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Family Offices Must Take on Twenty-First Century Risks

Charles Hamilton Stubber

Aon Private Risk Management

15 January 2007

Family offices see insurance as a significant part of their mandate to manage and protect the family wealth, in addition to their core investment management and advisory function. This should involve reviewing a family’s overall exposure and deciding how to transfer these risks, either through insurance or bearing the costs themselves. Despite an estimated 25 per cent of a family’s wealth comprising of insurable assets, many family members are reluctant to engage in complex insurance arrangements because of the belief that their wealth will allow them to self-insure against most risks. As a consequence, insurance has become less of a strategic priority for family offices but, considering the threats they face, learning how to manage exposures needs to receive the same attention as fund management or actuarial services. Unlike other areas of responsibility for family offices, such as administration and estate planning, there is little research on family offices’ attitude towards the assessment and management of their risks. To gain a deeper insight into their approach to risk and insurance, Aon Private Risk Management conducted confidential face-to-face interviews with ten offices whose families’ declared assets range from £150 million to £7 billion. The interviewees were split between single family offices, family office providers, multi-family offices and private bank family office providers. Key Concerns Protecting material assets was cited as the top concern for family offices. Traditionally these have been the obvious, quantifiable risks to insure but their value must be continually assessed and the policy adapted accordingly. Meanwhile, risk auditing and commercial insurance for the family office and members, such as trustee liability and employment practices liability, ranked of low importance. Yet, encouragingly, family offices believe this is set to change in five years time. We believe this is because of the ever-growing compensation culture, increased exposure through board roles and the complexity of structures such as on and off shore companies. But it does not mean that family offices should be complacent until then while they still face large exposures, which could range from being sued as a charity board member or due to a wrongful termination. The offices need to act on the consensus that their risk monitoring processes must improve to raise the quality of existing insurance programmes and introduce alternative approaches to transferring and minimising risk. Only a few, high profile, families were found to play “tug of war” with the concept of improving their risk management and insurance processes while, at the same time, wishing to maintain discretion. When families have stringent requirements for privacy, they tend to be concerned about insuring certain assets in order to avoid disclosing a true view of their wealth. This also affects the number of service providers used so they can spread their risk amongst several advisers and protect their privacy. Frustration The family offices admitted they were frustrated by insurance service providers failing to deliver an integrated service. Where more than one broker or insurer is used, it is now less for “old family connection” reasons and more for need of a specialist service for unique chattels, such as specialist motorcars, bloodstock and aircraft, where the main provider has been unable to cover all requirements. Although many have multiple providers, there was nearly a unanimous desire by the family offices to combine risks with one provider in order to obtain more favourable terms and premiums. This would also ease the administrative burden and claims management. The research also showed that selection processes for finding a provider that can deliver an integrated service and risk audit expertise will vary greatly amongst families, although proven knowledge of “private clients” and empathy will be commonly expected. Where currently the majority of appointments are made on the basis of personal recommendation, few family offices have established a formal process for selecting insurance providers. Some select brokers on an ad-hoc basis as the particular insurance need arises, which proves the lack of integrated services available in the market. However, as the need for a rationalised and seamless service grows amongst family offices, the development of an established selection process is likely. This will achieve a better understanding of a family’s exposures, more control over the policy purchasing and more manageable administration. Barriers have existed in the past due to the reluctance of families to engage in insurance matters and the sensitivity around revealing a family’s true wealth. Yet encouragingly, family offices have indicated that a risk audit service is an attractive proposition and the necessity to protect the health of both a family’s material assets and family members needs to be put on the top of the agenda in 2007.