A $30-million wine collection. A $100-million jewelry collection. A $1-billion art collection. A privately owned rocket launch. A mansion that needs to be moved 600 yards in the wake of a hurricane.
These outside-the-box exposures are just a few real-life examples of the unique risks that abound in the high net-worth insurance market.
Since the 2008 economic recession, “high net-worth clients and the segment in general have rebounded well,” says Jerry Hourihan, president of AIG’s Private Client Group. “If you look at the composite annual growth rate of ultra-high net-worth individuals globally and in the U.S., it’s grown by almost double digits since 2008. It’s a $30- to $40-billion premium segment, and it’s growing every year.”
“We had one agency tell us that while high net-worth only represented 10% of their volume, it represented 20% of their margin,” agrees Will Van Den Heuvel, senior vice president of personal lines at Cincinnati Insurance. “The eye opener for a lot of agents is as they look at their books of business and segment their margins, they realize in a soft commercial market, high net-worth personal lines can be a growing space—and the margins can be significantly better than commercial lines.”
Whether your agency already has a high net-worth book of business and wants to expand its footprint, or you’re eyeing this segment as a potential growth opportunity, here’s what you need to know about the space in order to succeed there in 2017.
The Consequences of Consolidation
The elephant in the high net-worth room is ACE’s acquisition of Allianz/Fireman’s Fund’s personal lines book in 2015 and Chubb in 2016. And while Hourihan points out that consolidation has created challenges for agents, whom he says have been “put at the back of the bus” in some respects as carriers become more internally focused, consolidation has also opened up a whole new world of possibilities.
Although some agents were concerned that the three-way consolidation would lead to too many eggs in one basket, the acquisitions have ultimately resulted in more options for consumers as companies that previously had no interest in the segment—Ironshore, Berkley, QBE, National General and even Travelers, to name a few—are now eyeing it as an opportunity for growth.
“With three leading high net-worth companies coming together, we’ve seen a number of competitors or soon-to-be competitors announce that they’re entering the high net-worth space,” points out Scott Gunter, COO of Chubb Personal Risk Services North America. “And from a competition standpoint, we welcome that, because it really helps keep us focused on the customer and the agent and driving innovation. The more carriers come into the space, the more opportunity everyone has to innovate.”
“From a carrier perspective, there’s been a lot of innovative products and services in order for them to stay relevant and competitive,” agrees Lisa Lindsay, executive director, trustee and founding member of the Private Risk Management Association, an independent association committed to the promotion and advancement of the high net-worth insurance industry. “With the consolidation, everyone wants to be assured that this type of innovation will continue—that no carrier’s going to say, ‘We don’t have to do that, because there aren’t too many choices.’”
That’s a given for the new Chubb, which Gunter says now has a “tremendous opportunity” to deliver better, more tailored solutions for high net-worth clients. “Each company has unique strengths,” he says. “How do we extract those strengths, keeping the best of each, so that the agents and clients are getting the best of the three? That’s been our mission right from day one.”
The same perspective applies to every new competitor. “With consolidation comes different value propositions for different companies,” Van Den Heuvel points out. “Some focus on different price points, some focus on capacity, some focus on agency strategies, coverage differences, client experiences—I think it’s good for the marketplace. Customers in this space need choice and flexibility, they want it at a competitive price and they want great service.”
If that’s what you’re aiming to provide, remember that the recession hit many wealthy insureds hard—and transformed their approach to financial security in the process. “People were not really happy with the performance of their bond portfolios or their stock market investments,” Gunter says. “So what they were able to do is turn around and say, ‘I’ve got a passion for collecting, and I’m able to use that as an investment tool.’”
In the post-recession world, “there’s definitely been a flight to passion investments,” Hourihan agrees. “As the other investment options flattened out, people are absolutely spending more of their investment dollars on art, jewelry, antique cars, and we saw that in our collections portfolio. That segment of our business is growing faster than any other part.”
In the past, most carriers would consider these hobbies. But now, “what we’re seeing is that people are investing in art and wine and those types of things, and they’re looking at it as an asset class,” Lindsay says. “They’re saying, ‘I have this wine collection, and I want to understand how my wine can depreciate.’”
And that’s another post-recession trend sweeping high net-worth insureds: They want to get their arms around their risk. “In the old days, everyone said, ‘Just place my policy—I’m not going to worry about it,’” Gunter says. “Now, everybody says, ‘I need to understand—how do I prevent losses? Give me advice on that.’ That’s the dynamic shift we’re seeing from a service standpoint, and it’s very dramatic.”
“They’re moving away from that laissez-fare attitude of, ‘I’ve got my agent looking after me—I don’t have to think about my insurance,’” Gunter adds. “They want to be more involved in the insurance conversation. It’s not just about buying a policy—it’s about understanding the whole universe of my life, and then what do I need from a risk mitigation standpoint?”
Lindsay agrees that the silver lining of the recession was that it made high net-worth clients smarter. “The recession made them step back a little bit,” she says. “Now, we have smart consumers who really want to understand value and make sure they’re covered.”
You should also expect that they’ll want to understand what they’ll be paying for it. Like agent commissions [see sidebar], pricing in the high net-worth segment is currently “all over the map,” Hourihan says.
“Most new entrants are really burning into the market—they’re anywhere from 20–50% below AIG in pricing. That might be good for one year, but what I’ve seen happen over my time in the business is that’s just not sustainable,” Hourihan points out. “They either end up getting out of the business or pushing through significant rate increases that are very difficult for agents and brokers.”
Across the market, heading into 2017, “I think the reality is pricing probably goes up a little bit, maybe 0–5%, somewhere in that range,” predicts Ross Buchmueller, CEO of the PURE Group. “It’ll maybe be higher in some cases—parts of the central part of the country where hail has been a considerable source of claims over the last couple of years, or the cold weather in the Northeast.”
“The same trends you’ve been reading about for the overall industry affect the high net-worth industry,” Van Den Heuvel adds. “People are driving more, fatalities are up, severity is way up in a lot of cases, so I do expect rates overall for high net-worth to be accelerating to keep up with trends.”
Homeowners, meanwhile, has been relatively cat-free. “We haven’t had significant hurricane or earthquake cats,” Van Den Heuvel points out. “The homeowners market right now is pretty stable.”
But Van Den Heuvel also expects more segmented rates on the horizon for high net-worth insurance. “Companies are doing a better job understanding model profitability and predictability, and having rates that are more segmented and sophisticated to capture that,” he says. “So you might see a greater variation in rates for a given home, depending on who the customer is and the geography as well.”
Geography always matters in personal lines, but high net-worth personal lines is even more susceptible to location because it’s “a very dangerous business to get into,” Hourihan says. “It’s extremely cat-intensive—hurricanes, wildfires, earthquakes, high concentrations of risk in one building, large art collections, mega yachts moving around the world. It’s not for everybody, and if carriers get into this and don’t understand how to underwrite that business, how to price it properly and how to provide stable services over time, they end up creating a very difficult time for their agents and their customers.”
Coverage Best Practices
In fact, because many high net-worth clients tend to buy properties that are “typically concentrated in areas that have a lot of wind or a lot of shaking,” Van Den Heuvel says, “one of the central issues facing most high net-worth customers is how companies are responding to their cat issues.”
“Property is typically in the bigger cities, on the coast, in California, and with that comes a lot of coverage need and capacity need,” Van Den Heuvel explains. “Compare that to the middle market, where it’s pretty cookie cutter, and a lot of times you can’t get the wind coverage or the limits you need.”
Make sure you point your high net-worth clients toward coverage that includes unlimited backup for sewer and drain, seepage into basements and, where appropriate, excess flood solutions, Van Den Heuvel suggests.
“You can’t rely on the FEMA flood zone map anymore to advise your client on whether they should have flood insurance,” Lindsay agrees. “Flood is happening everywhere. Sit down with your client and talk about the scope of the property and all sorts of crazy stuff that, years ago, you just wouldn’t think is what you did in personal insurance.”
For example, for a high net-worth client with a large art collection, “not only is their art in their primary residence, but they might have so much art that they’ve got some art in storage,” Lindsay points out. “You really need to understand the risks associated with that, because what Superstorm Sandy showed us is we weren’t buttoned up. People had artwork in storage facilities in downtown Manhattan that were underwater.”
Beyond catastrophe coverage, most high net-worth clients have a wide range of unique needs, passions and lifestyles—so be ready to deliver tailored coverage solutions that don’t fit neatly into the usual boxes. Lindsay likens the insurance portfolio of a high net-worth client to that of your standard commercial lines account.
“It’s the same level of due diligence—they need that same disciplined process because there’s so much going on,” Lindsay says, noting that requires performing a proper lifestyle assessment in which you review not only family members, but also domestic staff such as housekeepers, nannies, gardeners, caretakers, captains and more, all of whom could create unique liability exposures for high net-worth clients.
And beware trendy new coverages that sound great on the surface but lack substance when you actually read the policy, Buchmueller warns. For example, while high net-worth clients could benefit from coverage for children involved with cyberbullying, some policies involve such specific requirements that they effectively render the policy worthless.
Meanwhile, the market is still working on developing adequate solutions for much more common high net-worth exposures. Consider that the average unscheduled jewelry loss costs about $18,000, but that the limit for lost, misplaced or stolen jewelry is usually only about $5,000 in many high net-worth policies, Buchmueller points out.
“That means every time somebody has a jewelry loss that’s covered under the homeowners policy, that family is out of pocket $13,000,” Buchmueller explains. “The issue is that companies want to come up with new coverages that have virtually no exposure, and then ignore the fact that people are out of pocket every time they lose a watch.”
Just like in commercial lines, cyber is a major concern for your high net-worth personal lines clients, thanks in large part to smart home devices that are susceptible to hacking.
“Hackers can almost create this insightful little journal of you where they know you’re not there,” Lindsay points out. “Through the network of devices, they can actually understand the pattern of your lifestyle based upon when your lights go on and off, when your heat goes up and down. And on top of that, you’ve got your kids out there in a real-time moment posting ‘Greetings from Cabo.’”
And since so many high net-worth clients employ domestic staff, “maybe you give your WiFi password to the nanny, but when you let the nanny go, you forget to change it,” Lindsay says. “Most of these clients don’t have a protocol for onboarding an employee and then firing an employee—it’s more like they’re fired and they leave, but they’re not going through the same rigor they would when they leave a firm which takes their electronics and changes the access code.”
“Cyber is definitely something you have to be dealing with, whether it’s coverage under the policy for recreating property after a malware attack, or unauthorized electronic funds transfer,” agrees Gunter, who notes that Chubb has observed more personal lines client interest in ID theft services in recent years. “You have to look at your limits under your current policy.”
Globalization is also sweeping through the high net-worth community—and coverage needs to extend far beyond the risks associated with frequent travel, Gunter says. “We have more and more clients acquiring homes outside the U.S.,” he points out. “Agents have to be aware of how that exposure is being protected.”
It’s a particular concern for affluent millennials, who may acquire wealth through inheritance or entrepreneurial pursuits and “often overlook exposures from their behavior,” Gunter points out. For example, Generation Y tends to focus on giving back, which means your high net-worth millennial client probably sits on at least one nonprofit board. “It may not occur to them ever to mention that to their agent, but now is there a need to have D&O insurance?” Gunter points out.
Another typical millennial behavior: embracing the sharing economy. “You might not think a lot of high net-worth individuals are interested in Airbnb, and you’d be wrong,” Lindsay says. “We’re seeing a lot of people say, ‘Huh, I could make some money to cover the maintenance of my multimillion-dollar home in Aspen by renting it out on Airbnb.’”
Lindsay recommends asking questions like, “What kind of places do you own? How are they used? Where do you like to go? Are you traveling overseas? There’s a lot of lifestyle assessment that needs to be done so that you can then sit back and help them determine what types of coverage or nuances in the coverage they need.”
Jacquelyn Connelly is IA senior editor.
The Compensation Question
One consequence of consolidation is high net-worth carriers treating their distribution force extra nice—perhaps, some are concerned, at the expense of the end consumer.
Agent commission rates are public data, and they’re currently incredibly inconsistent in the high net-worth space, running as low as 10% and as high as 27%.
“If you make a conscious decision to serve wealthy people and say they are the most discriminating, service-demanding, sophisticated consumer out there, for companies to go in and tell agents, ‘I want your independent advocacy, but I’m going to pay you 27% so you will steer it to me regardless of what my virtues are’—that’s a collective action to ignore the consumer and to try to influence the brokerage community,” suggests Ross Buchmueller, CEO of the PURE Group.
“The balance is important,” says Jerry Hourihan, president of AIG’s Private Client Group. “We want to maintain competitive pricing, and we also want to reward agents who are investing in this business. This is not the kind of business where you’re going to be in the black overnight. If agents are hiring producers and spending time on educating their existing staff, that takes a few years’ time, so they do need to get a fair amount of commission to be able to support that kind of activity.”
The situation puts some agents in between a rock and a hard place, because “no broker created this problem,” Buchmueller points out. “No broker said, ‘Please create a conflict for me by forcing me to make a decision to do this.’ If somebody says they’re going to pay you more money, you don’t say, ‘No, please, don’t pay me more money.’ What ends up happening then is if you have somebody paying 14% and somebody paying 18% and somebody paying 20% and somebody paying 30%, when the industry average is 12% and the brokerage community already has huge margins on this business—you want to talk about an industry ripe for disruption?”
Over time, “the lasting success of this category will be determined by how well we serve consumers,” Buchmueller says. “If we are absolutely obsessing over delivering great service, I think we become more valuable to the independent broker who, given a choice between a carrier that serves their clients better than anybody else vs. one that serves the agent better than anybody else, will elect the person who delivers the best experience to their clients.” —J.C.