Leveraging the expertise of a Family Office and guidance of a Family CFO, high-wealth families can conduct the due diligence necessary to identify insurance coverage gaps before crisis occurs. Including an Insurance Program review as a part of Family Governance documents assures the strength and health of the gift and preservation of wealth for future generations.
The Family CFO and the Family Office Insurance Program – How the next-generation of Family CFO advisory services address complex, high-wealth family coverage reviews
Family offices and Family CFOs are offering high-wealth family members a broad range of services through the Family Office, and an established set of insurance standards that provide a clear governance framework for decision-making is an example of this next-generation of Family CFO advisory services.
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Marsh Private Client Services (PCS) conducted an in-depth Family Office Benchmarking Study in 2018 that identified trends among family office personal insurance programs and concerns. The results showed that “56% of large family offices utilize some sort of family insurance standards as part of their overall risk management program. The standards are established and customized by the family office in conjunction with the family to help set clear expectations for the management of the insurance program. These standards are then captured in a clear and concise summary typically provided to family members, the family office, and the insurance broker.”
Family standards often include stipulations such as:
- All family members must carry a specific minimum liability coverage.
- All homes must carry primary flood coverage.
- All homes over a specific value must carry a specific deductible.
- All family members are provided with a minimum level of art and jewelry coverage.
- All family members obtain estimates before submitting any property claim.
The study went on to document that “with the changing global landscape, financial reform, increased cyber awareness, and growing environmental concerns, including global warming and natural disasters, …. more than half (58%) of the families surveyed, who have between two and six generations, indicated a greater or much greater level of personal risk exposure in the last three to five years, and 52% indicated that their level of concern around these exposures has grown significantly.”
Similarly, 56% anticipate this trend to continue and foresee that their level of personal risk exposure will become even greater in the next three to five years.
At i3, we believe in building the framework for a multi-generational, high wealth Family Constitution through the leadership of the Family CFO. In the initial outlining of the Family Constitution, the question of centralizing risk management and defining insurance standards is an important part of the conversation.
In the Marsh study, of the families who implemented insurance standards, 89% use standards specific to coverage limits, nearly 50% make them specific to each generation of the family, yet only 23% have put them in formal, written documents. Although it takes some extra time, having an official set of written standards helps to ensure there is no confusion between family members, the family office, and the insurance advisors. The Family CFO is there to streamline the process, facilitate conversation, and mediate potential conflict.
It is our practice at i3 to define all critical points of the governance of the family, and highly customize each document to assure consensus and agreement between the family’s individual members and to address the diversity of their existing needs, coverages and risk tolerances.
Understanding risk tolerance and conducting a current coverage inventory conversation and review should occur at least every two years as situations, the family structure, and risk profiles change. A coverage gap analysis should be conducted at least once a year.
It is next important to explore whether different types of coverages on individual family members, for the family office, and for the family business are scattered and disparate. Is there a lack of consolidation of contacts and understanding of policies, limits and should a crisis event occur, plans and policies?
Next, we ask does the family and family business have group personal coverages to protect assets as a result of litigation? Coverages may include personal injury, property damage, product liability, etc. As noted in the Marsh study, as younger generations age, they expand their asset bases, become more involved in the family business or their own businesses, buy more properties, expand their families, and generally may have differing views on how to manage their risk. Yet, these growing families continue to see the importance of protecting their assets and wealth through comprehensive insurance programs.
These questions must then expand to all entities within the family framework insurance program. For instance: family trust, foundations and charitable entities, commercial real estate investments, and property owned under individual LLC’s.
For those families that live in or visit areas prone to natural disasters such as hurricanes, earthquakes, floods, tornadoes and other natural disasters, have crisis and disaster response plans been documented tested and distributed to all family members? A crisis plan and post-crisis reunification plan are important parts of an overall insurance program, especially if family members are located over broad geographic areas. The same is true for those traveling to areas with a greater propensity for political unrest and crime: Kidnap & Ransom coverage for both domestic and international travel must be included in the insurance program review.
Complexity and Customization
While there are many additional areas for review including employees — those employed by individual family members, estates and organizations, and those by the family office itself; additional insurance coverage provided by not-for-profit board seats; coverage review conversations for those family members experiencing significant life events such as new marriages, remarriages, births, hospitalizations and treatments, or the loss or death of loved ones; cyber risk and cyber breach coverages; land, air, and water vehicles coverages, there is no question that the diversity of risk exposures for a multi-generational, extended high-wealth family creates complex insurance needs.
Often the insurance program is focused on the patriarch or matriarch of the family and their immediate needs only. However, an effective family office recognizes that the growth and subsequent transfer of wealth to future generations is a key mission of the family office and as such, will drive a program to conduct comprehensive risk profiles for all family members. In addition, the consolidation and consistency of coverages under one roof of the family office may allow for economies of scale related to limits and pricing.
Considering insurance as a fundamental component of an overarching Family Constitution and Investment Program will help mitigate risk due to uninsured or underinsured losses and will provide significant protection for the family’s lifestyle and legacy.
At the core of our philosophy and based on more than twenty years of experience, i3 believes that those families that approach wealth as a gift from one generation to the next are better positioned for the continued growth of wealth and achievement of investment goals than those that view generational wealth as an entitlement. Including an Insurance Program review as a part of Family Governance documents assures the strength and health of the gift and preservation of wealth for future generations.
I invite you to learn more about this process, the i3 firm, and the services we offer. Visit us at http://i3resources.com