Key-Person Insurance a Hard Sell

In the wake of Sarbanes-Oxley, insurers are making a case for covering CFOs with key-person policies. But who's buying it?

Andrew Morrison, CFO of American Science and Engineering Inc., passed away in August at the age of 52, a year after joining the $70 million manufacturer of X-ray detection and imaging systems. At the time of Morrison’s hiring, AS&E chief executive officer Ralph Sheridan said the CFO brought “a wealth of international treasury finance experience” that was “invaluable” to AS&E in broadening the global reach of field operations. Yet, while his death left a void, AS&E had elected not to insure Morrison — or any other company officer for that matter — with key-person life insurance. “It just didn’t make sense,” says Paige Cochran, vice president of human resources at the Billerica, Massachusetts-based company.

AS&E is not alone in forgoing key-person life insurance, employer-paid coverage that provides a payout to the employer in the event of a key person’s death. While it is routine for corporations to insure their physical assets, many do not insure their human assets, believing key-person life insurance to be pointless, if not inappropriate. They contend that prudent succession planning obviates the need for the insurance — the argument at AS&E.

Vendors of key-person life insurance policies maintain companies are wrong about this. They note the policies’ wide-ranging utility, relative inexpensiveness (costs are based on standard actuarial tables), and tax-free benefits. Moreover, they point out that the insurance payout from the policy not only defrays the costs of replacing an executive, but also can finance employee-benefit obligations and absorb financial strains caused by a key executive’s death, from an impaired credit rating to lost customers.

Such benefits are part of a renewed campaign by insurers to sell key-person insurance to the C-level suite. And given the new responsibilities bestowed upon them since the Sarbanes-Oxley Act was passed, some are convinced that policies for CFOs will be a major new market. “The role of the CFO has taken on an importance post-Enron and post-Sarbanes-Oxley that is greater than at any other time in history,” says Patrick Smith, director of advanced marketing at Hartford-based insurer The Hartford, adding, “We believe that key-person life insurance on CFOs will be a growing phenomenon, given their expanded responsibilities.”

Smith is not alone. “Key-person life insurance on a CFO makes sense today,” says Robert Hartwig, chief economist at the New York-based Insurance Information Institute. “CFOs’ reputations and potential freedom are at stake in the wake of Sarbanes-Oxley. Consequently, companies will seek higher-quality CFOs — individuals whose integrity is unimpeachable and whose skills are broad. These CFOs would be more costly to replace in the event something happened to them.”

Still, key-person life insurance promises to be a tough sell. Many public companies are loath to buy insurance that pays a large sum of money when a C-level executive dies. And, given the strain on cash-strapped budgets from skyrocketing insurance premiums, beleaguered risk managers are not about to add another policy to the mix. “Insurance is not a good substitute for high-quality management teams,” says Richard Inserra, assistant treasurer and director of risk management at Praxair Inc., a Danbury, Connecticut-based industrial gas company with $5.2 billion in 2002 revenues. “When you lose a general, the colonels take over until a new general is put in place.”

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