Tom Montgomery takes a light-hearted but insightful look at insurance, the pitfalls to avoid and how a family and its family office can navigate the complexities and options they have when choosing and maintaining their insurance coverage.
Now let’s be honest about this; insurance is possibly the dullest subject out there. Everyone hates paying for insurance, and insurance brokers are as popular as estate agents or the tax man! However, everyone needs insurance and everything is insurable. In the Lloyds of London market we have insured everything from Pamela Andersons’ breast implants and Jennifer Lopez’s bottom, to Elon Musk’s recent space rocket launch, to the most mundane such as warehouses in Northamptonshire and fleets of white vans.
Family Office Insurance Underinsured As a family and family office you all need to work out your risk appetite and how you’re going to structure your insurance and risk management.
This will save you money on your insurance premium and give you reassurance that you are covered if a disaster happens.
There’s one thing that most UHNW families have in common, and that is they’re underinsured. This is increasingly true as asset values and personal liability risks increase. Industry stats in Europe estimate that seven of ten luxury homes are underinsured. Furthermore, many UHNWI don’t adjust their coverage limits in accordance with changes in the value of their assets or risks.
Recently this was demonstrated by a new client ho had been let down by his previous insurance company. The old insurers had not updated the values of his classic cars for about a decade, and over the past twenty years the prices of classic cars, often seen as alternative assets now, have risen hugely. All this came to an (expensive) head when he was manoeuvring a rare Ferrari around his garage and reversed into his classic Aston Martin DB3. Altogether both cars were undervalued by almost US$700,000 which he couldn’t claim due to their true value not being stated on the policy.
The global recession, which hit many wealthy insured families hard, has transformed the approach these families take to maintaining their financial security. We have found that clients have not been very satisfied (or happy) with the performance of their bond portfolios or their stock market investments so they reinvigorated their financial returns by taking their passion for collecting and using that as an investment tool.
In the past, most insurance companies would consider these simple hobbies, but in recent years what we’re seeing is that people are investing in art and wine (and other luxury items), and insurance companies are now placing them into an asset class.
As a result, in their investment and insurance life, individuals and families need to look at, for example, their wine collection and investigate whether it has depreciated – and I don’t mean by drinking it!! Drinking it is very sadly not a recognised insurance risk. It is much like the insurance myth of the man in New York who insured his most expensive cigars for primary risk, that is, fire. He then proceeded to smoke them all, and claim the value of the cigars on his insurance, as they had, of course, gone up in smoke!
Property values are always index linked up every year, and every five years the insurer will ask for an up-to-date valuation on your jewellery and watch portfolio. However, your vehicles, yachts, planes, and all other assets (such as wine collections, sporting goods, clothes and so on) will need to be monitored by someone in your family office. One of their most important tasks will be get each item or collection appraised as to their worth and, in turn, up-date your insurance policy so that if there is a claim the underwriter has the right value to return to you!
Family Offices face unique insurance challenges and tend to gravitate towards different insurance products. Wealthy families have relatively more complicated risk management needs. The real risk might be over-insuring against minor threats and underinsuring against major ones. The benefits of an ultra-high-net-worth insurance policy are largely centred on smoothing out the relationship between needs and coverage.
Another key issue that is often overlooked (but not if your broker is doing his job correctly) is protection against incidents, such as theft by household employees. I have one family who often leave 50€ notes around their houses to test whether their employees are trustworthy. In this litigious world that we live in, a family should cover themselves against a legal suit from an employee or service agency. This is known as Employment Practices Liability Coverage, or, sometimes, Nanny Insurance. Such a suit was actually brought against another client of mine, in the South of France, two winters ago. In this case, the cleaners had a local illegal robbery racket going. Over the course of a winter they managed to clean out all the out houses, and pool house, as well as take all the garden ornaments, heavy machinery, pathway ornaments and anything else of value. However, they really outdid themselves when a cleaner ‘tripped’ moving of one of the larger pot plants and then tried to sue the family for her ‘accident’. Thankfully these over excessive ‘cleaners’ who tried to completely clean the family out are now serving time.
How to save money withyour insurance? So, we’ve looked at why you need insurance, a few of the pitfalls, but now we should look at how you save money with your insurance premiums. In fact, through careful management we managed to dramatically reduce what one of my clients he was paying by avoiding the pitfalls I’m about to tell you. The easiest way to quickly save money is by consolidating all your insurance to one insurance company. There is then little chance you will double up on any insurance coverage. I had one client who had 49 different insurance policies. We managed to reduce them down to 8. Ironically, was the same number of husbands she’d had over the years!
Excesses: One of the first questions I always ask my clients is: what would they claim? Would they make a claim only if their house burnt down? Or would they like a reactive policy that pays for every lost earring, red wine stain, and/or minor bit of damage? This is where playing with the excess on your policy really pays.
In fact, sometimes playing with the excess is the only way to get insured. One of my higher tariff oligarchs has a 17 year old son who passed his driving test in the UK a few months ago. He, of course, bought his son a Porsche GT3, a vehicle notable for two features: 1) it is worth about £200,000, and 2) it is one of the fastest production vehicles in the world.
In most cases, nobody in their right mind would ever consider insuring such a car for someone so young. However, through some very careful negotiations, we managed to get the underwriters to accept the risk by having the excess set at 20% of the value of the car. Fingers crossed, he still hasn’t crashed the Porsche to date!
Watch the Broker! So that’s one way to save money on your insurance premium. Another is to check the paperwork when the insurance invoice comes in.
The insurance broker can make his money through the commissions he earns from the insurance carrier he places the policy. Normally the commission they receive is from 10% to 40% of the value of the insurance policy. Do check they’re not putting any other fees on top of their commission earnings.
You could look to negotiate a fee and make sure the broker gives you the net premium from the insurer, which would then give you more control.
Also, as I’m sure most of you are aware, have your offices and assets under a tax efficient company structure. Doing so will mean that you wouldn’t be paying any insurance tax, which in some countries can be 25% on top of the premium.
Family Office Management Liability Issues to Consider As you well know, family offices combine financial, philanthropic, legal, and administrative operations and help ensure that family objectives are achieved from generation to generation. However, these responsibilities create a range of liability exposures for the family office executives and professional staff. A family office manager’s exposures rival those of corporate directors and officers. Family office executives perform many services commonly associated with trust operations and assume those duties and obligations as well.
Protective Measures – Indemnification and Insurance Often the best protection a family office manager can employ is to obtain indemnification provided by the family office itself. However, even written indemnification is not without its limitations.
Insurance programs, written broadly enough, will also help protect the family office professional against director’s and officer’s liability, professional errors and omissions, exposures, and employment practices risks. In addition, appropriate insurance coverage can complement existing indemnification provisions — in some circumstances exceed them — and absorb indemnification costs assumed by the family office.
Cyber Cyber is a major concern for ALL of us, thanks in large part to smart home devices that are susceptible to hacking. Hackers can almost create an insightful little electronic journal of you and your life. Through the network of devices people carry and use, they can actually map and understand the pattern of your lifestyle based upon when your lights go on and off, when your heat goes up and down, and on top of that, you’ve got your kids out there in a real-time moment posting ‘Greetings from Hawaii.’
And since so many families employ domestic staff, it is often forgotten that they may have your WiFi password. If the nanny has it, and then you let the nanny go, you need to remember to change the password. Most families I’ve dealt with don’t have a protocol for on-boarding an employee or for firing an employee. Usually it’s no more than they’re fired and they leave. The problem is they’re not put through the same rigorous procedures that happen when someone leaves a firm. Firms take away their company electronics and change their corporate access codes.
Cyber is definitely something you have to be dealing with, whether it’s coverage under the policy for recreating property after a malware attack, or protection against unauthorized electronic funds transfer. Check your policy for cyber coverage; it is becoming more standard on them these days, but not all policies cover it.
One area cyber is definitely not covered is on superyachts, and this is something I’m currently trying to resolve in the market. Yachts are extensively automated these days, and a few yachts (and we’re taking yachts worth in excess of $300m) have even been remotely controlled by hackers. The prospect of untold havoc happening should a ‘black hat’ crash one these huge yachts into a port or into another yacht is a terrifying one. Thankfully this hasn’t happened yet, but the exposure to the yacht owner or company could be in the billions. Hopefully, I’ll have this gap filled in the market soon. In summary, insurance and family offices can be a total bloody mind field, but if it’s looked after carefully and you form a good relationship with your insurer, so that they will fight your fights when a claim arises, and make sure you have little to no exposure whilst you and your a family go about your business and pleasure, then it can be simple.