Goodbye to all that

Less than a year ago, the City’s masters of the universe were flush from a bonus season worth £8.5bn. Giddy with wealth and toasting their success with fine champagne, it seemed the good times would never end.

This year’s bonus season will be a different story. In the Square Mile and Canary Wharf, “credit crunch lunches” have replaced foie gras and the talk is all about market gloom and job losses.

Outside the City, the mood has turned against the “excesses” of financial services professionals. Even David Cameron, leader of a party that has always been the banker’s friend, has hit out at “reckless bonus structures” and called for more regulation.

Last Thursday, after launching a £500bn bail-out designed to kick-start the stricken market, Gordon Brown lashed out at the banking sector. He vowed to “punish” greedy bankers and issued a stark warning: “The day of big bonuses is over. As part of this deal, we’ll have to reach an agreement with banks over executive remuneration.”

The Centre for Economics and Business Research (CEBR) has forecast that City bonuses for 2008 (to be paid at the start of 2009) could drop to £3.6bn. This would be a crushing 60% drop from 2006, when bonuses totalled £8.8bn (see box, right).

But what does all this mean for insurers and brokers trading in the high net worth market?

The bonus season runs from December to April and it’s within these five months that the insurance industry gets much of its high net worth business. If the CEBR is right and bonuses fall to their lowest level since 1998, insurers’ pockets could be hit hard.

John Sims smells big trouble. He led Chubb’s high net worth insurance division, Masterpiece, for more than 10 years before becoming chief executive of Lorega, a loss adjuster. He says the drop in bonuses could push down rates for the entire high net worth market next year.

“It’s difficult to say how the market will react, but I can see there being a 5% to 10% fall on current prices. If a renewal was £5,000, I can see this dropping to £4,500. This is based on feedback from a wide variety of high net worth brokers over the last three months who have seen significant pricing pressures as the credit crunch takes hold,” he says.

In a typical year, the first three months are when the market experiences “a surge in new business or a surge in the values of risks on existing business”. But this isn’t a typical year: “I suspect that might not happen to the same extent this year. There’s so much talk about more regulation and the size of bonuses.”

Sims believes insurers’ premiums will be an important factor in claiming market share. “I think they will be sharpening their pen in the next 12 months to try to retain the better customers,” he says. “It costs you a lot of money to attract a high net worth customer; going out and appraising the home and doing all the other things. The worst scenario is to lose them after year one or two.”

Despite the clients’ wealth, cost remains a factor, he adds. Affluent customers usually use a specialist broker in order to obtain a high level of personal service. But some medium-value business could still fall into aggregators’ laps. And now more than ever, people are looking for a bargain.

“The opportunity to save money has never been more prevalent and I think it’s a weakness with our industry,” says Sims. “I think the mid and high net worth clients will still be prepared to pay that little bit more for quality … but they still want to feel they’re getting value for money.

“I can see there being a 5% to 10% fall on current prices.
If a renewal was 5,000 pounds, I can see this dropping to 4,500 pounds.

John Sims, Lorega

“It’s a tough sell to say to them they’re getting all these extra benefits but it’s going to cost 40% more [than rock-bottom prices for insurance].”

In these belt-tightening times, customers may look to reduce their insurance spend through higher excesses, says David Sweeney, director of household and commercial insurance at Sterling. “I think people will maybe go for larger excesses,” he says.

“If they’re looking to cut costs, that’s something we could help with.”

Nick Brabham, head of private clients, Zurich, also sees a downturn. “We tend to do mostly high net worth insurance, but on the lower end of our book we would expect to see some downturn in the first few months of next year,” he says.

“I think clients will talk to their brokers about cost. It’s just a case of making sure they’re aware that they can get a cheaper premium, but also what they’re sacrificing.”

Industry figures agree on the importance of differentiating between what some term “ultra high net worth” customers and “working-class high net worth” clients. The former refers to the super-rich and those with assets of more than £10m, who would be better insulated from any economic turbulence. The latter group includes those who have high salaries but may rely on bonuses to supplement their lifestyles – in short, City workers.

David Foster, director at Lark Insurance Broking Group, says these two types have different buying habits.

“They [City workers] are not spending on insurance what a mature high net worth client is spending,” he says. “Maybe that mid net worth, aspirant market does not tend to be so asset heavy and therefore doesn’t have the insurance spend that goes alongside that.”

Meanwhile, clients who have amassed greater assets over the years are less likely to alter their spending habits. Foster says the broker’s true, established high net worth clients are still buying art and jewellery.

Even this group is not entirely immune from market forces, however. “They’re probably not looking to move house at the moment so there is a lessening of activity there,” says Foster.

The CEBR reports that 50% of bonuses are invested in property, so the knock-on effect could be substantial. The housing market continues to struggle, with the Halifax reporting a year-on-year fall of 12.4% in September – which means the average UK price is now close to the level it was at in January 2006.

The spectre of negative equity is dissuading many homeowners from moving, which means renewals on existing properties are expected to rise.

“Generally we’ve seen with household a slowing of the market for new business because people aren’t buying new properties and aren’t moving house,” says Foster.

“Many people are switching away from stocks and shares into jewellery and fine art because they see that as probably safer.

Simon Mobey, Chubb

While many people are cutting back on luxuries, high net worth insurers expect their clients to invest in tangible assets, which are looking far more secure than the stock markets. And of course, they’ll want insurance for their goodies.

“Many people are switching away from more day-to-day investments, such as stocks and shares and even bank investments, into things like classic cars, jewellery, commodities and fine art because they see that as probably a safer, long-term investment,” says Simon Mobey, UK and Ireland personal lines manager at Chubb.

Mobey adds that the insurer’s ultra high net worth book, which accounts for 30% of its business, has grown.

But not all luxury markets are safe. New car sales for September were down 21% on the same month last year (excluding Scotland, where sales fell 26%). Bentley sales are down 48% this year and, following the massive job cuts at Lehman Brothers, there was talk of hundreds of Ferraris being put up for sale. None of this bodes well for the luxury motor arena.

Earlier this year Welsh broker Moorhouse launched a high net worth motor product aimed at high-performance vehicles and cars worth over £50,000. Lyndon Wood, the broker’s chairman, remains defiant but cautious. “What’s going on in the economy doesn’t seem to have affected it yet but that’s not to say it won’t affect it, with people tapping into their reserves,” he says.

A new registration plate used to be a must-have for many affluent car owners. But this is unlikely to be a priority when the batch of 2009 plates arrives on forecourts in March. “For motor we tend to see a surge of business twice a year with new vehicle registrations,” says Wood.

“It could slow up this time around. Where historically, a Bentley owner would keep his vehicle for one or two years and then change it for a new registration, this time he may not.”

While purchasing power looks set to slow, there is some consolation for high net worth insurers out there seeking to cover valuable goods. While assets such as motor vehicles will inevitably fall in price, niche products such as fine art are far more likely to hold their value.

The record-breaking £111m auction of works by Damien Hirst last month seemed to suggest the wealthiest art collecters hadn’t yet noticed the credit crunch. Even if more modest buyers make fewer purchases, their existing pieces should retain their value.

“A high net worth customer may have fine art and that may not necessarily be reducing in value at the same extent as other things,” says Sweeney of Sterling.

Lark’s Foster agrees: “There is still plenty of money out there in terms of assets. Effectively we’re insuring assets.”

At best, lower 2008 bonuses might lead to a shift in consumer behaviour, with people buying – and insuring – commodities that will hold their value.

But given the continuing market turmoil and the mood of the country, even a bonus payout of £3.6bn is not guaranteed. “I’m angry at irresponsible behaviour,” Brown said last week. “Our economy is built around people who work hard, who show effort, who take responsible decisions, and where there is excessive and irresponsible risk-taking that has got to be punished.”