In Focus: Is high net worth cover ‘too generous’ for clients?

Typically, the narrative that most concerns high net worth (HNW) brokers is underinsurance because the potential for inadequate sums insured around expensive properties, jewellery, vehicles and art collections can dent the reputation of the “concierge service” environment that HNW brokers operate in.

However, one broker leader has told Insurance Times that he is concerned that HNW “cover is too generous to the clients”, meaning that “premiums are underpriced” and “the cover is too good”.

Ultimately, this could impact brokers’ and insurers’ bottom lines, as well as the sustainability of the HNW sector.

William Cooper, managing director of family founded HNW broker Stanhope Cooper, explained: “[HNW] policies are great. The cover is actually too good. We’ve got to a stage with the policy wordings [where] the cover is too generous to the clients.

“Premiums are underpriced and the cover is too good - those two put together are a recipe for disaster.

“Insurers will never give you the whole truth. Are they actually making a profit on their high net worth business? Some are, but some clearly aren’t and that’s because the cover is good and the clients are really savvy.

“You’re dealing with very switched on people who have made their money - they’re buying a policy, they’re reading it and they’re claiming.

“You can have a £200,000 ring, [then] swim in the sea [wearing it] and it’s fully covered – there’s no personal custody clause. Or you can tell your best friend to jump in your Ferrari and it’s fully covered if it crashes. Where does this stop?”

Cooper is by no means dragging the HNW market through the mud, however. Describing the HNW sector as “fun” and “really cool”, Cooper is instead advocating for caution.

He explained: “High net worth - the cover, what it stands for - we can all be proud that we sell these products. They are genuinely great products [and] insurers have done a great job.

“I just think we now need to be a bit prudent as we move forward because large losses are inevitable. [That can affect] the sustainability of a business [and] how we can all make a living without making losses. That’s my worry.”

An insurer’s view

A straw poll of 293 members of Insurance Times’ LinkedIn group, conducted in September 2022, showed that HNW brokers are divided on whether they concur with Cooper’s stance or not – 54% agreed that HNW premiums are underpriced, while 46% thought that premiums and cover in the HNW market are fair and well matched.

Although this feedback presents a generally equal split in opinion from brokers, what does the broader insurance market think?

Sarah Willoughby, art and private client business director at insurer Ecclesiastical, emphasised that all insurers are vigilant and analytical when it comes to the sustainability of the books they write.

She said: “[Insurers] need to be profitable to [ensure they are] there for [their] clients for numerous years.

“It’s not about making lots of money - it’s about ensuring that there’s consistency, longevity and profitability of the overall account.”

Willoughby explained that when designing HNW covers, insurers will debate whether to “add something different” to policies, if this amendment will be “too expensive to add in” and whether clients really need that element of cover or not.

“If you don’t think that you could afford to [add an element of cover] as the insurer, you wouldn’t do it,” she added.

Furthermore, Willoughby believes that the FCA’s general insurance pricing regulation - which came into force from January 2022 to eliminate dual pricing and uneven premiums between new business and renewing customers with similar risks – has also “levelled out the premium levels that you would find within the HNW market”.

Broader cover causing claims costs?

Meanwhile, James Long, managing director of HNW focused loss adjusting firm Criterion Adjusters, primarily disagreed with Cooper’s perspective – although he does list some instances where wider cover in HNW compared to typical household policies could cause insurers to shell out thousands of additional pounds.

In the main, Long believes that both general household policies and HNW policies cover the same high frequency risks, such as fire, escape of water (EOW) and escape of oil – although standard household insurance is typically arranged on a contingency basis, whereas HNW is secured on an all risks basis and usually features six or seven detailed exclusions, such as wear and tear.

An example where this difference could impact HNW insurers is regarding the ingress of water into a property. Long explained that many household policies will only pay out if the ingress of water is storm-related, while HNW policies will often pay these claims regardless of recent storm activity.

Long noted, however, that these types of EOW claims are typically “relatively small”.

He continued: “There is a wider cover under HNW policies, but that wider cover tends to be in areas where it’s unlikely to generate large claims.

“HNW policies have all sorts of add ons – such as kidnap and ransom cover – which are very rarely bought into use.

“HNW insurers would have you believe that their policies are wonderful - all singing and all dancing, [covering] cyber attacks and all these wonderful things which I suspect are very, very rarely called into action.

“Yes, the cover has widened, but the big claims always come back to fires, floods and storms - things which have always been covered.”

Long added that HNW property cover has also widened out to include preventative measures, such as the installation of leak detection systems – this change has been positively received by customers.

In terms of jewellery insurance, Long said there are “far, far fewer restrictions” and where “restrictions [are] applied, they tend to be applied at a much higher limit”.

Although HNW jewellery claims could, therefore, prove costly for insurers, Long believes that “theft and accidental loss is rare compared to the standard losses which occur every week as a result of an EOW, fire or flood”.

Despite this overarching view that broader HNW cover does not automatically equal higher insurer costs and an unsustainable marketplace, Long did acknowledge that there are some problem areas where wider HNW cover can cause insurers additional claims-related costs, indicating that Cooper may have a point when it comes to some facets of HNW cover.

For example, HNW policies often include a trace and access clause, which works to detect the source of a leak in an EOW claim. This can prove more costly in the HNW arena compared to a traditional semi-detached house because “there can be marble bathrooms and the pipe could be buried underneath a jacuzzi”.

Another exception to the general rule of thumb, which Long thinks is “very underestimated by underwriters”, is alternative accommodation costs. Although this cost is usually capped within a normal household policy, HNW policies often set this as an unlimited amount.

According to Long, a claim regarding a Chelsea-based townhouse – for example – could rack up alternative accommodation renting costs between £12,000 and £15,000 a week. “The cost of those properties massively outweighs the cost of the physical damage,” he added.

For Long - although HNW customers typically “don’t [seek to] maximise their claim and are not hell bent on claiming every last penny” - underwriting remains “critical” in order to maintain the sector’s sustainability.

He still sees cases, for example, where insurers “don’t ask for proof of ownership or proof of value on items of jewellery” or where a “desktop survey” is used instead of a physical site survey, “which is never as effective”.

Long continued: “There’s [a] number of different underwriting issues that arise, [which] - from where I’m standing - look to be pretty avoidable.

“[Insurers] try and cut costs at the underwriting stage. They need to sharpen that up and they need to make sure they get the claim stage right.”

‘Slack in the system’ is ‘fallacy’

Sitting on the other side of the fence to Cooper is also Daniel Lloyd-John, chief executive of Broadway Insurance Brokers – a HNW broker established in 2020.

He told Insurance Times: “I don’t think insurers in this space are going to bandy about cover willy nilly to a HNW audience. Yes, gross written premium can be larger per head than standard personal lines, but so are [the] claims and that’s the nature of the asset that HNW insurers are insuring.”

Lloyd-John feels that insurers are “pretty intelligent” when it comes to the oversight of management information, operating costs and other factors that influence profitability and sustainability, meaning that “the idea there might be slack in the system is a bit of a fallacy”.

Plus, “savvy” and “informed” HNW customers are likely to know if their cover sounds too good to be true, Lloyd-John added.

For him, navigating the “underserved business to entrepreneur” HNW clientele revolves around partnership and collaboration.

Lloyd-John explained: “The more transparency and detail [there is from the FCA and insurers] around how to present a risk to market, the better the broking community gets at really embracing [the HNW] audience [and] the less likely [it is that] cover [is] underpriced or too generous.

“[This is] because [brokers] are really informing insurers and helping them manage their businesses in the most cost effective and sustainable [way]. The more detail, clarity and guidance all parties gain, then the more sustainable the market becomes.”