Helping affluent clients understand the risk management landscape
Protecting their property may be more expensive and complicated than it used to be.
Affluent individuals with substantial assets face a myriad of challenges that demand a reevaluation of their risk management strategies in 2024.
For example, just 16% of high-net-worth parties polled in HUB’s 2024 Outlook Survey have recently revised their risk management procedures, which highlights the prevalent lack of the adjustments that need to be made by clients in this demographic group.
The increase in highly damaging weather events, economic uncertainty, interest rates and cyberthreats has pushed up the cost of personal insurance and restricted coverage availability.
Premiums are on the rise, coverage limits are dwindling, and insurers are imposing stricter conditions on policies, posing formidable obstacles to wealth preservation.
For a more secure 2024, financial advisors should advise affluent individuals and their families to implement proactive strategies to safeguard their homes, assets, personal data, reputation and financial well-being.
Discussing those concerns must be part of any credible holistic planning effort.
It’s important to craft a customized strategy that ensures the protection of your clients’ properties and assets while enhancing resilience, whether your help clients set up the arrangements or refer them to outside brokers.
Here are four initial guidelines to follow when advising HNW clients.
1. Strengthen your threat response to lifestyle risks.
We are seeing personal lines risk management policies evolve to take into account more than just the protection of physical items.
However, many general policies often still fall short in covering business, philanthropic and lifestyle activities.
Cybersecurity is continuing to emerge as a critical concern, with a quarter of affluent families experiencing cyberattacks in the past two years.
Less than one-third of families surveyed in the HUB report believe they have adequately shielded themselves from cyberthreats, prompting insurers to demand more stringent cybersecurity measures, including multifactor authentication, professional security scans and fortified payment processing systems.
Additionally, lifestyle choices significantly influence risks, notably in travel behaviors.
This consideration is perhaps even most important when we think about risk management.
Lifestyle-related risks can put many folks in a dangerous spot, and they may not be adequately covered.
For example, despite a strong rebound in luxury and adventure travel post COVID, more than half of survey respondents lack a risk mitigation protocol for travel. Only 13% buy kidnap and ransom policies.
Advise your HNW travelers, especially those who frequent remote locales, to scrutinize coverage limits in travel insurance, assess protection offered by credit card issuers and address potential coverage gaps.
2. Protect assets by prioritizing mitigation.
Fewer than 8% of affluent families surveyed by HUB recognize natural disasters, liability risks or water damage as threats to their financial stability, and recent trends paint a concerning picture.
The United States witnessed a staggering 25 weather events causing over $1 billion in losses for each catastrophe from the start of 2023 through the first week of November, setting a new record.
At the same time, personal injury liability payments soared, propelled by social inflation amplifying litigation and settlements.
Destructive weather events and instances of vandalism have specifically impacted insurance costs for art collections and the expenses associated with insuring watercraft, ATVs, motorcycles and similar vehicles.
The repercussions are felt even more so in states such as California and Florida, known for catastrophic events and sought-after destinations for second homes.
In response, several insurers have withdrawn from these markets, exacerbating the challenge of obtaining adequate coverage.
Whether at the direction of their policy or not, high-net-worth homeowners should take steps to fortify their properties and possessions.
These range from securing roofs with hurricane straps and clearing wildfire-prone areas to regulating where yachts can dock.
Investing in mitigation measures, such as installing wildfire-resistant landscaping, incorporating water sensors or fortifying home servers, can significantly reduce risk and bolster insurability.
Extend this focus to safeguarding valuables, utilizing temperature- and humidity-controlled environments for fine art.
3. Manage exposures by evaluating options.
Insurers are increasingly transferring more responsibility to policyholders for safeguarding their assets.
This includes accepting higher deductibles and implementing measures to shield properties from various perils like wildfires and earthquakes.
This trend coincides with insurers introducing exclusions for catastrophic events such as floods and named storms, alongside eliminating coverage for cosmetic damages resulting from weather incidents.
In markets deemed high-risk, insurance policies are being priced to incentivize families to opt for these higher deductibles or even consider self-insurance, a path taken by an estimated 20% of homeowners in Florida — double the national average.
For affluent families who might consider this route, it’s crucial to assess the full financial impact of such a decision.
Understanding that a typical policy value can be around 200% of a home’s insurable worth, encompassing replacement costs for the main house, auxiliary structures, contents and debris removal, is essential.
The advantages of a traditional insurance policy extend beyond coverage; they typically include complimentary risk management assessments to mitigate property risks and assistance in managing incidents like coordinating restoration services.
Self-insured homeowners, however, must strategize for accessing such services independently, especially when resources are scarce after a major event.
They also must be prepared to bear the complete cost of cleanup, repair and reconstruction.
Be sure to discuss these risks with your clients.
Fortunately, alternative options exist beyond traditional markets, such as non-admitted market insurance.
These policies offer flexibility by removing unnecessary coverages, potentially saving policyholders money on premiums, particularly for those with multiple properties.
4. Maintain transparency with your broker.
HNW buyers, particularly those eyeing properties in vulnerable areas, must engage with brokers to understand the potential limitations in insurance coverage or the insurability of properties, which has become an essential precursor before considering the purchase of primary or vacation homes.
Open communication with the insurer is crucial.
Advise your clients to inform them about significant life changes or upcoming property purchases — including assets like yachts — to ensure comprehensive protection.
HNW clients should review their exposures and insurance requirements at least 90 days before policy renewal, empowering their broker to optimize coverage that aligns with the affluent individual’s evolving needs.
In the year ahead, affluent individuals and their families need to increase and improve their risk management strategies.
Adapting to the evolving insurance landscape, addressing vulnerabilities and preparing future generations are imperative for safeguarding wealth in an increasingly uncertain world.
Katherine Frattarola is head of HUB Private Client.