Subscribe to The Risk Rundown on Apple, Amazon, iHeart, Spotify, or YouTube to listen to and get notifications for each episode release.

Linda (00:00):

And those questions that they ask are open-ended, and they'll do a tabletop analysis of, hey, does this strategy make sense for us now and where we're going in the future? And I think that conversation, that's the question that needs to be answered by the family as it moves and changes through various types of property.

Julie (00:25):

Welcome to The Risk Rundown. I am Julie Rison, and today, as always, I am joined by my co-host, Tyler Banks. Hey, Tyler.

Tyler (00:33):

Let's go, Julie.

Julie (00:35):

All right, well, so we have 2 special guests. This is the first time that we've had 4 people on this podcast, but we have 2 special guests with us today. The first one is our one and only Linda Bourn. This is a mouthful, but Linda is our Alliant Private Client Family Enterprise Leader. Welcome, Linda.

Linda (00:55):

Thank you for having us.

Julie (00:57):

We also have Seth Madnick, who is also an Alliant colleague who actually specializes in captives and actually specializes and helps organizations determine the proper strategy in order to be able to create captives. Hello, Seth.

Seth (01:12):

Yeah, hello, Julie, Tyler, Linda. Good to be here.

Julie (01:16):

So as families become more and more successful, protecting wealth just really isn't about just buying an insurance program, right? A lot of insurance programs are not built for the complexity of very large multigenerational families. And so today, we're really gonna talk about developing a long-term strategy for managing risk across their businesses, their investments, their real estate, and actually their multigenerations.

Tyler (01:43):

You know, Julie, what's unique about today's conversation is that we're actually viewing this from 2 different perspectives, right? You know, Linda's, perspective on when a captive should be part of a larger conversation with the client. And then Seth is going to help, you know, us kind of understand whether a captive is the right solution for a client. So I think together they're going to help us understand not just what captives are, but how families should think about them within a larger kind of risk management context and strategy. So this is going to be a very interesting conversation, to say the least.

Julie (02:19):

Yes, absolutely. So I think it would be good actually to kind of level set a bit. And Linda, I would love to ask you to share with our audience about what is the typical insurance profile that, you know, these successful multigenerational families have and are looking for?

Linda (02:41):

Julie, I think you can look at it from the perspective of multiple layers. So on one hand, you have the family, which have residences, not only where they live in their home state, but they have residences around the United States, mountain areas for a getaway, maybe some fly fishing, as you know.

Julie (02:58):

Yes, we do love some fly fishing, don't we, Linda?

Linda (03:00):

We do. Coastal areas, island properties. And then you have these young adults who are having life stage events in the family tree. Where they have their first home, their first apartment. All of this you could see builds as the family grows in generations. At the heart of this is a family office that has its own entity and its own employees, and they're in service to the family itself. And so that partnership typically has a lens toward managing things more holistically and managing things to make sure that they make some informed decisions around the right way to think about risk.

Tyler (03:41):

You know, I know a lot of family office executives, they spend a lot of time talking about tax. They talk about estate planning strategy, investments.

Linda (03:50):

I think that's a good point because the dynamic that we just discussed is changing because you have a family that's changing in family tree, in their life stage, or those sort of events that happen with first home apartments. And then you also have a long-term planning horizon. Most family offices and their family members take a long-term view, 5 years, 10 years out, and it's dynamic. And so they want to make informed decisions. They want to have better things in their toolbox when markets change. We've just come through a really challenging insurance marketplace for properties and for liability and associated insurance that we talked about earlier that pertain to a family. Now we're in a softer cycle, but family offices tend to take a longer view, not just on an annual renewal basis, but they're looking 3 to 5 to 10 years out and they want to make an informed decision and revisit it. So they have that in their toolbox of the right way to manage risk on behalf of their family.

Linda (04:50):

And if it makes sense for the family office as well.

Tyler (04:53):

You know, this has been an interesting concept for family offices, you know, for many years now. And so at what point does a family office look at a different risk transfer mechanism like a captive? You know, when does that become part of a broader conversation from your perspective?

Linda (05:11):

I think a captive becomes part of a broader conversation when the marketplace changes and shifts, especially with large properties. And nowadays large properties, they're $20 and $30 million replacement cost properties or higher. They might have a family compound, they might have, a challenging risk profile. And so for that reason, insurance might be scarce, or you might have to make trade-off decisions on self-insurance and risk mitigation and understand where to meet in the middle to maximize the way that you're buying insurance as a useful tool to manage risk or transfer risk, but at the same time, to make sure that you have a decision around what alternatives might be available for a large property portfolio. And I think in the challenging marketplace with natural disasters, I think that's where the conversation kind of took place. And now that the insurance marketplace has sort of normalized that conversation, it's still something meaningful to have, but I don't think it's as urgent as it was before.

Julie (06:15):

Seth, I'm going to put you on the hot seat for a minute because Linda's kind of been taking the brunt of Tyler and I's questions, but I've got— I want to shift a little bit. But to level set, what you do, for our listeners that might be unfamiliar with the concept of a captive insurance program, can you kind of give us a little Captive 101?

Seth (06:38):

Captives, when you think about it, it's a funny name, but it's an insurance company that's captive or controlled by the parent, essentially the parent company or the owner of the captive. That's where the insurance industry jargon came from. What effectively you're doing is creating a specialty or niche insurance company that's insuring the risks of the owners or the parent of the insurance that are going into that. So when you think about it, it has all the regulatory process and procedures and licensing and operational, but it's a small niche insurance company. So that's what a captive is. And captives can really fall into one of two buckets. There's either what we call a single parent or pure captive, where it's one entity or a cluster in the economic family entities, or a group captive where you have a number of unrelated families or businesses coming together to share risk.

Julie (07:35):

So, Linda has talked a lot about like the whole entire broader wealth management strategy, right? And the broader conversation that we're having with these family offices. Where does a captive fit in that conversation? Is it a replacement for the traditional insurance program, or is it a complement to it, or is it something completely different?

Seth (07:56):

So a captive is really, if you think about insurance spectrum, as Linda was discussing, on one end of the spectrum you have guaranteed costs where you pay a premium and walk away. And the other end is self-insurance where you totally take 100% of the risk on one side. And captives are sort of in between. What you do with a captive is essentially you're buying insurance or a layer of risk as a complement or part of the overall risk financing strategy. It really is not designed or typically designed to take 100% of the risk layer. So you're going to see where is the pressure on either price or capacity of the insurance market that there's a need for that.

Tyler (08:37):

So, you know, Linda, you started, you know, our conversation talking about family offices and long-term strategy, right? So from your perspective, what characteristics tell you a family is ready to start the evaluation process of a captain, not because of market changes, but because it, it aligns more with their long-term strategy that they're implementing for the family office.

Linda (09:00):

You know, I think the family office is in service to the generational family itself. And so with that conversation comes the partnership between family office advice as advisor to their family as a client of the office. And so when you look at the characteristics of that advice, bringing in a third party to talk about risk and the lens that they need to look through, it gives that multiple dimensions that the family really appreciates. What they really want is a trigger that says, hey, you know what, on a long-term basis, we have a portfolio of property, for example, that is in very challenging areas. We have, in addition to that, by extension, we have these luxury warehouses that are built because they contain collections, for example, of an important automobile collection or an important other collection where they might have property on top, but they're a pretty significant property. What's the right way to look at it? And those questions that they ask are open-ended, and they'll do a tabletop analysis of, hey, does this strategy make sense for us now and where we're going in the future? And I think that conversation. That's the question that needs to be answered by the family as it moves and changes through various types of property.

Tyler (10:17):

You know, if it's going to be serving them well over time to transfer some of this risk or create an entity that says we can probably manage it that way better than just buying traditional insurance. You know, we spent a lot of time discussing strategy, right? And the strategy behind captives and so Seth, this question's for you because this came up particularly a couple of years ago where I think a lot of family offices were faced with the opportunity to use a captive as a potential tax-saving strategy. Have you seen that be utilized successfully as a tax-saving strategy?

Seth (10:56):

The issue with captives a few years ago, they were very much promoted by the estate planning community as a wealth or tax vehicle, which unfortunately was not the intended use of the captive. The micro captive or small captive concept was designed to really has to have risk transfer risk to be truly insurance. And so what happened was the IRS really cracked down on that. And so the micro captives were getting on the Dirty Dozen list on a regular basis. And so what they really were looking to do and to serve the tax courts and the IRS saying, well, this has to be truly insurance. to be a captive. It's not a tax play, it's an insurance process. So our perspective is don't go into a captive for tax play, go use a captive for truly insurance purposes. That's what it's designed for. And you're not really, we don't really want to recommend our clients get subject to the scrutiny by the IRS. It's not a good practice for us. So we like to focus on using captives as truly an insurance vehicle.

Julie (12:01):

I don't think those families will want that either. So, Seth, previously you mentioned the single-parent captive and the group captive, but what are some of the advantages or trade-offs?

Seth (12:15):

We underwrite in our group both single-parent and group. So there's pros and cons of each one. With a single-parent captive, you have a lot of flexibility. You can manuscript or you can create the coverage and mix and match and adjust as needed for the client's needs and what their various options are and change over time. Group captives are designed to really have a lower cost of entry, but it's very homogeneous in coverage. Everybody has to have the same scope of coverages because there have to be that. Now, in a group captive, the other issue is to qualify as insurance, there has to be risk sharing. So that means a portion of the risk typically is retained by the client, and then there's a pooled or shared layer with the other, with the other members of the group. That's always an open question as to who am I going to share risk with and for how long.

Tyler (13:12):

So Linda, you know, what's the guidance that you're providing for them when they kind of approach you with these type 2 kind of competing types of captives in the industry?

Linda (13:20):

First off, I would say that to level set, we all echo that family offices are private and confidential, and they are private and confidential caretaking a generational family and this sort of complex landscape of planning. So under that context, I think it is a private and confidential conversation where a group captive probably wouldn't be as appealing as exploring their own and understanding what that means to them. So that's the first thing. They want to maintain their privacy, confidentiality, and they want that control. And they want that control over a long period of time that benefits the family if they're going to transfer risk and form a captive. In one case, we looked at the run rate of the expense and cost of administration required to set up a captive. And then we compared that to the portfolio of properties and the trade-off in restructuring the insurance program along with a high degree of what the family wanted are self-insurance options. And so it's a multi-pronged sort of conversation and not one fits all. But I think for me, in the recent conversation, Those are the type of factors that we talked about.

Tyler (14:29):

You know, it almost sounds like, Linda, that it's— the most important question isn't, do we need a captive, but rather, is it the right tool for our family situation? Do you think that's a fair way to think about it?

Linda (14:43):

I think there are different types of tools that we can use, and insurance is a strategic tool that you can use to structure. I think you're right about that, Tyler. I do think it's a tool. usefulness is there. Not always, but yes, it can be very effective.

Julie (15:00):

And Seth, if a family decides to explore a captive option, what is like the very, very first step?

Seth (15:07):

So the, a lot of the work we're doing with Linda is really the initial analysis, the viability, does it make sense discussion on that side of it. So that's looking at premium, size, exposure, loss history, those types of factors. And if this decision is we want to take a deeper dive, then we, we look at doing what's called a feasibility study. And any captive formation requires a feasibility study, which is a deep actuarial exercise. We do 5-year pro forma on capitalization, premium, surplus, financial investment return, all of that. And also look at different domiciles where the captive could be located. You can have a captive in over 30 states in the US, and the states compete, capital and surplus requirements, taxes, fees, and then the usual offshore jurisdictions. Most captives are now US-based after the 2017 tax bill. So that's really the in-depth dive is the feasibility study. And after that, it's usually the go/no-go decision at that point with the clients. And we do, they select the domicile and there's an application process creating the legal entity and then up and running you go, so.

Tyler (16:17):

So if a family office comes to you, Linda, and says, we're interested in a captive, You know, what is your typical answer or engagement with the client that's, that is, that wants to engage on a captive?

Linda (16:29):

So my first question is, why now? What is troubling you? Or what is your, what are you looking at staring down that you feel there's a better way? And they'll tell you what they feel they're up against and how they want to change it. That's the conversation then that led Seth and I to have a deeper dive into, does it make sense? And then you work your way into the feasibility study and the characteristics.

Tyler (16:58):

Why now is a great follow-up question, right? Because this shouldn't be used as a knee-jerk reaction to the swings in the market. Property's hard, property's soft, liability's hard, liability's soft. And, you know, clients are looking for a better mousetrap. So, you know, this, again, this always has to be part of a larger kind of strategic long-term conversation with our clients. So that's very insightful information. Thank you, Linda.

Julie (17:23):

Well, Seth and Linda, thank you so much for joining Tyler and myself. We really appreciate you guys getting on.

Linda (17:30):

Thank you very much.

Seth (17:32):

Thank you.

Julie (17:32):

Thank you everyone for joining us. And as always, stay safe and stay protected.

01:16 — Managing family enterprise risk across generations
Julie opens by noting that protecting a multigenerational family’s wealth involves more than buying an insurance program. Tyler adds that the discussion looks at when a captive belongs in a broader strategy—and whether it fits the family.

02:41 — How a family’s insurance profile can change over time
Linda discusses homes in different parts of the country; large properties and the first homes or apartments younger family members may take on. As the family and its property portfolio change, its risk management and insurance conversations must evolve as well.

07:56 — How does a captive insurance program work for a family office?
Seth describes it as one layer within a broader risk financing strategy, between guaranteed-cost insurance and self-insurance—not a way to take on every risk.

10:29 — Understanding family goals: insurance or tax savings?
Seth emphasizes evaluating a captive for its insurance purpose. The decision should start with whether it addresses a real risk need for the family.

12:15 — Single-parent vs group captives
Seth compares the flexibility of a single-parent captive with the lower entry cost and shared risk of a group captive. Linda adds that privacy and control can also affect what suits a family.

15:07 — What should a family assess before pursuing a captive?
Seth walks through the process of initial review—including premium, exposure and loss history—before a deeper feasibility study. Linda offers a practical starting question for families considering a change: “Why now?”