These clients' unique needs
warrant attention from advisors.
Planner Mitchell Freedman had talked once before
with his client about kidnap and ransom insurance, coverage designed to
protect everyone in the insured's household from abduction and
extortion. "He has a wife and children but wouldn't consider it at
all," says Freedman, president of MFAC Financial Advisors Inc. in
Sherman Oaks, Calif.
Then a magazine in the client's home country glorified him on a list of its wealthiest citizens. "The net worth they showed for him was many, many times what it truly was," Freedman says. "He appeared to be enormously wealthy, so I brought up the subject again and he said, 'Let's buy it.'"
This exotic policy is just one genre of property and casualty insurance, an arena often neglected by many individuals and some financial advisors. Why so? P&C is esoteric, complicated and tough to present in a pie chart. None of that means it isn't important, though. Just look: "On average, our clients pay $23,000 in annual premiums for 3.2 lines of coverage," says Charles Williamson, president of AIG Private Client Group, part of the triumvirate that dominates the high-net-worth P&C marketplace, along with Chubb and Fireman's Fund. "Homeowners is our clients' most common purchase," Williamson says, followed in order by auto, collections (jewelry/fine art), umbrella coverage and "other."
Now, you don't need to become an insurance expert to help clients. You can effectively mind their P&C by (oversimplifying here) doing just three things.
One, get familiar with the coverages available and the issues surrounding them. The affluent have exposures that standard policies don't cover, or don't cover adequately, which insurers targeting the affluent routinely underwrite, Williamson says.
Two, thoroughly review the client's situation to make sure all risks are properly managed, both at the start of the relationship and periodically throughout.
Three, oversee implementation. Yes, that means keeping an eye on premiums through, for example, prudent deductibles. But it may also mean working with an insurance professional who either the client or advisor has chosen. "In those cases we get something in writing from the agent saying that the client is appropriately covered," says wealth manager Stewart H. Welch III, founder of The Welch Group in Birmingham.
When clients look to you to decide whom to buy from, steer toward an independent agent representing numerous carriers rather than a captive tied to one, recommends Alan Goldfarb, chief financial strategist at Weaver and Tidwell Financial Advisors in Dallas-Fort Worth. "You want flexibility," Goldfarb says, although spreading policies across a host of carriers lessens the opportunity for multiline discounts or gaining clout as a big customer.
Whoever the insurance specialists and carriers are, they should be committed to delivering the top-shelf service the wealthy demand, or the client could be disappointed. In a recent study by The Luxury Institute, a New York research outfit, of 15 P&C carriers targeting high-net-worth individuals, USAA scored highest in service, with Chubb second and American Family third.
Your final implementation duty is to coordinate all policies' deductibles, coverages and effective dates, says agent/broker Lee Hargrove, president of Professional Service Associates LLC in Raleigh, N.C. "One agent may not know what another is writing, and a gap in coverage could leave the client responsible for a claim." Don't let that happen, okay?
A key issue with homeowners is maintaining sufficient coverage to rebuild in case of a partial or total loss. Clients with vintage homes grandfathered into today's zoning requirements need to realize that many homeowners policies pay only for the materials and workmanship that was lost, even though replacement construction would have to comport to modern, and potentially more expensive, zoning rules. Additional protection, sometimes referred to as building ordinance insurance, is needed to cover the incremental cost of getting current.
A widespread concern is rebuilding costs' brisk escalation. Many so-called "replacement cost" policies cap what they'll pay to rebuild at, say, 150% of the policy face amount. So a home can quickly become underinsured-just one reason why you revisit the P&C file regularly. "Often the cost to replace a home is 100% or more of the policy amount," says AIG's Williamson.
To make sure his clients aren't underinsured, Welch puts the onus on the insurance guy. "Every few years we ask the agent for a new written appraisal of the cost to rebuild, and we insure the home for that amount. That way if it's destroyed and the actual cost is significantly higher, there's a much better chance of working things out with the insurer," Welch says.
All of this assumes your client can get insurance. In some places, like the Gulf Coast, that's suddenly very difficult. "The problem is really twofold, because there's also been a huge increase in rates," says Benjamin Tobias, president of Tobias Financial Advisors in Plantation, Fla. "We laugh with clients that you hope your homeowners is renewed, and if it is, you're thankful whatever the cost."
The root of the problem is protection for windstorm damage. Historically that coverage has been part of the HO form. But now insurers are reticent to write it in hurricane zones. Some carriers have pulled out, others folded. At least in the Sunshine State there is an insurer of last resort, state-backed Citizens Property Insurance Corp. "But it's very expensive and not great insurance," Tobias says.
Yet there is good news, according to James Kane, president of HUB International Personal Insurance, an arm of Chicago-based brokerage HUB International. Many insurers have the capacity to write a small amount of wind coverage in coastal areas, he says, and individuals with high-value homes who are willing to manage their property's risks are among the most likely candidates to get it. Taking out a high deductible is often treated favorably by underwriters.
Underwriters also like it when the company is insuring a noncoastal property in a different state as well, Kane explains. The insurer not only gets more premiums, but also equally importantly gets a more diverse collection of risks (two houses in two different areas). For clients building new residences in storm-prone areas, installing shutters and wind-resistant glass improves the odds of approval for HO. Insurers have loss prevention experts who can aid clients during the design phase.
Many consumers are unaware of the modest limitations (e.g., $1,000) that HO policies typically place on losses of jewelry, furs, antiques, Oriental rugs and other collectibles. Yet even those who are familiar with these limits frequently believe the value of their possessions is less. "Then you point to the [client's] antique French Provincial dining room set," Kane says. To protect such treasures, a rider or separate policy is needed. "Otherwise the insurer gives you back eight chairs and a table." Active art buyers may require quarterly or semiannual check-ups to ensure all new acquisitions get covered, Kane adds.
Another policy underappreciated by the public is excess liability insurance, or umbrella coverage, which provides protection from lawsuits over and above that afforded by the client's home and auto policies when the deductibles are properly coordinated. For example, if the HO policy only covered liability up to $100,000 and the umbrella policy kicks in at $300,000, a $280,000 claim would mean the homeowner would be left paying $180,000.
"People either don't have enough umbrella protection or don't have it all," says Tobias. As a rule of thumb, clients should have coverage roughly equal to their net worth.
Flood Insurance Gets Personal
Should residents of areas which historically have not flooded buy flood coverage? Maybe. "Because of increased runoff from development, you're seeing flooding in areas that you didn't used to," Kane says. But federal flood insurance often doesn't cover damage below ground, such as to a finished basement. And it halts protection at $250,000 for building coverage and $100,000 for contents, limits that may not be sufficient for well-to-do clients. In such cases, excess flood insurance, available in the excess and surplus lines market (e.g., Lloyd's of London), historically has been the answer.
Yet in select states there's a new kid in town. Within the last several months, the high-end carriers have introduced personal flood insurance with coverage into eight digits. It's an endorsement to the homeowner's contract against certain kinds of surface water damage, and is designed to compete with national flood (which Kane says it's better than) and excess flood policies. The only problem so far is limited availability. "That will change," Kane predicts.
Sitting on a corporate board as an independent director is one of the more thankless jobs around these days. Clients in such positions can protect themselves with personal director's liability insurance. It pays off when the corporate directors' and officers' policy doesn't, either because the client's actions aren't covered or its limits have been exhausted. "This coverage is a last line of defense before digging into your own pocket," says Jim Fiske, a vice-president at Chubb Personal Insurance. Chubb's policy also protects clients serving on not-for-profit and charitable boards.
For families who employ household staff, state law may require worker's compensation insurance. But an employment practices liability policy might be a good idea, too. It indemnifies the family and foots certain legal expenses when a domestic worker sues for wrongful discharge, discrimination, or harassment, including by a houseguest or other domestic worker.
As bad as that could be, the kidnap policy is the one that's hopefully never relied upon. But if it is, it pays for negotiators and the ransom. Who might need it? "Someone with high visibility, or who is well-heeled and travels internationally," says Freedman, whose client mentioned at the outset definitely appreciates the protection. About a year after buying it, he rang Freedman and said with nervous excitement, "That list came out again and I moved up several notches. Mitch, is my kidnap coverage adequate?"