More family offices are and should be exploring captive insurance solutions, with a wide variety of risk financing options available depending on the profile and structure of the organisation.
Speaking on the latest episode of the Global Captive Podcast Mikhail Raybshteyn, partner and co-leader of EY Captive Insurance Services (Americas), and Prabal Lakhanpal, senior vice president at Spring Consulting Group, discussed how captives can be valuable tools for family offices and why we may not have seen major utilisation by this group in the past.
A family office is usually structured as a privately held company that manages the wealth and investments of a wealthy family.
“At least in my opinion, family offices have been a little lagging in terms of joining the crowd when it comes to setting up captives,” Raybshteyn said.
“Some, for various reasons, may have felt a captive was not for them. Others may have thought it is too cumbersome or too complicated to set one up because they had heard horror stories or even tried to apply the law as is to their situation, to their ownership facts, and found it challenging to put together.
“And in some cases just the number of decision makers in the family office may not have allowed them to be very proactive.
“We see that’s changing in recent times, but I think there’s still a lag.”
Lakhanpal said we could be starting to see a different approach and an embrace of captives as risk managers move from the corporate space, where they might have had previous experience with captives, into a family office role.
“One of the things I am starting to see a trend on is corporate risk managers who are transitioning to family office organisations are bringing that level of sophisticated risk management to those entities,” Lakhanpal said.
“And the fact that a lot of family offices have a very long-time horizon on capital utilization allows them to be extremely innovative in the way they leverage a captive solution.”
Family offices, naturally, can vary greatly in terms of the types of assets and portfolio they manage. As such, the associated risks and insurance needs also differ from one to the next.
Similarly, ownership structures can vary where multiple generations could be covered by one family office or every couple of generations could split off to form a new entity.
“For family offices that have corporate entities or companies that manufacture something, sell something, export something, move something, the risks may be similar to a company that sells something, but is a commercial company,” Raybshteyn said.
“However, the way they’re owned and the way the family thinks about risks, the number of companies the family owns, becomes more of a private equity structure.
“While risks may be the same, especially when you look at a cross section between qualifying as regulatory insurance company and qualifying as a tax insurance company, some family offices provide very challenging equations that need to be solved.”
Lakhanpal explained that because a family office may have a very high cost of capital and very defined medium and long term objectives, it can be very exciting to produce solutions that include a captive structure.
“We’ve seen organisations where their cost of capital is well in excess of 17%, 18%,” he said.
“So when they’re thinking of setting up a captive, their objectives are very different than what a normal corporate’s objectives would be. And then we’ve seen family offices view it from the standpoint of, ‘I’m not setting this up for today, I’m setting this up because five years from now here are some of the goals I want to achieve, and I recognise I need to plant a seed today so that I have a tree five years from now to be able to achieve all the objectives we’re trying to get to.’
“As an advisor, it’s very exciting to be able to work with someone who’s viewing programmes from such a strategic and long term perspective. I think it gives you a lot of flexibility in what you’re going to help them structure and achieve through that process.”
Listen to the full 20 minute discussion on the Global Captive Podcast here, or on any podcast app.