Insurance needs for family enterprises and the family offices that support them are unique compared to smaller corporate insurance demands.
For the family, privacy and protection are of the utmost importance, and their offices have their own risks to be shielded from in order to best suit the family they work for.
Here, several experts discuss what trends are emerging in the area of insurance for family offices in today’s ever-evolving economic climate.
Melanie Wilcox
Senior vice-president, Head of Chubb Canada Personal Risk Services
What are clients asking for right now in terms of insurance for family offices?
“Family offices are looking for holistic strategies that include management for their assets, wealth and insurance needs. They are looking to have bespoke tailoring for the unique needs of their family and not off-the-shelf solutions.”
Are you seeing any trends developing?
“The complexity of the risks associated with individual family offices continues to grow. With a complex risk management environment, comes the need for risk managers, brokers and insurers that understand the unique needs of family offices.
In addition, the climate in Canada is becoming more litigious. We are seeing escalating costs of personal liability claims because of increased litigation and the growing size of compensatory awards. High-net-worth families and the family offices that support them need to understand this current trend as they contemplate their insurance needs.
The best way to protect oneself from liability risk is to put in place an appropriate insurance program, including the purchase of an excess liability policy with adequate coverage limits and then thoroughly understand the policy’s features. Most excess liability policies cover liability for property damage, bodily injury, and personal injury, and defense costs for civil lawsuits.
Have there been any effects on insurance requirements or demands for family offices since COVID and the current economic environment?
“In addition to the economic inflationary pressures on construction costs, brought on in part due to the pandemic, we are seeing considerable changes in a post-pandemic environment on Canada’s roads.
An increase in auto thefts has hit many communities in Canada. Also, Canadians are on the road more now than pre-pandemic levels, resulting in distracted driving and speed increasingly being a factor in crashes. Ensuring adequate auto liability protection is in place for drivers should be a top priority for family office leaders today.”
Andrew Clark
President and chief executive, Aligned Insurance
What are clients looking for in the area of insurance for family offices?
“Typically, family offices are most interested in professional liability, directors and officers, family trust/trustee liability, crime and social engineering fraud and cyber insurance. Property and general liability for the physical operations/office are key and commonly purchased too.”
Are there any trends emerging?
“Given the increased frequency, severity and sophistication of cyber-attacks and phishing scams, many of which specifically target high-net-worth individuals and family offices, the interest and uptick of cyber insurance and broad crime insurance products that include social engineering extensions being purchased is a trend.
Another trend is the increases of limits [more insurance] being purchased, given the increased perception of risk, instability and uncertainty in Canada and the world today.”
How have client needs for insurance for family offices evolved throughout the pandemic?
Also, as the financial markets and many industries have experienced shocking and surprising fluctuations the importance of professional liability and directors’ insurance has only increased because when things don’t go well, and losses are incurred, allegations (rightly or wrongly) can be made against the employees and team responsible for running a family office.”
What trends are emerging specifically tied to the current economic climate?
“The trends mentioned above are all relevant and tied to the current economic climate and generally when there is an increase in risk or perception of risk created by an economic climate or season, there is a correlated increased interest in protection and “insurance” from external risks, threats, etc.”
Graeme Martin
Partner, Bridgewell Financial
What are clients looking for in the area of insurance for family offices?
“First, clients are looking to their family office to ensure the insurance professionals they bring into the conversation are fully vetted and have an extensive knowledge of the current market, as well as legacy insurance policies that may already be in force.
We’ve also seen a shift in mindset where family offices are increasingly focused on helping clients and their families achieve overall financial wellness. They’re analyzing clients’ lifestyle and financial goals – both personal and professional – and then using tools such as insurance to develop a holistic financial strategy that puts them on a path to achieving those objectives.
The total financial wellness approach is a relatively new and important framework that family offices can use to deliver greater value to the families they serve.
Clients of family offices often have the mentality that they are stewards of their family wealth and want it to endure for generations to come. Insurance provides an opportunity to guarantee a transfer of wealth in a tax-efficient manner. Life Insurance proceeds are paid tax-free to the beneficiary and can be settled outside the will, avoiding probate and any potential challenges to a will.
Similarly, it allows families to guarantee financial support to their favoured charities and foundations while realizing certain tax advantages, either by naming the charity as the beneficiary of the life insurance proceeds and receiving a donation receipt at time of death, or by assigning ownership of the policy to the charity while living and receiving a donation receipt each year in the amount of the annual premium.”
Are there any trends emerging?
“With the realization that the fallout from the government’s pandemic spending would lead to a period of inflation, and the potential for governments to increase taxes to pay for the spending, insurance will become a more and more utilized tool to minimize estate taxes because of its tax-free transfer of cash to beneficiaries upon death. Insurance has always been a tried, tested, and true solution for high-net-worth families to transfer wealth. While life insurance products have changed over time, at their core, the advantages have remained much the same.
One thing we have seen is that for business owners, there is a desire to have clarity on the integration between corporate assets and personal assets and ultimately how those assets will be passed down to future generations. Insurance can be a tool to provide liquidity to the estate for the purpose of paying taxes and avoid the need to sell real estate assets or the business.”
What trends are emerging specifically tied to the current economic climate?
“We’ve noticed that when there is volatility or accelerated inflationary periods, as we’re seeing now, clients tend to go back to basics and look for guarantees.
Insurance can provide guarantees, tax-advantages and asset creation beyond simple interest-bearing investments. For instance, a whole-life policy that pays dividends, structured properly, can provide cost-certainty, tax-sheltered growth, an increasing insurance benefit and an increasing cash value.
Scott Dickenson
Principal, Client Services, Northwood Family Office
What are clients looking for in the area of insurance for family offices?
When it comes to life insurance, the needs of a family office client are different from the needs of most Canadians. Most Canadians use life insurance to help provide for their families in the worst-case scenario where something happens to them, and they are no longer there to provide for their family. The most common (and best) form of insurance for most Canadians is a term life insurance policy. I’ll use myself as an example here because my wife and I just purchased term life insurance policies last year after the birth of our first child. We bought separate term life insurance policies for both of us that extend for the next 20 years. Essentially, we pay annual premiums each year for the next 20 years, and if one of us dies during that timeframe, the insurance policy pays out to the surviving spouse. In the event that both of us pass away during that timeframe, both policies pay out and are kept in Trust for our surviving child. If we’re both still living 20 years from now (fingers crossed), we have the option to extend the policies (at a higher cost to reflect us being 20 years older) or let them lapse. I can’t predict the future, but I assume we will let them lapse after 20 years or shortly thereafter because by that stage they’ll have served their original purpose of insuring the cost of raising a child in the event that one or both spouses pass away before the child becomes an adult.
Family office clients don’t typically need term life insurance. This is because they usually have enough liquid wealth to ‘self-insure’ in the event of a catastrophe where a parent passes away during the childhood of one of their [children]. What this means is that they have more than enough money to cover the cost of raising the child if the worst-case scenario happens, and don’t require an insurance policy payout to cover these costs.
The type of life insurance usually more applicable to family office clients is [various types of] permanent life insurance. The key differentiator between term life insurance and permanent life insurance is that a permanent life insurance policy covers you for the rest of your life (as long as you keep paying your premiums), while a term life insurance policy expires at the end of the term (10 years, 20 years, 25 years, etc.).
The other key differentiator is that permanent life insurance policies have a cash value that builds up in the policy over time as the annual premiums are paid and invested in the policy. This cash value can be withdrawn from the policy while the insured person is still alive, but these withdrawals would ultimately reduce the amount of the policy payout on the person’s death.
Kyle Nichols
President, Hugh Wood Canada Ltd.
What are clients looking for in the area of insurance for family offices?
“The calls we are receiving from family offices is the need for guidance across various aspects of niche risk to better understand the current insurance market and how they can improve their risk profile to reduce premiums.”
Are there any trends emerging?
“On hard asset coverages: Real estate assets in the residential and commercial classes continue to experience rate increases and, in some cases, especially older buildings and difficult occupancy classes, are finding it difficult to secure commercially viable insurance protection.
On directors and officers coverage: Liability to ensure personal asset protection for the family office as well as family members. For example, those who may sit on non-profit boards or private entity boards of their investments.
On cyber risks: Across all aspects of the family office ecosystem. For instance, in family office operations: How exposed is the data? With investments: What are the risks should any of the investments be hit with a cyber incident (network breach, privacy breach, ransomware)? In personal or family cyber protection: Should their devices, personal servers or connected home items experience an attack?”
What trends are emerging specifically tied to the current economic climate?
[Mergers and acquisitions]: there has been extensive M&A activity in the insurance industry on both the broker and insurance company sides, which has impacted service levels and coverage items.”
Responses have been lightly edited for clarity and length.
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