posture. Protecting against certain risks can be costly and so they tend to see insurance as an expense. An expense they want to keep at a minimum. But if you take away only one thing from our time together, I’d like it to be this: I’d like you to consider the fact that risk management tools aren’t simply line-items on a budget – they’re strategic assets that can help you protect and grow your business. In fact, a recent study out of USC’s business school found that companies that proactively manage risk not only have fewer problems, they’re also more likely to succeed over the long term.3 Being proactive means understanding your exposures to risk and then securing appropriate coverage to meet them. And that means conducting not just a risk analysis, but also a cash flow analysis to evaluate whether you have the financial resources to meet any potential claims. For example, what percentage of total revenue should be put aside to insure risks? Is two percent of total revenue too much to spend? How about five percent? One argument for transferring risk to an insurance company is that it provides protection for unpredictable, large, catastrophic losses – making it possible to budget for such losses and to fix the price of risk without extreme fluctuation. 3University of Southern California’s Marshall School of Business
- So what risks do you need to protect against? A majority of business owners have property/casualty insurance according to LIMRA – The Life Insurance Marketing Research Association. This focus on protecting your physical property is understandable – it’s easy to see the impact of a fire or a flood on your business. But what about your other business assets? When it comes to protecting human capital only 23 percent of businesses carry individual business life insurance on their key employees. And when it comes to protecting the business itself, less than 10 percent of owners carry disability insurance on their key employees. And just 4 percent have coverage to protect against business interruption losses. To have a sound risk management program you need to cover not just your property. You also need to protect your business reputation, your human capital and your ability to continue doing business, even when outside events make that difficult.
- In addition to property insurance, there are three main categories of insurance coverage to help answer these needs. The first is Business Liability coverage. It provides protection in the event your business is sued for something it did – or didn’t do – that resulted in property damage or injury to someone. Why is this important? The chance of being named in a suit today has dramatically increased in recent years – and the majority of these claims involve individuals who, directly or indirectly, suffered some type of harm or injury related to goods and services sold by a business. The restaurant that is sued by a job applicant who claims he was discriminated against in an interview. The store that is named in a suit by the parents of a child who suffered lead poisoning from the paint used to decorate a toy train. The pharmacy that is sued by a woman who claimed bodily harm when she wasn’t warned that she might have an allergic reaction to the drug prescribed by her doctor. Without proper planning and protection, an unexpected event like these could destroy the business you’ve worked so hard to build. Liability insurance protects your business from the financial impact of a lawsuit. Specifically, it covers claims and expenses related from allegations of negligence, bodily harm, property damage, slander, false advertising – even malpractice. Some business owners purchase broad coverage that combines property and casualty with liability insurance in a single business owner’s policy – what’s referred to as a BOP. But not every business faces the same level of liability risk. Depending upon your particular business, you may need a higher level of protection or a specialized policy to meet your unique needs. Policies such as: Professional Liability Coverage – which protects you in the event your actions, or failure to take action – results in injury or financial damage to a customer. Employment practices liability insurance – which protects your company against certain employment-related claims; and Directors and officers liability insurance – which can help protect your company and its leadership against allegations of breach of fiduciary responsibility in the management of the company – among others.
- The second type of business insurance I’d like to talk about today is Key Person Insurance. Your head of sales fractures a leg and won’t be able to travel for months. Your office manager learns she has cancer and needs a leave of absence for treatment. Your business partner dies suddenly, leaving his shares of stock to his heirs. What would you do if you were to suddenly lose the services of a key person in your business? What impact would that person’s absence have on your business? What would happen if that injured or deceased person was you? As your company grows and you add employees, it becomes increasingly important to protect your human capital – those key employees who are vital to the success of your business. Key person life insurance and disability income protection can help compensate your business should you or one of your most valued employees die or become disabled.
- Most of us would rather not think about these things. But the chances that you or one of your employees may become disabled due to illness or injury is greater than you may think. Studies show that in a group of five people, there is close to a 70 percent chance that at least one will become disabled for 90 days or more prior to age 65.4 In fact, you face a far greater risk of becoming disabled prior to retirement than you do of dying early.4 For example, a 37-year old is three times more likely to become disabled than he is to die before reaching age 65.5 4Commissioner’s Individual Disability Table A (1985); Statistical Abstract of the United States 5Disability Resource Center: Disability Insurance Statistics, 2007
- But injury is only a small part of the disability equation. In reality, you stand a significantly higher chance of having an illness keep you or one of your key employees from working, regardless of your age. In fact, approximately 75 percent of disabilities are caused by an illness – not an accident. Think about some of the people you know. It could be an employee who just had planned back surgery and is expected to be out of work for several months. A partner whose pregnancy resulted in unforeseen complications. A colleague who is struggling with Lyme’s disease. Or a vendor whose asthma has caused him to miss months of work. You might not think of a back problem, pregnancy, Lyme’s disease or asthma as a disability, but any one of them could keep you or a key employee from working. These are the top causes of disability claims filed by Northwestern Mutual policy owners in 2004-2006. [Read from chart]
- Being out of the workforce – even for a short period of time – can be devastating to you and your business. Key person insurance can help minimize the financial impact on your company of a disability or death. I want to make clear that key person life insurance and key person disability insurance are different from the life and disability insurance programs you might offer to your employees. Those programs provide benefits to your employees or their beneficiaries in the event of injury, disability or death. In contrast, key person insurance is purchased by your business for your business – in other words, you retain the ownership rights to the policy. In the event of death or disability, the business receives the proceeds, in most cases tax free. Those proceeds can then be used to: Help replace lost profits and overhead; Recruit, hire and train a replacement; and/or Assure customers, creditors and employees of business continuity.
- This brings me to the third and final business protection strategy I’d like to share with you today –Business Overhead Protection. When we think about death or disability, we tend to think about the financial impact to our families. But what about the impact on your business? Let’s say that your back suddenly goes out. Four hours of surgery later, you’re facing months of intense rehabilitation. How will you cover your business obligations while you’re out of work? The lease on your office space? The payroll for your employees? Your business taxes? Utilities? Business Overhead Protection provides cash to help you: Meet your financial obligations, such as your lease or rent, payroll, benefits, utilities, property taxes, repairs and maintenance costs, supplies and other expenses. Avoid needing to deplete your other business assets to fund ongoing expenses should you become disabled and unable to work. Keep your business open, preserving relationships with your customers. Maintain the services valuable to your employees. Continue paying suppliers and maintain a healthy credit record. In short, Business Overhead Protection provides a way to keep your business going in the event that you or a key employee becomes unable to work.
- Liability Insurance…Key Person Insurance… and Business Overhead Expense Protection: the right risk management tools can contribute a great deal to your success by protecting against unforeseen events that could derail your business. But managing risk is about more than having the right coverage – it’s about making sure your risk management program evolves to protect your business through all its phases of growth. The insurance coverage you needed when your corporate office was in the basement of your house isn’t the same as when you’re leasing 25,000 square feet of office space downtown. Similarly, the needs and goals of a new business owner is vastly different from those of a seasoned entrepreneur who is looking to cash out of a business he’s built over time. The more complex your business, the more customized solutions you may need for your risk management strategy.
- We’ve looked briefly at the multiple dimensions of your financial security needs. It’s often difficult to separate one from the other and often times, as the saying goes: everything’s tied for first. That’s where working with a competent advisor can help you determine what is a priority and why. Beware of anyone who uses a one-size, one-product approach for addressing your risk management needs. Every business has unique issues and challenges, and yours is no different. A competent advisor will take the time to get to know your business and personal goals. And he or she will collaborate with you on addressing how those needs dovetail with the other issues impacting your financial security.
- Business owners tend to seek the advice of professionals. In fact, LIMRA reports that two-thirds of business owners prefer one advisor for both their personal and their business needs. And nearly half have a primary financial advisor. Do you have one?
- If you have an advisor, do you trust and value his or her advice? Does your advisor understand your goals; your business; your unique issues? At the end of the day, the best advisor is one that listens first and then acts as a quarterback to bring you appropriate resources and experts to the table.
- No one advisor, on their own, can possibly do an appropriate job of attending to and properly addressing the many various and complex issues facing today's business owner. Which is why, when selecting and working with an advisor, business owners should be sure that the advisor has access to, is affiliated with and can bring to the table, other licensed professionals who specialize in each of these uniquely challenging areas of concern.
- The Northwestern Mutual Financial Network is a network of financial specialists schooled in the various disciplines of financial security. These specialists are the advisor’s and business owner’s team of experts. And of course, with your direction, we’ll collaborate with your other business and personal advisors like your CPA, attorney or banker.
- Before I close, let’s quickly review the topics we’ve covered: When you think about the risks to your business, what keeps you up at night? Are you protecting not just your physical assets, but your people and business assets as well? Do you have a strategy that can grow along with your business? And finally, do you have a competent, trusted advisor? Someone that you consider to be a member of your team? Does he or she have access to other specialized advisors?
- The Northwestern Mutual Financial Network is a network of financial specialists schooled in the various disciplines of financial security. These specialists are the advisor’s and business owner’s team of experts. And of course, with your direction, we’ll collaborate with your other business and personal advisors like your CPA, attorney or banker.