Market Watch: Kings of the castle

ON 3 FEBRUARY a man-size bronze sculpture sold for £65m at Sotheby's in London. In just eight minutes the price for Alberto Giacometti's L'Homme Qui Marche I (Walking Man I) rose from £12m to reach the highest amount ever paid for a piece of art.

At that price it is fair to say the purchaser is more ultra high net worth than high net worth. However, the purchase reflects the findings of an earlier report on the HNW sector by Capgemini and Merrill Lynch Global Wealth Management. Their World Wealth Report 2009, showed the percentage of passion investments made on art by HNW individuals rose from 20% in 2006 to 25% in 2008.

Hugh Champion, managing director of wholesale and direct at privately owned Lloyd's broker RFIB, notes: "For an investor in art the high end is better. The Masters have been impervious to the recession. For people with a lot of money wondering where to invest it they get something they like to look at and it's unique."

Despite the fact that the HNW sector has not been immune to the recession - the World Wealth Report 2009 showed the number of HNW individuals in the UK fell from 491,000 in 2007 to 362,000 in 2008 - Champion believes that emotional attachment has been a powerful force with HNW individuals holding onto their paintings throughout. He says: "When people collect and buy for love they get rid of those last. They also pass them on generation to generation."

With assets retained, and in some cases increased, who is serving the insurance needs of this sector? Barry O'Neill, managing director of Home & Legacy says: "The broker is still king in high net worth."

However, O'Neill believes there have been changes over the past 12-18 months. He says: "There have been some changes in behaviours which may be recessionary driven. They are looking more closely at the premium but are not sacrificing the quality of cover. More clients are taking bigger excesses to achieve a better price."

He feels these changes have led to more research online but stresses there has been no discernable switch to online purchasing. The head of the Allianz owned dedicated wholesale HNW broker adds: "Because of the complexity of HNW it is not practical to deal online."

Loyalty

Champion advises such stability should be reflected in developing a steady relationship with the insurer to match the one most HNW clients have with their broker.
He clarifies: "There is a lot of loyalty in this market. You have got a track record and it obviously gives you credibility with the underwriter when you have a claim you’ll get more leeway."

However Champion stresses this is not the same as complacency. The best brokers know their market and keep up to date with the changing demands of insurers as well as clients. He adds: "There is more awareness for protection such as alarms connected to [police] stations and more concentration from insurers on making sure you have such an alarm."

Defining high net worth is an imprecise art rather than a science. Capgemini’s and Merrill Lynch’s report defines HNW individuals as "those having investable assets of $1m or more, excluding primary residence, collectibles, consumables and consumer durables". Another report, Hiscox’s Wealth Review 2009, identified the top 10% of people in the UK by income – 2.5 million households – as wealthy with an average annual income of almost £93,000.

Austyn Tusler, head of art and private client, Hiscox, backs up the idea that whatever the precise definition, the HNW spectrum continues to be served best by brokers. He says: “The broker absolutely remains king. The last 18-24 months has amplified the benefits of why they are – their ability to help navigate the complexity of the market and provide support and guidance in the event of a loss.”

The insurer has similarly found there has been an increasing scrutiny on premiums during the recession. Tusler explains: "Consumers are demanding value now more than ever. Pension returns may have been effected or they may work in property. People are taking on a £1,000 policy excess."

Part of the reason for the ongoing longevity of broker dominance in the sector is undoubtedly due to the complexity of clients’ needs but the human relationship element should not be overlooked. Nick Grazier, vice president, private client group at Chartis, explains: "It is about understanding the quirks of the HNW individual. They are all unique and there is no one-size fits all approach. Most clients see the broker as the insurer – it is a relationship that is fundamental."

Chartis believes many brokers in the commercial sector are keen to ring-fence their clients but may not feel they have all the expertise necessary. To help deliver the relationship it provides access to a range of additional functions. Grazier says: "We have a panel of networks that are not part of Chartis but are part of our business model. For example people who ship fine art or restore it. We can find all this [for brokers] and the client doesn’t have to worry.”

Steve Smith, managing director at Croydon-based SmithGreenfield, a specialist niche broker dealing with HNW and mid net worth individuals, thinks that brokers often fall into the trap of expounding the quality of these insurance add-ons without blowing their own trumpet enough. He says: "Brokers need to let people know what they do. They communicate how good their product is but not necessarily how good their own service is."

Wholesale function

Just as Chartis looks to support brokers who have limited experience in the field so SmithGreenfield offers a wholesale function. Smith says: "For a broker who cannot generate enough premium income and doesn’t have the expertise using a wholesale function can protect commercial business and stop it going to another broker.”
One example of the expertise that Smith cites has been a noticeable increase in people investing in jewellery or precious metals during the recession. He continues: “Where clients might have invested in property they now may be investing in gold. It brings a different balance for a portfolio and different challenges. For instance insurers may exclude jewellery if it goes abroad."

While not providing a HNW offering to a crucial commercial client could be seen as foolhardy, Howard Lickens, chief executive officer at Clear Insurance Management, says it is not just a defensive play, the sector can also be part of a new business drive: "It is a stable, loyal business and can be a way to get in and pick up commercial business."

David Sweeney, household and commercial director, Sterling Insurance, also feels it is one more brokers should consider offering. He argues: "The average premium on a high net worth policy is akin to an SME and retention rates are better."

Along with the recession this year the insurer has noted more impact from the weather. He says: "There have been more wet perils such as floods and burst pipes in second homes due to cold weather and snow before Christmas."

So given the resilient nature of the sector, if not the pipes then where next for the sector? Sweeney says: "The market has hardened slightly but it has only gone up a bit. This year will see the same sort of increases." He cites a celebrated industry axiom: "In commercial it goes up like a lift and down like an escalator. In HNW it goes up like an escalator."

With pressure on brokers to keep clients happy, and opportunities almost as precious as the property clients want to insure, tapping into "a hidden goldmine" as Sweeney describes could be time well spent for brokers in 2010.

• For an interview with Bob Trott, managing director of specialist high net worth underwriting agency Oak, see pages 28-31.