When a client with a net worth of $10 million came to independent agent Kim Dandrea insured with mainstream personal lines policies, she knew she had to make some changes.

The client and his wife were the named insureds and title holders on the auto policies for their three adult children, who lived outside the client’s home. Each auto policy covered everyone in the family, as did the client’s $1-million personal umbrella.

Dandrea worked with the client to increase his umbrella to $10 million, and then put each of the children on their own individual policies and retitled the cars in their names. “They had a lot less to risk,” says Dandrea, Private Client Group manager, M3 Insurance in Milwaukee.

Then, Dandrea put each adult child on their own umbrella, “because of the trickle-down effect of the net worth being in the family,” she explains.

Four months later, “one of the adult sons had a horrific accident where two people were ejected from the car, and he was at fault,” Dandrea says. “If we had not made those changes, that family’s net worth would have been at serious risk.”

Many agents find that a high net-worth personal lines account has more in common with a small commercial account than one in standard personal lines. Dandrea, who has over 25 years of experience in personal lines, started focusing on the high net-worth space about six years ago and earned her CPRM designation in May 2017.

The process was “eye-opening,” Dandrea says. “There are so many different ways you can become more of an expert.”

As the threat of directs and disruptors weighs heavy on standard personal lines, high net-worth insurance is becoming a more attractive niche for independent agents. How has this lucrative industry transformed in recent years, and what do you need to know about these clients in order to become a true trusted adviser?

State of the Market

Over the last 17 years, “the frequency of U.S. weather events has doubled,” says Fran O’Brien, division president, Chubb Personal Risk Services. “We have seen significant increases in all weather-related categories, including winter storms, hail, flooding, hurricanes and wildfires, placing catastrophic losses three times higher than the previous 10-year average.”

“Many homeowners carriers have had very high cat losses and, consequently, unacceptable, undesirable levels of profitability,” says Mark Galante, president of field operations at PURE. “Given where you find concentrations of high net-worth homes, it’s fair to say cats have had a big impact on underlying profitability.”

They’ve also led to serious cost inflation, says Jerry Hourihan, president, AIG Private Client Group: “There’s incredible demand surge in several parts of the country—materials like lumber have increased in price dramatically in the last 24 months. Given the increased costs of adjusting claims, that leads to a need to increase pricing.”

Home reconstruction and household replacement costs “are rising for items such as top-of-the line appliances, technology and advanced parts, and Internet of Things devices,” O’Brien confirms. “Coupled with affluent clients continuing to raise their expectations for coverages and service, that will impact the pricing of certain homeowners coverages.”

Galante, too, expects that “pricing in the space will be going up a bit,” he says. “You’ll see that not just in the high net-worth space, but among standard market homeowners carriers as well.”

“Most companies are looking at their long-term cat trends and modeling trends, and in California and Florida specifically, companies are retrenching a little bit and trying to resize their portfolios,” agrees Will Van Den Heuvel, senior vice president, personal lines, The Cincinnati Insurance Companies. “That is a challenge, but it’s also an opportunity.”

Although the consolidation of Chubb, ACE and Fireman’s Fund several years ago opened the door for new entrants to make a play for high net-worth business, “2017-2018 was a little bit of a wakeup call to some of the newer entrants that have experienced really adverse experience on the coasts,” Van Den Heuvel says. “The volatility of the high net-worth space is certainly higher than in the middle-market space—it’s not for the faint of heart. Burning into a cat market has some serious risks attached to it.”

Dandrea says it’s a tale as old as time in the insurance industry: “When you have a new emerging market, they’re going to come in and essentially want to buy the business. You have to monitor that, and you have to disclose to the client that this is a newer market—explain that these prices are extremely competitive, explain to them the history, and let the client make that decision. I think you owe them the opportunity to make that choice.”

Portrait of the Affluent Client

Despite the challenges high net-worth insurers are facing, “high net-worth clients continue to be in acquisition mode,” says Lisa Lindsay, executive director, trustee and founding member of the Private Risk Management Association. “They’re looking at their collections as not just something they want to enjoy, but as a very deliberate asset class they want to see grow.”

Whereas the home is often the most valuable asset of a standard personal lines client, that may not be the case for a high net-worth insured. “These are families with significant assets to protect,” Galante says. “It could be the case that the sum of their homes is their most valuable asset class, but it could also be something like an art collection or a stake in their business.”

Whether it’s fine art, jewelry, wine, vintage automobiles or another collectible, “clients tend to spend a lot of emotional energy and financial resources on building these collections, often throughout a lifetime,” agrees Ron Fiamma, global head of private collections, AIG Private Client Group. “Many times, these assets are amongst the most important things they own—in many cases, they’re irreplaceable.”

As a result, “this is a group that comes with a higher level of customization, from the homes that they own to the art collections they’re building,” Galante says. “That requires a high degree of personalization when it comes to their risk management program and the policies and services behind it.”

At M3, which employs six agents focused on the personal lines space, “our focus is on being that trusted adviser—the declaration pages are secondary,” says Dandrea (pictured right). “We have a conversation with the prospect and just do a real fact-finding about their insurance and lifestyle needs. We sit down and find out what’s important to them, what’s not important to them, what exposures they want to assume the risk for, and what exposures they want to cede to the insurance company.”

After that, M3 agents compare rates, eligibility and coverage across the agency’s four high net-worth carriers. “If we clearly see one carrier is the best bid, we will go with that recommendation,” Dandrea says. “If a client has an extensive classic car schedule, for example, maybe one of the carriers will write it on an inland marine policy instead of putting them all on the auto. Or maybe one carrier has more expertise and resources available to somebody who’s a collector of certain items.”

For most high net-worth clients, you’ll have a lot of moving parts to contend with when pulling together an insurance program that addresses every need. As Dandrea puts it, “what does the whole account look like? We need to be able to tell the story to the underwriter and see which carrier has the best opportunity for our client.”

Coverage Distinctions

On the liability side, a high net-worth account may involve unique exposures, “whether that’s because they employ full- or part-time domestic staff, serve on a nonprofit board or just have a higher profile in the community,” Galante points out.

Or perhaps a third party sustains an injury while attending a fundraiser on the insured’s property, or in an auto accident with the insured. “That leads to a significant number of lawsuits and the need to defend these deep-pocket clients from folks taking advantage and looking for a payday,” says Stephen Poux, global head of risk management services and loss prevention, AIG Private Client Group. “From a coverage perspective, high limits of liability are very important.”

On the property side, “if you look at concentrations of wealth in the U.S., they tend to be in New York, California, Florida and Texas,” Van Den Heuvel says. “High net-worth insureds are living on the coasts or in earthquake zones or in brush areas.”

“With many successful individuals owning second residences in coastal communities, they are more susceptible to increased frequency of weather-related catastrophes,” O’Brien agrees. And location isn’t the only issue—according to Chubb data, both the frequency and severity costs associated with water claims is the No. 1 driver of claim loss growth.

“These trends have a greater impact on more successful individuals and families as their homes tend to have more plumbing connections—more bathrooms and appliances connected to plumbing,” O’Brien explains. “They also tend to be more customized and advanced in terms of materials, contain the latest technology, and often have unique building features and materials, fine art and collectibles.”

Combined with the fact that many high net-worth insureds own secondary homes that have a greater likelihood of vacancy, it’s no surprise that non-cat-related water damage continues to be a source of loss for many affluent homeowners. In fact, plumbing supply system failures are the No. 1 source of residential water losses, according to Chubb data.

To make sure your clients are protected, Van Den Heuvel suggests seeking out coverage options that include insurance to value and a wider range of options for deductibles.

When one of Dandrea’s clients experienced a water loss that damaged an expensive oriental rug, for example, “we could only get it restored to 70% of the value, but we had it insured at an agreed value,” she says. “The market value was actually about $10,000 more, so they were offered the market value. The carrier had a built-in 140% that allowed for some market fluctuation on the value.”

Robust flood insurance is another important coverage consideration. “A high net-worth client is not going to be properly served by an NFIP policy,” Lindsay says. “NFIP flood maps are outdated, and they’re not really properly assessing flood risk—for example, they don’t take storm surge into consideration.”

Pay close attention, too, to coverage elements like guaranteed replacement cost on the homeowners policy—Lindsay notes that some policies cap coverage at 125-150%.

“There are very few mainstream carriers that do well with a home valued over $1 million in replacement cost and over, just because of the intricacies of the interiors,” Dandrea agrees. “Oftentimes we find the lower level is equally as finished as the main level, or we find specialty rooms, or we’re dealing with restored and historic homes. You want to make sure the policy’s going to help get the home back to its original condition.”

Finally, cash settlement is an attractive option for many high net-worth insureds who may not want to rebuild their home in the event of a total loss.

“Maybe it’s just been too emotionally devastating, or they simply don’t want to go through the hassle of rebuilding,” Lindsay points out. “This cash settlement option could be life-changing for someone who just wants to get on with their life.”

Risk Management

But the silver lining of the last few heavy cat seasons is that “people’s awareness levels are up,” Hourihan says. “More resilient homes are being built than ever before.”

Lindsay points to the Miami-Dade building codes born out of Hurricane Andrew as an example of multiple industries coming together to “put forth better guidelines that allow for better disaster planning, recovery and resiliency,” she says.

Even in geographies that are not as susceptible to extreme weather events, many high net-worth insureds will want to pursue a construction or renovation project this year—and “that’s an area where an agent can really insert themselves and become valuable,” Poux says.

From elevating a home beyond the base flood level elevation to adding a row or two of concrete block to the foundation of a home while it’s being built, various techniques which are “negligible from a cost perspective” can be “invaluable from a protection perspective, and not something you can do after the fact very easily or cost-effectively,” Poux explains.

The IoT can also play a role, particularly in mitigating the risk of water damage. According to Poux, the average water damage claim can put AIG’s Private Client Group insureds out of their homes for at least three months.

“That’s very disruptive to a family,” Poux points out. “To prevent or minimize that loss by using technology to detect water before it becomes catastrophic is something we spend a lot of time and effort on.”

Hourihan says carriers like AIG are working hard on developing relationships with third-party providers to bring “state-of-the-art technology that monitors water flow, shuts off water flow and alerts clients and our teams that there’s been some sort of breach along the way.”

“We’re investing a lot of time in trying to help make our members smarter about the risks associated with water loss, to help them prevent losses before they happen in the first place,” Galante agrees. “We do that in a variety of ways, from issuing what we call ‘Situation Room alerts’ in the event that severely cold temperatures are predicted, encouraging them to keep their low temperature monitor at a minimum of 65 degrees, to helping them research and install leak detection systems.”

This type of loss control is particularly crucial for high net-worth insureds who have more assets at stake than the average personal lines client. Many high net-worth carriers offer risk management services tailored to the unique needs of the affluent, from “walk-throughs to make sure the clients’ collections are displayed and protected properly” to “putting together an emergency evacuation plan for clients that live in cat-exposed areas,” Fiamma explains.

Dandrea partners with an appraiser so she can help her collector clients “get the right protection for their firearms, sports memorabilia, whatever it may be,” she says. “We set up an appraisal where someone comes right to their home so that it’s the least inconvenience to the client, because they’re busy running their lives and their businesses.”

The common thread of all that advice? “This notion that what is needed for individuals with complex lifestyles is really education,” Lindsay says. “The risk management conversation is just as important as the insurance coverage conversation.”

Jacquelyn Connelly is IA senior editor.