The importance of risk management for your business (Part 3)

  • the importance of risk management for your businessthe importance of risk management for your business





    The importance of risk management for your business (Part 3)

2. Enhances Business Value

Running a business is about creating value for your stakeholders. When business is smooth sailing, what are your immediate thoughts or priorities? For most keyman, it is usually to invest their resources into new markets, products and technology. However, according to Mr. Le Tham Duong (Doctor of Credit Management, Finance Department Head at Banking University of Ho Chi Minh City), about 98.7%(2) of SMEs in Vietnam do not have a proper system for enterprise risk management (ERM). It’s time to relook at our approach to risk governance.

Investing in a life insurance plan is a long term commitment. Premiums contributed over the years will be accumulated with a cash value. Depending on the policy features, the insured keyman or business will also get protection against unforeseen events.

On the other hand, the ability to leverage on the cash value is also an advantage of life insurance to businesses. The cash value component of the life insurance plan will grow over a period of time. Rate of growth will largely depend on the underlying investments and performance of the insurance underwriter. You may wish to speak to a qualified financial service provider to understand the details.

On top of the protection your business will enjoy, the cash value of the policy may be used as an additional comfort when you apply for working capital financing. Cost of borrowing differs depending on the risk assessment by your financial service provider. With the policy in force, you may be able to improve the outcome of your loan application.

As a keyman or shareholder of your company, are you willing to pledge your personal assets to secure a business loan?

3. Safeguard Your Keyman/ Shareholder Against Unforeseen Pandemic

Covid-19 is the world’s biggest challenge since World War Two. The speed of transmission and lack of a vaccine for the virus is causing unprecedented uncertainty - what will happen to their families if they were to succumb to the pandemic? If he/ she is the sole breadwinner of the family with dependants such as parents, spouse and children, what will happen to their future? Can they maintain the same living standards or be forced to sacrifice their plans (e.g. quality education)? In retaining your Keyman as an executive benefit, a life insurance policy can be an effective safety net and allowing them to focus on what is important – your business.

4. Retain and Incentivise

Beyond remuneration, providing your keyman/ shareholder with a strategic benefit such as a life insurance plan will help incentivize them to stay with the business for the long haul. The golden handcuffs, so to speak, is an effective way to mitigate departure risks.

For instance, business ABC is in the technology business of providing alternative credit scoring to financial institutions. One of the directors has priopritory knowledge about the algorithm and it is important for the business to retain him. In buying a life insurance policy for him, as the cash value accumulates over time, the policy ownership can be transferred from the company to him upon gratuity. The longer they stay with the company, the greater the value of the policy. Killing two birds with one stone, the benefits of a life insurance plan does not only provide your key executives with immediate protection, the cash value of the policy can be an effective component for retention.

In your opinion, what is the ideal percentage of the annual profit which should be invested for risk management purposes?

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All businesses are different and application of business life insurance to manage risk is both a science and an art. UOB Vietnam partners Prudential to provide quality solutions for both businesses and individuals. Drop us a note and speak to us today. It is never too late to start a meaningful discussion.

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