Risk Management

Keep your head covered

When an unforeseen accident befalls a headteacher, leaving the school temporarily adrift, the governing body can be forced into crisis management. Mike Davis advises key person insurance to guard against the fall-out

If you walk into any headteacher’s office, you will be confronted by many items that the school has insured: desk, chairs, carpet, curtains, IT equipment, china tea service, even the sports trophy sitting proudly on display. But what of one of the governing body’s most important employees? Unless the school has specific loans outstanding where the lender has specified that the school must take out insurance on the headteacher, it is unlikely that the school will have key person cover in place.

Given the value that a good headteacher brings to a school and the importance attached to the appointment, governors should protect this asset accordingly.

Key roles
A glance at some of the functions that headteachers perform highlights why it is so important to ensure the school secures and retains their services:
• CEO of a major business in the community;
• visionary;
• guardian of the school’s reputation;
• counsellor to parents, pupils and teachers alike;
• fundraiser-in-chief; and
• an exceptional educator.
A good school inherently relies on the services of a top quality headteacher.

Moreover, the sudden loss of a headteacher, through death or ill health, can have serious financial implications for the school. At its most basic level, it means that the school could incur expensive recruitment costs while employing either a temp or a deputy to take their place.

Prospective parents can be wary of a school that does not have a permanent head in situ, leading to a reduced intake. This deficit is potentially carried over for the next five or seven years, of course.

High impact
The disruption to the day-to-day running of the school and the need to re-evaluate the school’s strategy often leads to longer lasting and high impact financial implications. Yet these financial risks are insurable.
Most schools provide life assurance cover to protect the families of the headteacher, but fail to appreciate that there are other ways of mitigating the school’s prospective financial problems caused by the sudden loss of their headteacher.

A misunderstanding about key person cover, whether considering life assurance protection only (ie it only pays out in the event the headteacher dies) or life and critical illness cover (ie claims can be paid on diagnosis of any one of a list of critical illnesses, or alternatively in the event of death), is that it is prohibitively expensive.

In fact, the cost of providing cover on the life of a headteacher (in this example, assumed to be a male, non-smoker, aged 50 next birthday) is generally around £2.20 per £1,000 sum per annum, assured for a five-year renewable “life assurance only” contract.

By comparison, it typically costs around £3.50 per £1,000 sum assured per annum to insure the other, more readily replaceable assets identified earlier.

In these turbulent times, increasing numbers of schools should plan ahead to mitigate the potential threat to their management, future strategy and reputation.

Mike Davis is insured pension practice director for HSBC Actuaries and Consultants. Mike can be contacted on mike.davis@hsbc.com

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