While most of the insurance market covers for the risk of damage, liability or personal policies for companies or individuals, there are other fields where insurance policies can help you overcome complex binding or legal situations. These lesser known insurance products can be used to secure a transaction or contract and achieve your goals. Below we will discuss the more common among them.
One of the more common topics we deal with is the security of shareholder pacts. Even though, in the majority of cases, the partners have all individually established takeover clauses in the event of the death of one of the members, none of them has thought in the long-term about the actual ability of the other shareholders to find the money needed to buy the newly available stake and avoid the arrival of new and unchosen shareholders. The heirs may also prefer to have capital rather than shares and voting rights. This situation is forced upon all the parties.
To fulfil the pact as it was intended, we have come up with combined policies among partners in which the insurer pays for those shares. The policy allows the partners to buy the shares of the deceased partner and distribute an equal amount of capital to each partner commensurate with their shareholder rights. Registration rights may be deducted from the payment.
In some cases, the company may wish to take out the policy to cover for the death or incapacity of a partner in order to obtain the necessary funds to buy back that partner’s share of the company. In these circumstances, the company is the policyholder and beneficiary of payment. The partner is the insured party.
We recommend this type of partner policy for all shareholder pacts established.
Guarantees for a loan can also appear more complex than they really are. Here are two examples: a company project, and the financing of projects for a private client.
The head of the company, who has many projects to finance, may become more difficult to insure with age or illness, etc. It is possible to take out a permanent policy early on to insure the head of the company. This insurance can be collateralised and used to cover part or all of a loan. The policyholder is the company, while the natural person is the insured party, and the finance institution the beneficiary. This is known as key person insurance, and is generally used to insure the company against the financial consequences of the loss or inability of a key person within the company to perform his/her duties. The beneficiary clause is the cornerstone of the policy. The policy continues to exist as long as the premiums are paid, regardless of the state of health of the insured person.
Private clients are also affected by the risk of poorly covered tangible assets. Our region is one of the most exposed to natural disasters. Natural disaster prevention plans have multiplied, while red zones, which prohibit owners from rebuilding over homes destroyed by natural disasters, have become the norm in most surrounding areas. At the same time, top end housing prices remain high and are well above the cost of construction on a square-metre basis. However insurance always covers for the cost of construction. In the event of a disaster in a red zone, home owners are not authorised to rebuild their homes and will be compensated for the value of reconstruction, which can be 50% - 80% of the value of their home before the claim. The payment is not enough to repay the loan, so the claimant loses out.
It is however possible to cover for the market value of the home on the day of the claim if it cannot be rebuilt for administrative reasons. An opposition is made based on the loan granted by the financial institution which becomes the beneficiary of payment in the event of the claim. This type of insurance covers for property transactions in complex zones, both for the client and the lender.
It is also clearly suited to the property market in Monaco where many buildings lack cover in the event of an earthquake. Apartments destroyed in this type of natural disaster cannot be rebuilt by the insurer or the owners. There is considerable uncertainty over the remaining loan repayments and the payment from the insurer.
These are just a few situations in which insurance, combined with financial intelligence, can secure and make projects possible. Other examples include insurance for the guarantee provided to back a company commitment, loan insurance for Lombard loans to avoid inheritance risks, and products that insure against financial loss of financed assets.
The relationship between insurance and banking serving company finance and private clients are many and varied. Insurers need to continue to innovate and find the best possible solutions for their clients and spread the risk between the insurer and the bank, to allow their clients to achieve their goals.
