Charles Hamilton-Stubber, director of Aon Private Risk Management, looks at how ultra-high-net-worth families and their offices have changed their approach to risk over the past two decades. This feature first appeared in www.wealthbriefing.com.
In 1987, Van Gogh’s Irises sold for a record GBP27 million. In 1987, managing risk and insurance was mainly confined to a family’s tangible assets such as art collections. But 20 years later, this has shifted as families have become more aware of the liabilities that threaten their wealth. Bearing in mind that in today’s art market the Van Gogh picture would probably sell in excess of GBP60 million, what lessons can be learnt for family offices in the future?
Identification of the risks to a family’s wealth has evolved in virtually every aspect over the past 20 years. This evolution has also changed the way that individuals and families look at the risks that they wish to retain and the exposures they wish to transfer to the insurance market.
In the 21st century, most family offices have identified three key areas of risk: the family’s assets, personal well being and liabilities. Some 20 years ago, the latter was not on the radar and families focused on the more obvious assets to insure.
Protecting Your Assets
Theft and damage to art was more prevalent 20 years ago for a number of reasons. Security was not as sophisticated and the disposal of stolen art was more prevalent. Today, police forces around the world link into organisations, such as the Art Loss Register, Trace and other international databases, which have weakened the flow of stolen art. Damage to art has also decreased, for example while in transit, due to enhanced packaging and specialist fine art shippers.
Jewellery was more vulnerable as it was stored at home, whereas today most private collections are generally kept in banks or more sophisticated home safes. I remember when people were not keen to wear jewellery in cities such as New York and London due to the threat of opportunist ‘snatch and run’ thieves.
In 1987, ‘super yacht’ was a term used for a large motor yacht. In 2007 we’re more likely to refer to a ‘mega yacht’. For example, the order book growth for yachts in excess of 50 metres has increased from 24 in 1999 to 106 in 2007, according to The Yacht Report. Over this period insurance premiums have risen as a reflection of the complexity of risks facing owners, such as increased values and liabilities associated with the size of the vessel.
Similar changes can be afforded to the ownership of private aircraft and helicopters. The market has not only grown, for example with large Boeings and Airbuses in private hands, but has also extended as exposure to terrorism brings additional liability costs to families and individuals.
With the property market, we have seen a rise in values and an increase in the territorial expansion of private house portfolios. The insurance market has had to deal with schedules of houses, ranging from central London to Los Angeles.
As a result, underwriters are more aware of the exposures faced by the continued onslaught of natural catastrophes and have become very concerned about their accumulation in certain territories, such as Florida and LA. The size of these losses means that insurers are relying more on underwriting models to understand how best to underwrite those risks.
Meanwhile, country estates have diversified their operations to the extent that the insurance market has had to come to terms with a more commercially minded business.
Protecting Your Well Being
Protecting your personal well being is no longer viewed as purely taking out insurance for health, travel, death and permanent disability. Over two decades we have seen more sophisticated products from repatriation to 24-hour call centres. From our experience the most marked change in attitude is families’ demands to choose where they wish to receive specialist treatments, not necessarily where the insurance company has approved hospitals.
The level of cover and service has very much been driven by the client, rather than the industry. The additional drivers, which were not prevalent 20 years ago, are the attitudes towards security and peace of mind, while at home and overseas. Growing global 21st century threats, such as kidnap and ransom, and terrorist threats, have been influential in the rise of security consultants to advise on how to protect themselves at all times.
Emerging Liability Risks
Certain liabilities have unfortunately raised their heads, particularly relating to the operational liabilities rather than public and third-party liabilities. It was considered an honour and also a sign of support to join a friend or family member’s board of trustees as a non-executive member, but nowadays individuals are cautious to avoid the potential exposure of accountability within that position.
Families are also becoming more aware of the risk of defamation to their family name and the impact it may have in the near future. The cost of reputation was barely considered two decades ago but today families recognise the potential threat to their wealth.
Insurance Industry’s Reaction
Over the past 20 years, the insurance industry has had to seriously re-evaluate how it approaches, understands and underwrites this increasingly sophisticated and professional arena of exposure. The underwriting has not only had to evolve around the intricate knowledge of the exposure but has also had to provide substantially increased capacity for the assets of the families.
One of the most important lessons we have learnt is the need to shift from being an insurance broker to acting as an insurance consultant to the family. There has been a dramatic change from being product driven to analysing the lifestyle and exposure of the family, then adapting the relevant insurance solution around that exposure.
Underwriters have also had to adapt their philosophies towards the types of risks they cover, moving away from standard wordings and carefully monitoring accumulation of risk, particularly in relation to catastrophe perils. Overall the insurance market has had to restructure its approach, sophistication, solution and service to accommodate the diverse levels of cover required across the spectrum of a family’s risk exposure.
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