Property Casualty 360 - 09/02/14
By Mark Galante
Insuring high net worth individuals is a terrific business. The long-term financial performance of the niche has been strong for carriers and brokers alike, and the work is both interesting and rewarding due to the fine properties and, more importantly, the people behind it all.
If you’re finding success in this business, there’s no doubt that your network of referral sources includes members of the wealth management community. While they come in different shapes and sizes—registered investment advisors (RIAs), family office advisors, and private bankers, to name just a few—wealth managers are arguably among the most influential professionals in your clients’ and prospects’ lives. As such, referral sources from this community are coveted.
In the last several months, I’ve had the chance to meet with dozens of men and women who are trusted by ultra-high net worth families to protect and grow their wealth, the vast majority of whom have worked with numerous independent agents and brokers. When I asked these professionals to describe how the best agents and brokers differentiate themselves, here’s what they said.
They carefully uncover and address each client’s unique exposures.
On the surface, an account with a couple of fine homes, luxury automobiles, jewelry and other valuables can seem pretty cut and dried. The fact is that a poorly structured insurance program could put massive amounts of wealth at risk.
Frequent and thorough personal risk assessments are critical to uncovering the unique exposures of high net worth families. “I conduct regular, comprehensive reviews to understand and keep pace with each client’s life and exposures,” says Patti Clement, managing director at HUB International. “The client’s wealth advisor is typically part of the process from day one and fully engaged when we update our reviews each year if not more frequently.”
During this process, it’s important to:
- Align the insurance program with the estate plan and asset protection strategies. “As families increasingly focus on asset protection concerns, we see them using limited liability companies (LLCs) to separate liability associated with tangible assets from other kinds of property,” says Kevin Luchetta, CFP, wealth advisor with Pioneer Financial of Northwestern Mutual Wealth Management Co. “For example, the executive who owns a jet may hold the jet through an LLC so that potential liability from the jet will not reach his other assets.”
It is not uncommon for LLCs to own homes, yachts and other assets, and it is important that these entities are listed as additional named insured. “One of my clients has a pretty elaborate estate plan, as his home is owned by an LLC which is actually owned by another LLC,” says Clement. “During our initial review, the homeowners policy he shared with me had no additional named insureds. That was one of the first things we addressed so now the technical owner and occupant are properly listed.”
In addition to LLCs, it’s important to ensure that trusts, commonly used in estate planning, are also identified and properly listed in the insurance program. Both are frequently overlooked.
- Take a good look at the umbrella. “By far the single most important specific coverage issue we address is personal excess liability insurance, because it helps shield the family’s assets from claims,” says Gary Pasternack, director of insurance advisory at Bessemer Trust. “Often clients come to us with inadequate limits.” High net worth specialist insurers like ACE Private Risk Services, AIG Private Client Group, Chubb, Fireman’s Fund, and PURE all offer excess liability limits that far exceed what is available from direct writers and other standard personal insurers.
While eliminating coverage gaps created by inadequate underlying insurance is formulaic, choosing an umbrella limit is not quite an exact science. Most agree that the limit should be influenced by the value of the assets at stake, the family’s risk tolerance, and lifestyle-related risk profile. “We advise clients to consider maintaining a personal excess liability limit which is at least equal to their net worth, up to $20 million,” says Pasternack. “Even greater coverage amounts should be considered when the client has an exposure to a large liability loss or has a low tolerance for the risk.”
Pasternack also suggests that net worth would not include protected assets like qualified retirement accounts, irrevocable trusts and homesteaded residences, but should include five to ten years of irrevocable trust distributions or other substantial income depended upon to pay living expenses.
- Shield the client’s wealth from the uninsured. The Insurance Research Council (IRC) estimates that 12.6 percent of motorists, or about one in eight drivers, was uninsured in 2012. Oklahoma, Florida, Mississippi, New Mexico, Michigan, and Tennessee are among the worst for this, as the IRC estimates that at least one in five motorists in these states is uninsured. Comprehensive coverage reviews of very wealthy families routinely uncover missing or inadequate UM / UIM coverage.
- Mind their business. Commercial exposures are common and diverse in this niche. Sometimes they stem from the property itself, such as gentleman farms, ranches, or historic homes that are regularly toured by the public. Other times, the owner’s primary business creates the risk, such as the independent consultant who earns seven figures a year working out of a home office. The "incidental business" coverage found on homeowners' forms typically isn’t enough and professional liability is likely excluded. In some cases, a specialist insurer will endorse additional coverage to address the exposure; in many others, obtaining commercial coverage is necessary. Regardless, it starts with understanding the exposures.
- Address the nanny. And the home health aide. And the… Be sure to identify all of the domestic staff and list them on the appropriate policies. Just because that nanny, chef, or gardener has been with the clients for a long time doesn’t mean employment practices liability coverage isn’t necessary. Become an expert in domestic workers’ compensations laws, options, and procedures so you can be an advocate for clients with qualifying employees, whether the coverage is ‘compulsory’ or not in a given state.
- I.D. the D&O risk. It’s quite common for wealthy clients to serve as directors or officers for a variety of professional, philanthropic, or other not-for-profit organizations. Find all of them, then obtain the appropriate coverage, whether personal, commercial, or both.
They emphasize alignment of interests with the client
If you visit the websites of many of the most distinguished family offices and other boutique investment advisories, it is hard to miss common principles of alignment of interests, elimination of conflicts, and transparency. These manifest themselves in a variety of ways, from disclosures of fees and other compensation to the advisor’s investment of his own funds alongside his clients’. It’s no surprise that this community seeks the same principles in insurance transactions.
“Full transparency is crucial. Even though an agent is compensated by the carrier, the most effective agents that we see focus on putting their clients' interests first by always seeking options for the best and appropriate coverage, without regard to their own compensation,” said Michael Zeuner, managing partner, WE Family Offices. “For example, an aligned insurance broker will take the time to identify all the possible risks, and explain where insurance could mitigate those risks, as well as where it may not be an effective mitigate, as opposed to automatically proposing insurance solutions to every situation.”
Simple ways agents can create alignment and transparency include disclosing all of the markets considered and quoted on the client’s behalf, placing the client in the best available writing company (even those marketed as "new business companies"), and aligning with insurers that embrace the same principles.