This article explains how captive insurance’s unique advantages can align with family offices’ evolving needs—offering bespoke, cost-effective solutions to enhance risk management and preserve wealth within complex portfolios.
Over the past five years, the number of single family offices worldwide have grown by approximately 31%. That growth has been further trended to grow another 33% by 2030, with the worldwide count of single family offices surpassing 10,000. Similarly, it has been estimated that assets under management will increase by another $2.3 trillion by 2030, reaching a total of $5.4 trillion.
Implicit in that growth are increasingly complex investments that are held by those family offices along with the more traditional operating company that may form part of a family office structure. Given that increasing complexity, the implementation of a captive insurance company as part of the family office to support the operations could be the next logical step in managing the risks and preserving the wealth of a family office.
In basic terms, a captive insurance company is a wholly-owned company created by its parent to insure some or all of its own risks instead of purchasing from the commercial market. Effectively, a captive could allow a family office to become its own insurer for a variety of risks that the family office encounters.
As with most investment programmes, asset diversification is one of the keys to success. Today’s family offices often manage a diverse range of assets such as real estate, private businesses, investments, and other personal holdings. Given those unique investments and the unique risks that are faced, a captive insurance company is able to provide the following benefits.
More customised coverages when compared to the commercial marketplace, e.g., customised deductibles based on the risk or terms of coverage that otherwise would not be available in the commercial market.
Centralisation of risk management into a single entity: The risks to the organisation and family office are more clearly identified, and responses to those risks can be mitigated in a more efficient and bespoke manner.
Cost control: As a purchaser of insurance in the commercial marketplace, your own loss experience generally is not fully reflected in the price of the premium. While your own organisation could have better than industry average experience, insurance companies, by their very nature, will also cover organisations that will have worse loss experience. A captive allows you to set an actuarially determined premium level that blends industry loss data along with your own loss experience, allowing you to get the credit for your better-than-average loss experience.
Reduced expenses: A captive can provide coverage at a lower cost because they remove the need for the profit margins and overhead costs associated with traditional insurance companies. The typical expenses of a captive are usually anywhere from 5-10% lower than the commercial market, which can also drive premium savings.
For a diversified family office portfolio, a captive offers a broad range of coverages, such as:
- Property risks (e.g., real estate holdings, high-value assets).
- Liability risks (e.g., directors and officers liability for family members managing businesses).
- Cybersecurity risks (for technology infrastructure and private data protection).
- Medical and healthcare coverage (for family members and employees).
- Private equity and investment risks, offering coverage for potential financial losses.
Captives have become an important part of long-term wealth preservation strategies for ultra-high net-worth families. For example, a family office with a large shipping business could form its own captive to cover or participate in the insurance of their marine cargo, and ships, as well as participate in their non-marine coverage such as property for the office buildings that they own, or professional liability coverage for risks that may be present in the day-to-day management of the company.
By utilising the captive, the family office can reduce premiums paid to third parties. Premiums paid to the captive will be available to invest, allowing the family office to earn investment returns while the captive responds to losses on an expedited basis. Ultimately, the underwriting profits generated by the captive will remain within the family office structure rather than being lost to the commercial industry.
A captive insurance company is a vehicle that can provide benefits on a long-term basis. With continuing fluctuations in the insurance market, it’s the time to control your own destiny and finances.
Colin Robinson is chief operating officer at IMG Trust.
