HNW Insurance - Still A Growth Sector

Family Wealth Report
By Tom Borroughes

Insuring high net worth (HNW) individuals' possessions and protecting them isn’t a new one but still has considerable growth potential, bringing with it the need for different business models, a practitioner says.

Whether the risk concerns liabilities that can arise from doing business, or taking time out from work because of serious illness, or accidents and damage to property, the stakes are obviously high—in monetary terms anyway—for HNW individuals. As this publication has noted, insurance is and should be part of wealth management conversations.

An operator in this terrain is PURE (the acronym stands for “Privilege Underwriters Reciprocal Exchange”), a firm founded in 2006, covering areas such as homes, automobiles, watercraft, jewelry, art and other collections, personal excess liability, and flood. And, as that firm demonstrated in comments at a recent Family Wealth Report conference, it is also in areas such as insurance against the risk of cyber-security breaches—a potentially vast market.

Martin Hartley, chief operating officer at PURE, argues that his firm is different in specific ways, not least in how clients become members of the PURE operation, sharing in the profits it makes and ensuring commercial pressures work for their long-term benefit.

“Members pay their premiums to PURE and contribute surplus capital for the first five years of membership. All in, the cost of PURE policies (including surplus contributions) has led members to report significant savings - an average of 20 per cent or more annually on homeowners' insurance,” Hartley told FWR in a recent call. “While most members view surplus contributions as part of the overall cost of their insurance, they are separate from typical premiums and much more efficient. This helps improve operating results. Further, if at the end of the year the total premiums collected exceed the expenses and claims of policies issued, the difference is returned to the members in the form of an allocation to each member’s Subscriber Savings Account (SSA). To date, nearly $60,000,000 has been allocated back to the membership.”

Hartley continued: “The funds held within SSAs remain on PURE’s balance sheet until a member leaves, at which time the funds within their account are paid to them. This is a very tax-efficient way to grow surplus in PURE and creates a great alignment of interests: we are setting prices to charge the right price, not the highest price we can, and if we don’t deliver good service and members leave, they would take almost $60 million with them—which is quite a service promise.”

Such an approach to clients has, it seems, paid off so far for PURE. More broadly, Hartley argues that a range of risks creates plenty of growth opportunity.

It is easy to see some of the drivers for insurance. Besides areas such as cyber crime, as already mentioned, there is liability insurance – a big deal in a country as litigious as the US. Without indemnity insurance a person can, as a result of an accident or problem, be personally and commercially ruined, Hartley said.

On cyber-related losses, there’s definitely potential for growth: “We see a role for us in serving that need. It is never going to overtake cost of care insurance in terms of scale but it is something evolving,” he said. “We have had an interesting couple of years in running a cyber helpline for our members.”

PURE is not alone in delivering HNW insurance; there are organizations such as AIG and Chubb. In AIG's case, it told this publication: “As a public insurer, AIG’s strength of balance sheet is transparent. It enabled us to be there for our clients through simultaneous Atlantic hurricanes and unprecedented US wildfires last year. That strength combined with our longevity in the market, underwriting and claims expertise that support our high net worth clients’ needs, and unique loss control and mitigation capabilities are among the many reasons our HNW clients choose AIG Private Client Group.”

Chubb declined to contribute to this article.

Alignment and competition

Hartley argues that commercial pressures on insurers to sell products to clients don’t always mean customers obtain the cover they need, or may be over insured in some areas and under insured in others. Other insurance groups, he said, focus on serving insurance brokers rather than end clients and this means products and services don’t necessarily fit with what clients want. Such providers are trying to boost their underwriting profits, rather than first and foremost focusing on clients, he said. Hartley contended that established insurers want to bring out products likely to involve few claims and high profits.

A separate, but related issue may be that wealth managers, at least until recently with the rise of more fee-based advice and a move away from commission payments, haven’t had a strong incentive to put insurance into their offerings.

The need for wealth advisors to put insurance offerings to clients as part of their range of solutions has been called for in a recent study. US families and individuals want their advisors to address property and casualty insurance, and a large chunk would switch advisors if such help was offered - suggesting a strong potential to plug this gap. The results came from a study of 200 'successful' US individuals and the same number of advisors by Chubb and Oliver Wyman, the research and management consultancy. The study found that more than three-quarters of HNW individuals surveyed want property and casualty insurance needs addressed by their advisors but only 28 of them said that such persons do so.

As recently as last week, wealth technology firm Envestnet rolled out a program to make it easier for insurance solutions to be put into advisors’ toolkits.

The wealth space

Hartley said that the firm’s cohort of just over 70,000 members is an HNW one: “We are only focused on serving a narrow band of consumer, the top 1 per cent of the population by wealth. We continue to grow very fast – over 20 per cent last year for membership and revenues,” he said.

“There will be more products coming through, for sure,” he said.

PURE continues to push into spaces where there’s potential, Hartley said, referring to the firm’s purchase of an arts curatorial business, Haven, last year. “It [art] is the last great unregulated market,” he said. PURE is in the process of putting together an art buying service.

This article initially appeared on Family Wealth Report's website on May 31st. If you are a subscriber, you can log in and access the article here.