Carving out a niche among the nouveau riche

High net worth (HNW)?insurance has become an industry battleground, with new entrants seeking to carve out a space, and existing insurers responding to the challenge posed by these HNW upstarts.

Last year, Tradex, an insurer previously known for motor trade, announced its intention to launch an HNW product. Norwich Union (NU) looked to take on the HNW giants like Chubb and Hiscox with the launch of its own product.

In response, the long-standing players in the sector have been keeping a close eye on what the new entrants are doing and are developing their own offerings.

What makes the HNW sector so attractive? Better knowledge of the clients, lower levels of fraud, good profit margins and the potential for growth are cited by insurers as reasons for the strong interest in the HNW market.

NU head of service, intermediary business Sam Hudson says: “It’s a great business to be in if you get it right and can underwrite in a sound way. But it’s not an easy thing to do right. It requires a huge amount of investment in staff and their training.”

NU launched its HNW product, Distinct last May, replacing its mid net worth offering, Tapestry.

The number of wealthy individuals is set to climb, according to Datamonitor (see overleaf), presenting insurers with a growing and untapped market.

Hudson says: “Demand is increasing. People are more affluent, and with the way the demographic is moving there is a bigger market. But the penetration [of HNW insurance] is quite low. A lot of people are now HNW or have HNW insurance requirements, but don’t know that they are.”

Tradex launched a HNW motor product last year and is planning a product for the home insurance market. Roy Clegg, deputy chairman of Tradex says: “HNW clients tend to come through brokers that know the clients. You get a better understanding of the client. You have sound underwriting and better sums insured.”

“ HNW is not an easy thing to do right. It requires a huge amount of investment in staff and their training.

Sam Hudson, NU

For composite insurers, the HNW market offers the chance to cross-sell personal lines products to its commercial clients, creating a complete offering, something many companies find attractive.

The HNW market also offers resistance to the increasingly commoditised standard home insurance market.

“People who are real HNW are very time short and they require immediate turn around and immediate attention,” says Clegg. “Provided you can give them that then price doesn’t always come into it.”

Fraudulent claims are also less of an issue with HNW clients, says Charles Dupplin, chairman of the art and private client division at Hiscox. Risks are examined carefully by underwriters, and clients often come from professions where a fraudulent claim could impact on their careers.

“The HNW market is perceived to be more profitable than the average market,” says Simon Mobey, UK & Ireland personal lines manager at Chubb, one of the leading HNW insurers. “There are just more premiums there. The market has a high level of security.”

AIG entered the HNW sector in 2003, targeting ultra-wealthy individuals. Ann Owen, manager of its private clients group, says: “It is competitive not just about price; it’s about the service you promise.”

While the sector may be an attractive one, it presents unique challenges to those seeking to enter it. “It’s a difficult market to crack,” says NU’s Hudson. Any new entrant into the market not only has to meet the high levels of service, but also offer something new to tempt customers to join.

Hudson adds: “The service has to be very good right from the moment the broker picks up the phone. It’s very difficult to get it absolutely right in terms of the product, the prices and the claims right from the word go.”

Owen says: “This is an established market and the people in it are very good, so to break in is incredibly difficult. You have to prove your credibility, show what you can do, and prove you are serious about being in the market.”

“ Sometimes you have to do something like track down a pair of cufflinks when there are only 10 of them in the entire country.

Nick Brabham, Zurich

Handling claims is key to this. “The claims side is the true differentiator,” says Nick Brabham, head of private clients at Zurich Private Clients. “It’s more than just sending out a cheque. For some clients the payment of the cheque does not solve all their problems. Sometimes you have to do something like track down a pair of cufflinks when there are only 10 of them in the entire country.”

Hiscox’s Dupplin agrees that claims can be the point where new entrants to the HNW market fall down. “If you don’t know where the number one restorer in the world is who can restore a particular painting, then you are going to do a bad job for your client. It is quite a specialist service and we and others in the market have spent many decades trying to get it right.”

And any new entrant into the market needs to be confident of building a good sized book of business in order to cope with the scale of possible claims, warns Brabham. “You have to get to a certain critical size to be able to write those risks. You should be aware that you are going to get claims in the tens of millions rather than the tens of thousands.”

But there has been sustained activity in the market over the last few years, with new entrants, new products, and the traditional big players revamping their offerings.

“A lot of the activity has been people changing their products to reflect what their HNW clients want. Generally speaking, people are beefing up their levels of service,” says Hudson. “Wealthy clients in particular want really speedy service on their claims. Clients and brokers are very demanding of the service they get, right from the quote stage to claims.”

The result of this frenzy of activity has been good for the sector, leading to a healthily competitive market, but not one where rates appear to be under undue pressure, according to some. “I don’t think there’s a general move in the market to push rates down,” says Hudson. “People are underwriting prudently.”

Tradex’s Clegg disagrees, however, saying the new entrants into the market have increased pressure on prices, with some silly rates being offered.

Chubb’s Mobey agrees, saying the increased number of players in the sector means the market has become very aggressive from a pricing perspective.

Mobey says: “It’s been a very soft market over the past two to three years, with prices falling as people come in and try to build market share at a time when claims costs are increasing.”

“ The importance of the floods [last summer] was that they educated clients and brokers as to the difference between traditional HNW insurers and standard insurers.

Charles Dupplin, Hiscox

He says rates have gone down between 10% and 20% during that period but have been adjusted upwards over the past nine months, helped in part by the catastrophic flooding in the UK last summer.

If the long-standing HNW insurers are not prepared to chase prices down, they are certainly responding to the challenge of new market entrants by reviewing their products, looking to increase penetration in the sector, and revamping their service levels.

Chubb is planning a full scale re-launch of its HNW offering in January 2009 and is considering launching an ultra-HNW product. Meanwhile Hiscox is about to introduce a motor product aimed at its HNW clients, in addition to its direct offering for emerging clients.

Mobey at Chubb says: “It’s a challenging market but you can look on competition in two ways. You can ignore it and get overtaken, or you can use it to review aspects of your offering.”

Looking at the changes to the sector over the past few years, Zurich’s Brabham thinks the new entrants have had a positive effect. “I think things like service levels have definitely improved,” he says.

Some of the more established players in the market do not see the newcomers as a threat. “At the moment the newcomers are an impediment to growth, and they are certainly competitive insurers that help drive premiums a bit further south,” says Dupplin.

“But the importance of the floods [last summer] was that they were a great example that educated clients and brokers as to the difference between the traditional HNW insurers and the standard insurers with an HNW product. The differences were easy to see. A number of the standard insurers were swamped.”

But the newer entrants are gunning for market share. AIG has just passed $1bn of HNW premium worldwide.

The battle for the HNW market is still very much on.