Casting the net

Two recent DataMonitor reports on the UK high-net-worth market have uncovered some interesting trends for insurers in this sector. Their definition of what constitutes an HNW individual is based on liquid assets rather than long-term insurable assets and, while this may be at odds with how insurers categorise an HNW individual, the trends are nonetheless revealing.

Although the HNW sector accounts for a small portion of the UK's general population (about 2%), the report suggests that this sector is rising in prominence. According to the report, there were nearly one million individuals who fell under the HNW criteria in 2004 - a 25% increase from the 2003 figure of nearly 750,000. Since the late 1990s, the number of HNW individuals in the UK has increased and declined over the years, with 2003 being a pivotal year as the HNW population increased by 16%. This continued into 2004.

In 2004 there were nearly 465,000 female HNW individuals, accounting for just over half the total HNW population, perhaps reflected by longer life-expectancy and the transfer of assets into women's names if the taxpayer is male. However, the number of male HNW individuals has grown at a faster rate than their female counterparts overall compared to 2003. Males however hold a greater share of the wealth.

Looking at the sector overall, the older age brackets comprise a significant portion of the HNW market. In 2004, more than 49.8% of the HNW market consisted of the age group 65 years and over, which raises interesting questions as to how insurers and brokers are targeting this group.

Estimates and predictions

Insurance penetration levels of the HNW sector appear to be low. DataMonitor estimates between 20% and 30% of the total market in 2003 - a figure that has progressed little over the past five years - and implies that the remainder of the sector is not insuring through HNW providers and run the risk of being hugely underinsured and inadequately covered.

With predictions that the HNW population could reach nearly 1.3 million by 2009, this leaves a significant window of opportunity for brokers who are willing to engage this sector and educate potential clients about the benefits of an HNW policy.

HNW insurers have recognised that this sector requires further segmentation and various self-service offerings have emerged to cater for emerging wealth. However, it seems inevitable that brokers will remain the dominant force at the upper end of this market.

So, with the increasing number of people falling into the mid-net-worth category, should brokers also be looking to capitalise on this? One of the initial problems with the sector is very low penetration, as many potential clients do not associate their standard of wealth as MNW or HNW. This terminology, and the fact that clients cannot recognise the point in time when they have reached qualifying status, can act as a barrier to some potential clients entering the market. And, as they do not identify with the term HNW, they are probably insuring their assets through 'normal' home-insurance channels and running the risk of underinsurance, gaps in cover and lower inner-policy limits.

MNW individuals are probably looking for a more specialised cover and want to move away from the commoditised insurance packages they are currently being offered but possibly do not know where to look for this. Brokers wishing to engage this audience need to be out there intercepting this business. With direct insurers increasing their activity in this sector, it can only be good for the whole sector as awareness is continually being raised. Targeting affinity wealth groups such as associations, certain professions and societies would be a suitable method of communicating with this sector.

The challenge for brokers considering targeting the MNW market is that of pitching products in a targeted fashion to clients and understanding their needs. One of the key factors in doing this is ensuring that the insurance proposition is as simple as possible for the client.

DataMonitor predicts that service will become an 'increasingly important differentiator' for clients in the next five years. So, what do we mean by 'service' and how can we, as an industry, deliver this?

One aspect is that clients expect to be able to understand their insurance policy - what is and is not covered - and how they are able to claim. They do not want to be burdened with remembering to renew or valuing the contents of their house on an annual basis. They also do not want to have to deal with more than one party during the insurance transaction - hence the critical role of the broker.

Underinsurance

One of the major problems in the HNW market is that of underinsurance and it generates more questions for brokers and clients than any other aspect of the proposition.

Addressing underinsurance involves more than simply telling clients they have a problem and is often not uncovered until it comes time to claim. As an industry, we need to provide a real solution. In many cases, underinsurance comes about because clients do not add items they purchase onto their insurance policy and, over the course of a year, HNW individuals can make many significant purchases. This poses a potential problem.

Some insurers and brokers provide a 'calculator' so that the client can add things up themselves but that is not really providing high levels of service to the client - it is just making the client work for you rather than the other way around. In addition, calculators are very much open to error and may not be applicable to certain individuals.

People would rather have more cover than less, for the same price and where they do not have to do anything - such as add up their contents value. This is where real progress can be made.

Brokers should check that the insurer will automatically provide a sum insured for replacement of contents so appropriate levels of cover can be assured in all cases. A 50% ratio of the value of the home ensures that clients have sufficient insurance to cover full reinstatement and minimises the danger that they will have to bear a portion of the loss

Brokers may ask why this large sum is necessary as in instances such as theft, usually not everything is stolen. Perhaps not, but fire and water damage can ruin an entire property and its contents and this occurs more frequently than theft.

Under the buildings section, this issue is addressed by certain insurers offering their clients guaranteed reinstatement costs. GRCs will pay the reconstruction cost of the clients' home and other permanent structures, even if the amount is greater than the sum insured shown on the schedule. This cover provides the client with total peace of mind knowing that, once an insurer has offered this cover, no matter what the cost of reinstatement, there will be no financial implication for them.

This all leaves the broker and client able to focus on the more interesting aspects of insurance such as fine art, which often have greater value to the client - both sentimentally and financially.

Risk management

Another area key to product offering in the HNW sector is that of managing risk. Paying a claim is why insurers are there and what premium is paid for. However, in many cases - particularly for the HNW sector - claims can be avoided in some instances by insurers providing risk-management services that make a real difference to the client. Good risk management, however, goes beyond addressing only the perils of fire and theft.

A broker should be looking for the following risk-management options from an insurer to pass onto their client:

- Verification of the values at risk.

- Loss prevention review and advice. It is in the interests of insurers as well as clients to ensure suitable risk prevention techniques are deployed. In the case of fire awareness, proximity of the nearest fire station and availability of fire extinguishers around the property and even what the fire alarm sounds like.

- Disaster planning is also a value-added service insurers should provide. After devastating losses at Hampton Court (1986), Uppark (1989) and Windsor (1992), many large properties now understand the importance of disaster planning. That said, many HNW individuals do not know how to go about writing a disaster plan. For example, a property owner should ensure their driveway is wide enough for a fire engine to use in case of a fire and that there is an evacuation plan for each room - the most valuable works of art to be removed first and so forth. A guide is available to show clients and engage their attention to fulfil this valuable task.

- Access to fine-art valuation services so that there can be quantification of insured value for the client. In addition, collection management services involving the collection, transportation, storage and conservation of works of art to ensure that the art does not diminish in value.

To address client needs, insurers must have the capability to respond to the nature of a truly HNW individual. These clients may have assets around the world, fine art, a private jet, cars in several countries and additional property. In order to address their needs, insurers need to be flexible and offer cover for all these different aspects.

Being able to offer global coverage through a network of offices and understanding of local insurance markets is a distinct advantage. In addition to this, a broker needs to be able to anticipate how their client's insurable assets may grow over time and stay one step ahead by insuring with a global insurer so they are able to develop their portfolio without having to change insurer over time, or have additional assets insured with different insurers. In short, brokers must know their clients.

Eliminating gaps in cover

With the global nature of an HNW individual in mind, it is essential to ensure there are no gaps in cover. If it comes to making a claim, no client will be impressed to hear from their broker that, because they are using several insurers, one aspect has slipped through the net and is not covered. A single insurer truly reflects global demand of the HNW individual by offering peace of mind, in addition to being a single point of contact in the event of a claim - something that an HNW individual would value from a service perspective.

Taking a step back to look at the HNW market, it is surprising that, as an industry, we have still achieved no progress in penetrating the market any further over the last few years. With predictions of the market growing in size over the next five years, it is up to us to find ways of engaging new clients and making our products simpler to understand. Ensuring underinsurance is a thing of the past and investment in risk management is an effective tool in risk reduction are significant steps in the right direction.

AREAS OF SERVICE

Significant areas of service that a broker can offer their client:

- Solving the problem of underinsurance

- Implementing effective risk management

- Ensuring global coverage where necessary

- Eliminating gaps in cover in a client's portfolio.

Austyn Tusler, Manager, Private client group, AIG Europe (UK).