Perpetual Insurance that insures the head of the family businesses for a longer term covering certain risks, could save a potential $1 trillion worth of wealth in the Middle East in the next ten years. This happens as family business ownership changes hands from the first and second generation to the third that might suffer from the 3rd Generation Syndrome.
According to Capgemini Research Institute’s World Wealth Report 2021, the population of high-net-worth individuals (HNWIs) in the Middle East region grew by 6.8% to 800,000, while their wealth soared by 10.7% to $3.2 trillion in 2020.
The UAE is home to 92,600 US-dollar millionaires; 4,000 multi-millionaires worth more than $10 million; 251 centi-millionaires (over $100 million), and 14 US-dollar billionaires, according to the latest Henley Global Citizens Report.
Full estate plan
The majority of HNWIs don’t have a proper corporate governance structure or a wealth succession plan in place for their family businesses, according to a Lombard Odier exclusive survey issued recently. The Swiss private bank found that 90% think that their family business is set up for an efficient wealth transfer to the next generation. However, only 24% have a full estate plan in place.
Leadership of a large number of family businesses in the Middle East is changing from father to son or daughter, without proper estate plan or succession plan, that usually results in painful split in the family, hostile division of wealth, litigation or even bankruptcy.
Many family businesses have survived from the first to second generation, but failed by the third generation who are accustomed to luxury, a certain lifestyle and a superior degree of comfort and lack entrepreneurship and who are not accustomed to undertake challenges.
Family business wealth to the tune of $1 trillion (AED67 trillion) in the Middle East will keep changing hands one generation to the next in the next ten years – that need to be protected – which might disappear in thin air if not protected properly.
“Perpetual Insurance policies that protects the business owner against certain risks for a longer period with a one-time deposit that works as a premium, is one way of solving this problem,” Leena Parwani, Founder and Chief Executive Officer of LPH Financial Services, says. “The deposit remains with the insurer for the duration of the policy and could be taken back by the insured in full, without any deduction – which makes Perpetual Insurance Policy an asset, rather than an expense.
“It is important to fix the legacy issues so that the wealth doesn’t go ashtray due to inter-generational transition. Easy money is also lost easily.”
Private wealth centre
Due to these factors, the Dubai International Financial Centre (DIFC) launched the Global Family Business & Private Wealth Centre on September 1, 2022, to help nurture and promote an estimated $1 trillion wealth that will be transferred to the next generation in Middle East in the next decade. The DIFC Global Family Business & Private Wealth Centre is the first in the region & worldwide.
“The initiative aligns with the UAE Government’s commitment to support family businesses, which continue to play a prominent role in accelerating the growth of the country’s economy. It is estimated that only 20 per cent of family businesses are managed by the third generation in the Middle East,” a DIFC spokesperson said.
It is crucial to educate those who face challenges related to governance, succession, ownership, wealth, family dynamics and strategy to ensure a solid family business and long-term success.
Need for a trust
Additionally, Perpetual Insurance Policy could set up a trust where all family members become part of the trust and are protected by the policy.
“The family wealth goes to the trust once the business owner dies and is partly distributed to the surviving members. The rest of the family money is invested in businesses and investment schemes while proceeds go to the family members as per the succession plan and as per the terms of division of wealth,” Parwani explains.
“However, Perpetual Insurance protects the family wealth by ensuring that the wealth is invested in well-running businesses and sustains for generations. This way family wealth could be protected and passed on to the next generation.”
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