In this weak economy with historically low interest rates, many banks have been eager to bulk up in wealth management to generate more fee-based revenue.
A lesser-known opportunity exists in the risk advisory business. The client demand for business risk advisory services has been converging with the demand for comprehensive wealth management services.
This convergence has accelerated since the Great Recession. Recognizing this, more banks are becoming involved in the risk advisory business, often integrating those services with their wealth management business for their clients.
Banks are leveraging their existing client relationships to do this. Many of their clients own businesses that have risks needing to be managed. For example, a dentist needs to manage professional liability risks; a builder needs to manage workers' compensation risks; and an auto dealer needs to manage property-and-casualty risks such as fire damage to inventory and liability for personal injury incurred on a dealership's property.
Conventional business risk management typically has steered the client exclusively to commercial insurance without consideration of potentially more cost-effective and efficient alternatives.
Understanding this client need, banks are entering the risk advisory business. They have been doing this in different ways. Some banks have hired professionals with risk management and captive insurance expertise. Others have trained selected officers in this space. Many have built an interdisciplinary banking team, or separate division, comprised of their risk management professionals, wealth management experts and, in some cases, commercial lenders. All of this is being done by banks to provide integrated risk advisory and wealth management services to clients.
So what services are banks providing here? And what benefits are banks seeing from their bulking up in this space?
Privately held businesses and affluent families in the U.S. have been particularly active in establishing their own captive insurance companies as part of a comprehensive risk and wealth management program. In a study by McKinsey & Co., wealth management was one of five attributes identified for a successful family business, and an integrated "strong risk-management culture" was noted as a principal driver.
Some statistics illustrate this growing demand. Over 80% of U.S. businesses are family firms and family businesses account for approximately 60% of U.S. employment and approximately 50% of U.S. GDP. Most of individual wealth in the U.S. is concentrated in family businesses. In the United States, more than $40 trillion of assets — much of which are business assets — are expected to transfer to subsequent generations in the next four decades. Risk management and wealth management understandably have become integral needs in this market.
Today, banks across the United States increasingly are having both risk advisory and wealth management discussions with clients, meeting this growing market demand. Family businesses and their owners, enlightened by their bankers and other advisors, are setting up their own captive insurance companies, captives, for combined risk/wealth management needs. There are currently over 5,000 captives worldwide, of which more than 1,000 are domiciled in the United States. The growth of captives in the United States continues in response to increasing demand.
Well-advised clients, after appropriate analysis, often choose to set up their own captive insurance companies to cover one or more buckets of risk facing their businesses. They may be risks for which commercial insurance does not typically cover, such as employee benefit or business interruption risk; risks for which commercial insurance coverage is unavailable or too expensive, such as environmental liability risk; or risks that the enterprise has retained, such as the deductibles under current insurance. In short, a captive typically serves as a form of effective, and less expensive, enterprise risk management for the client's business.
Many banking clients, though, are unfamiliar with these risk management alternatives to traditional commercial insurance. And, traditionally, no one has been taking the time to reach out and educate them on this. By stepping into an advisory role, banks are strengthening relationships with clients and capturing more fees.
This risk advisory role involves more than simply advising the client about the nature and potential benefits of creating a captive insurer. The bank may provide various fee-charged services to the client along the entire captive formation chain: from studying the feasibility and metrics of creating a captive, to assisting the client with the licensing process.
Once the regulator approves the captive and issues it a license, many banks also offer follow-on services to the client — for a fee. For example, some banks offer ongoing governance services, such as conducting annual captive board meetings; or captive management services, such as administering some captive activities like claims processing and regulatory reporting. Some banks also offer ancillary custody, checking and/or fiduciary services. And some also perform procurement management for the captive, typically procuring needed accounting, audit or actuarial services. Banks providing some, most or all of these combined risk advisory and wealth management services are seeing increased revenue — and better client retention and new client development.
Captive insurance is being customized as an integral part of the client's holistic wealth and business planning. Banks participating in this evolution are helping to meet this growing market demand, generating new business from their existing clients and winning new ones.
Edmond M. Ianni, managing director of EMI Strategic Capital, serves as senior financial services strategist for ab+c Creative Intelligence.