High net worth - The high life

According to the Hiscox Wealth Review 2008, approximately 430,000 UK residents are millionaires and this total is predicted to rise to 1.7 million by 2020. As personal lines brokers face a dual-pronged attack from direct insurers and aggregators, this growth in the high net worth sector will come as good news for many brokers because their high-end clients' needs continue to go far beyond just a good insurance policy.

"The broker is very much king in HNW. Direct insurance always interests people but the real HNW clients appreciate the value of a broker's advice, especially where their requirements are complex," says Austyn Tusler, head of the art and private client division at Hiscox.

There are dedicated wholesale HNW brokers such as Allianz-owned Home and Legacy and brokers with HNW specialisms also doing small amounts of wholesale business.

The private client team at HNW specialist broker Brownhill Insurance Group believes that the HNW specialist insurers' distribution controls explains why so many wholesale brokers thrive in the market: "Some brokers will have trouble accessing HNW insurers due to the size and support that the insurer will be looking for. By forming a good relationship with a wholesale broker, the introducing broker can protect their clients from attack by its rivals in the market."

Premiums are competitive, with the average level for household and contents for a client with a typical £200,000 of contents cover currently sitting at around £2,500.

However, premiums are varied due to the nature of the clientele. Tusler says: "Some clients are asset-rich and cash-poor whereas others are the other way around, therefore premiums are varied. Premiums are also affected by security, planning and levels of occupancy. There is no such thing as a standard risk in high net worth."

Nick Brabham, head of private clients and special risks at Zurich, believes that premiums could rise, though he is not entirely optimistic: "HNW is still a very competitive market with new entrants constantly offering new ideas, which keeps premiums low. Rating is under some pressure to increase but premiums have yet to rise."

Ann Owen, manager of the private client group at AIG, is more sceptical: "There has been a lot of talk about the hardening of rates but there is no sign of it."

Advice

According to Aon, excesses for HNW policies range from £100 to £1,000, with some insurers offering zero excess for fine art and jewellery, though Owen believes that brokers should encourage their clients to consider taking them at a higher level: "People in the UK are not fans of bigger excesses. We offer big premium discounts but it is rare to get people take an excess of over £500. In the US, people love the big excesses with many taking excesses of over $10,000. We have been trying to change attitudes in the UK but with little success."

Tusler agrees. He thinks the economic crisis may prove to be the stimulus needed to encourage HNW clients to accept more risk: "Excesses in the UK are around £500. Previously, excesses stood at around £250, so things are moving in the right direction. Rather than downgrading cover with the credit crunch, many customers are choosing to take higher excesses to keep their premiums low."

There has been a high level of interest in this sector for the last five years but the current climate could have an adverse impact on this. In December, luxury carmaker Aston Martin announced that it was to cut 600 jobs as a result of falling sales caused by the economic downturn. Brabham believes that cutbacks in buying by some HNW clients will continue: "We are starting to see fewer HNW customers making exotic purchases. City bonuses are much less this year, so we expect to see this fall in spending continue. However, at the top end of the high net worth market, clients are buying as much as ever."

While some areas of HNW may be seeing lower spending and therefore less to insure, Owen believes that many clients will continue to see their worth rising in their more physical and alternative investments, such as wine and fine jewellery: "There are big increases being seen on the value of jewellery. Brokers should remind their clients to have pieces valued, especially large single-stone diamonds. We are also seeing a lot of activity with our wine collector clients at the moment as people look to make alternative investments."

Tusler believes that brokers should see the current economic difficulties as a chance to prove their worth to their HNW clients by renegotiating deals: "The credit crunch is providing benefits for many customers. Where a customer has the whole of their portfolio with one insurer, they can leverage costs more."

HNW clients are generally busy people and therefore brokers should be pragmatic. Owen believes that, by over-insuring, brokers could take away a lot of the hassle for their clients: "We automatically give clients half of the value of their house in contents insurance. This is often more than clients need but it means they do not have to think about insurance every time they make new purchases."

Despite increased awareness, underinsurance is still a problem in the HNW sector. Research conducted by Zurich's private clients division in 2008 showed that 10% of second homes do not have home contents insurance cover and another 11% do not know if the insurance they have is adequate.

Tusler believes that underinsurance is the largest single issue faced by the sector and thinks that economic difficulties will serve to exacerbate the problem: "The continuing challenge for the market is 'how do we get clients to understand when they are wealthy and the value of what they own?' As the economy is changing, people are upgrading where they live rather than moving. Upgrading properties rarely correlates to changing insurance, therefore underinsurance continues to be a problem."

Beyond home

Many HNW brokers have focused on home, contents and motor insurance traditionally, with clients having to look elsewhere for more obscure requirements. Owen believes the brokers that do not look beyond their comfort zones will miss out: "All HNW brokers should ask their clients if they have a yacht or jet. It used to be difficult to find a market for this kind of cover but now many HNW insurers offer it."

The report, Wealth Management in the UK 2008, from Datamonitor demonstrates that alternative investments, including wine collections and yachts, are becoming more popular. The report highlighted that the average UK HNW person invests heavily in alternative arenas, with 19% of their portfolios allocated to these products - and these people are expected to increase their exposure to this category to 21% by 2010.

One area handled by specialist brokers traditionally is yacht insurance. The most important element of cover for yacht owners is to have third-party liability cover for £3m: a condition of entering most marinas. Other essential covers include collision damage, fire and submerging; there is help available for brokers without experience in these areas from insurers and brokers such as marine specialist Coleman Insurance (see Broking Success, pp.20-1).

Internet threat

Understandably, direct insurers and affinity players have noticed the potential of selling HNW policies with offerings cropping up from the likes of John Lewis' Greenbee. Hiscox has moved its mid net worth policies from the broker channel to direct internet and telephone-only purchases and some insurers may be tempted to follow this model for their HNW offerings.

Barry O'Neil, managing director at wholesale HNW broker Home and Legacy, believes that this route to market may pose a threat: "It is possible that HNW clients at the lower end may well be attracted to direct or internet products, particularly where the client doesn't have a high personal possessions cover requirement. It is likely that HNW clients will use the internet more to research their insurance options."

However, Brownhill's private client team believes that the internet and direct insurers are not a threat to brokers: "The requirements of an HNW individual cannot really be packaged and the need for individual underwriting and personal service means that the internet can only be of limited use. How much information is an HNW individual going to put on the internet? Not much, we think."

Lifestyle add-ons

Lifestyle add-ons are becoming standard for HNW policies. Chubb Masterpiece Signature offers HNW customers options for green repair or betterment of buildings, cover for alternative accommodation and £10,000 worth of emergency clothing, fine works in progress cover (for artists failing to complete a commissioned art work) and risk services such as screening programmes for domestic staff.

As more HNW clients seek privacy abroad in higher risk and remote areas, there are some seemingly unusual policy add-ons. For example, Hiscox offers security services backed by the Control Risk Group, which acts as a protection extension to the customer's policy to cover air jacking, carjacking, kidnap and ransom. The Control Risk Group can also offer Hiscox HNW clients individual advice on security and claims to be able to remove them from a high-risk situation within 24 hours.