The “Triple S” family business insurance policy

There are various underlying principles that propel individuals to purchase insurance policies depending on their needs, be it to safeguard and protect their business, their assets, their family or their employees. These principles can also be applied within a family business context.

While key policies may protect the business to a certain extent, and life/health insurance policies will protect the family and employees to a certain extent, the coverage is understandably limited when considering the bigger picture: that of a family business.

There is no standard “Family business” insurance policy that can truly mitigate and cover all the risks associated with a family-owned business. However, it is possible to put in place a governance structure, akin to an insurance policy, to safeguard the capital of a family in all its forms: financial, human, social and intellectual.

What if?

While in some instances it is a legal requirement to have insurance policies in place (such as medical insurance for UAE employees), insurance policies are also used to provide financial security in the case of unfortunate and unforeseen events, ranging from the merely inconvenient to the truly life-changing:

- What if I crash my car?

- What if I break my leg on a skiing holiday?

- What if my bag is stolen?

- What if my house catches fire?

But there are also many “what ifs” that can affect a family business, such as:

- What if one of the family shareholders wishes to exit?

- What if the key family executive(s) passes away or wishes to leave the company?

- What if family members have different ideas about the commercial direction of the company?

- What if my children want to set up a business in competition with the family business?

- What if I work harder than my sibling(s) but they receive the same salary as me?

- What if a family member wants to join the firm, but does not have the right skills or attitude?

Any one of these scenarios can upset the delicate balance within a family, which in turn can generate financial, commercial and moral repercussions for the family, the business and its employees. So why not put in place a plan to secure the financial and commercial viability in the face of potential shocks that may affect the business? 

The Triple S family business insurance policy

The first step to mitigate against these scenarios is to recognize that running a business and being a family are two separate matters. When the two become intertwined there is a need to create boundaries and rules. Family governance is the Triple S (3S) insurance policy that ensures the long-term security, sustainability and stability of the family business.

A Summary of the 3S insurance coverage

The coverage required will differ from family to family, but typical clauses should:

• Set out core values to which all members of the family should adhere to, so as to ensure that the family identity and cultural capital is upheld;
• Set out a family investment policy i.e. strategy of operating businesses, investments and family office;
• Define a succession plan to secure a smooth transition from one generation to the next;
• Provide a mechanism for decision-making among the family;
• Define a dividend policy that meets the needs of both, the family and the business and to ensure that family members’ expectations are managed;
• Provide a way for next generation family members to be given responsibility for matters within the governance framework, provide mechanisms for their employment and integration into company operations;
• Provide agreed-to mechanisms for conflict management between family members; and,
• Provide a means for articulating the family's philanthropic vision and putting it into effect.

In essence, the family governance framework addresses all the potential “what-ifs” associated with a family business. It addresses the concerns of the different stakeholders within the family structure and it defines the roles and guidelines under which they should operate.

Agreeing on such a framework in advance allows the family to decide how to resolve problems and conflicts before they arise. Without a prepared response strategy, dealing with an unexpected problem at the same time as finding the right solution is not always immediately possible; any delay can cause a relatively minor issue to snowball into a much more problematic matter.

Governance is more than a hypothetical ideal or a physical or legal structure put in place to safeguard a family's wealth. It is the rules of operation for a given family, a set of systems and policies by which a family and all of its members can interact and work together to promote the family’s vision and philosophy while maximizing returns and preserving the family's asset base.

It is important to realize that a family governance framework cannot be imposed on a family, rather, it must be developed by the members themselves. In the same way that insurance premiums are based on an actuarial assessment of the risk of the insured individual/item, there are many factors within each family business that will affect the design and coverage of the Triple S insurance policy.

While there is a financial investment associated with implementing a governance policy, this can be far less than the long-term risks (and consequent costs) of inaction such as a forced disunion of a company, a stifled or ineffectual board, loss of commercial opportunities, irreparable damage to family relationships or costly litigation and other legal bills.

Governance or succession planning is not a mandatory legal requirement… …but maybe it should be?

The economic and social fallout of the failure of a large family business should not be underestimated, nor should the impact of the damage caused to relationships within the family.

As with all insurance policies, it is important to shop carefully and be certain of the extent of the coverage provided. Make sure the 3S policy purchase is adequate for the needs of the family and business. Just as business insurance policies can be changed and customized to suit the needs of the business and family, so can any given governance policy.

After all, entrepreneurs work so hard building their business, serving the community and creating employment, they owe it to themselves to ensure that their hard work has not been in vain, and that the family business is adequately protected. To quote Henry David Thoreau, “if you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them¹.” 

by Walid Chiniara, Partner and Head of Family Enterprise Consulting, Deloitte, Middle East and Yasmine Omari, Manager, Family Enterprise Consulting, Deloitte, Middle East

Endnotes

1. Henry David Thoreau, Walden,1854