Meeting HNWIs’ insurance needs is not an easy task, especially considering that inflation is affecting insurance rates. New insurance programmes are being designed and promoted, aiming at avoiding the less tangible risks the majority of clients are currently facing.
Looking at the past considering the future, Citywealth speaks to experts from the US and Bermuda to understand the evolution of insurance and its costs, risks and programmes.
Insurance and inflation
Inflation is having a considerable effect on insurance rates, but rising costs of it were becoming more and more evident long before inflation started to impact the worldwide economy. “For many years, the global insurance market was considered 'soft', meaning that coverage was widely available and pricing of insurance products was generally low. However, after years of overly competitive pricing, the insurance market recently experienced a swing towards a hardening market, characterised by an increase in insurance premiums, – explains Gavin Woods, Partner at Carey Olsen, in Bermuda - therefore, insurance rates were already rising before inflation began to affect the global economy. As inflation now drives up the costs of living and doing business (whether it be energy prices, manufacturing costs, the price of materials or labour shortages), this will inevitably impact the cost of insuring such activities and is likely to lead to further increases in insurance rates.”
Leigh S. Harter, Managing Director at NFP Insurance Solutions, in Chicago comments: “Inflation is affecting property and casualty costs/premiums due to its impact on the prices of materials and labour necessary to rebuild and replace. This applies to homes, autos, boats and goods that might be damaged, destroyed or stolen. Commercial coverages will be impacted in the same way. Life insurance has a different pricing model and should respond to increases in interest rates with lower premiums. However, the increased expenses affecting the bottom line at the carrier (insurance company) level resulting from inflation may offset any improved returns to the fixed piece of the general portfolio. Some other inputs to the actuarial modelling that determines premiums for life insurance are mortality, lapse ratios, and administrative expenses.”
UHNWI: present needs vs past habits
Insurance structures that were established long time ago and have efficiently worked during the years need to be updated, challenged and changed to meet expectations and solve potential issues for the new generations. “UHNW clients are often products of generational wealth”, comments Gavin.
He adds that “in the past they may have been the youngest members of the family and several generations away from benefitting from the wealth management and asset holding structures that their ancestors put in place. These clients now need such mature structures to be more nimble and flexible than they often were when they were established may years ago in order to provide for the client's present needs, to have the ability to address their present concerns and to provide for future generations. Therefore, existing structures will often need to be changed and modernised so that they can meet the evolving needs of UHNW clients. Some of the items UHNW clients are often now asking about (which were not a concern a generation ago) are digital assets, social media, security and ESG (environmental, social and governance) considerations. If UHNW clients don't raise these items, their advisors should be broaching them in any event. We live in a rapidly changing world and UHNW clients need their advisors and their asset holding structures to be able to deal with these new asset classes and modern concerns.”
Leigh underlines the vital importance of illustrating to clients all available insurance coverage options so that informative decisions can be made according to the current client’s needs. “Our clients need honest and reliable advice from their insurance advisors. This advice should give them access to best-in-class insurance carriers providing all lines of insurance coverage. This includes:
- Property and casualty coverage with great service for their homes, autos, “toys” and businesses.
- Life insurance, long term care and disability coverage. The life insurance coverage is there to provide liquidity at the time it is most needed to pay for estate settlement costs, estate taxes and to replace cash flow and income when families are not adequately liquid. Life insurance can also act as a portfolio stabilization tool in down markets. Closely held business owners use life insurance for key person needs and to plan for business continuity.
- Long term care coverage allows families to manage care rather than provide it. It is surprising how often family members feel the moral imperative to care directly for a loved one despite the fact that they can afford any level of home care available. Where insurance is in place to cover that need it will be used and family members can be spared the debilitating effort of being front stage caregivers.
- Disability coverage provides income replacement and can also be used for business continuity needs with lump sum and / or monthly payouts. Even the very wealthy still insure for income replacement.”
Taking into account present needs, digital assets cannot be left out of the equation. To this regard, Steven Rees Davies, Partner at Carey Olsen Bermuda, connects traditional structures for holding assets with digital assets stressing that "we are seeing an increase in UHNW clients not previously involved in the digital asset sector looking to the future and starting to ask whether there should be something in their family office or trust structuring that touches on digital assets.
Conversely, many UHNW clients already involved in the digital asset sector are unfamiliar with traditional structures for holding assets. This has resulted in a greater need for them to understand what a trust or foundation is, why they could be beneficial for managing and holding digital assets and what needs to be done to put a robust structure in place for them. We are also seeing an increased appetite in UHNW clients wanting to understand the technology underpinning the digital asset sector and a cautious approach of only dealing with recognised, licensed and regulated businesses in the sector."
Bespoke insurance programmes are often designed to meet clients’ requests. Looking at some of the designs being used in current projects by Leigh Harter at NFP Insurance Solutions, she talks about “policies to provide tax advantaged retirement income. By max funding contracts over a limited number of years tax free withdrawals can be made in later years (this strategy will depend on tax laws on a country-by-country basis and the residency status of policy owners). Life insurance for asset accumulation works even better for the UHNW inside of private placement policies. In a private placement contract individuals can recreate their current investment portfolios in an insurance policy and replace tax friction with cost of insurance (COI) friction. For actively managed portfolios the COI costs are typically much lower. Many of the best performing hedge funds are also accessible inside private placement life insurance policies and annuities.”
Gavin Woods comments that “the insurance programmes vary in type and scale. On the one hand, we have been developing new insurance vehicles for companies that want to self-insure their businesses (primarily, in North America). This is a relatively common type of insurance, but it demonstrates that there is a continuing need for such products. On the other hand, we are helping to design innovative insurance structures for clients in the digital asset/cryptocurrency sector, as well as structures for insurance intermediaries that aim to provide a more effective and efficient platforms for trading and syndicating insurance risk. The overarching trend is that Bermuda continues to be a fertile ground for producing all types of products for the international insurance market.”
Technology, travel, ESG and the other (less) tangible risks
Risks are always around the corner, especially new and unpredictable ones. Despite having been financially resilient in the last years, the insurance industry could have missed some new and less tangible risks, which need to be identified in order to protect clients. For instance, cyber-crime could hide within the ever-changing world of technology, as detected by Gavin: “Technology-based risks, such as cyber-crime and data mismanagement, is becoming a key concern for many of our clients, particularly as such risks can result in material exposures and losses.”
Considering less tangible risks, Leigh has no doubt in stating that on top of the list there is an “increased weather volatility impacting clients’ homes and ‘toys’. We address this issue with regular reviews of property and casualty coverage. Unusual risks for travel, for example terrorist and kidnapping risk, can also be covered under special policies taken out for limited terms.”
Leigh continues saying that “another interesting issue we often deal with is estate equalization with life insurance for family members who are not part of family-owned businesses. Where we have clients with significant trust funds, life insurance to protect spouses who will not inherit is an important planning tool. This applies through multiple generations. Where closely held businesses would not have the liquidity to pay estate taxes or other settlement costs without a fire sale we also often cover multiple generations to deal with that risk.”
Gavin also insists on risks related to ESG, focusing on the importance of implementing ad-hoc programmes. “Other key themes include environmental, social and governance (ESG)-related risks, such as climate change, social impact and sustainability and the implementation of new regulatory and governance standards. To mitigate these risks, companies will need to implement and maintain a strong risk management programme.”
What do our experts expect for the future?
… A distinct lack of capacity in relation to insurance products aimed at businesses operating in the digital asset sector. This applies just as much to D&O insurance as it does to the insurance of custodied digital assets. The issue appears to arise from a lack of understanding of the underlying technology (blockchain/DLT) and therefor an ability to risk rate and price such coverage. It is an area that, like in the past with cyber risk, is going to explode as soon as underwriters and actuaries figure the technology out.
Steven Rees Davies
- Increasing premiums for property and casualty and long term care coverage (where it is still available).
- Life insurance companies exiting the market. This has already happened, along with consolidation. We expect it to continue.
- Improvements in annuity rates with a return to higher yield fixed alternatives.
- More International clients and better availability of coverage for “citizens of the world”.
Leigh S. Harter
... We anticipate that many of the themes taking root today will continue to grow and develop. In particular, consideration of ESG-related risks will be commonplace. We also expect that today's innovative and technological developments will be integral to business in the future. This may be a patently obvious expectation – but we are already seeing examples of insurance products that were considered innovative and experimental only 12 months ago, but which are no longer looked upon by insurance regulators with the sample level of scrutiny or scepticism.