As the global population of HNWIs rises, the need for more bespoke insurance solutions increases. John Schaffer digs deeper into a WealthInsight report that looks at the insurance market for this demanding and complex demographic
High net worth individuals (HNWIs) are one of the most complex client segments to insure, yet integration of insurance into their wealth management strategies is important. A report by WealthInsight, Insuring HNWIs: Life and Non-Life Insurance, looks at the insurance market from a HNWI perspective.
There is a captive market to serve. According to the WealthInsight database, there were 17.7m HNWIs globally in 2015. Data compiled by WealthInsight and Timetric indicates that the global life insurance market in 2015 was estimated at $2.8trn, while the non-life insurance market was estimated at $1.6trn. The market clearly presents significant opportunities.
Demand for insurance among HNWIs commonly covers life insurance to protect their dependents. Strategically, however, life insurance can be used as a tool to facilitate tax and estate planning. In the December 2015/January 2016 edition of PBI, we illustrated the growing trend towards the use of offshore life assurance bonds, acting as tax “wrappers” to enable tax to be deferred and for portfolio gains to be compounded.
The need for non-life insurance services is also on the rise amongst the wealthy. As the number of HNWIs grows, the desire to protect their assets and luxury investments increases. Instability in equity markets and fluctuating global economic growth make alternative assets such as collectibles more attractive and these items require insurance.
The following key insights into the HNW insurance market provide a comprehensive view of the industry:
HNWIs are underinsured
According to Wealthinsight, the key issue for HNWIs in the insurance market is that many remain underinsured, owing to a failure to adjust their insurance coverage as they accumulate wealth or using an insurer that lacks asset valuation knowledge and protection capacity. HNWIs often find themselves overpaying and under protected. This is unsurprising given that broad product variety often makes insurances complex.
Ouliana Smith, head of content at WealthInsight, tells PBI:
“HNWIs who have amassed significant wealth are realising the value of insuring their assets. The adequate insurance cover can play a major role in their wealth, estate, tax and succession planning. The role of the insurance advisor is to help them manage risks by identifying gaps in HNWIs’ protection needs, which can also lead to cost reductions.”
Life insurance plays a significant role in estate planning
Life insurance can limit the exposure of HNWI estates to taxes by utilising vehicles such as the charitable investment trusts, irrevocable life insurance trusts (ILITs), credit shelter trusts or revocable living trusts. For instance, ILITs can be used to keep a life insurance policy outside the ambit of taxable estate. Transferring control and ownership of a policy held within an ILIT enables heirs to keep death benefit cover outside the estate, directly resulting in reduced estate tax. After death, the benefits are available tax-free to beneficiaries.
Proceeds from life insurance can be used to cover the payment of estate taxes on the death of the insured. This strategy can be helpful to HNWIs who have significant proportions of wealth tied up in real estate or closely held business. It enables families to pay estate taxes without liquidating assets, on the death of the insured.
For instance, wealth transfer tax is high in the US. The country’s wealth transfer tax system comprises inheritance tax, gift tax, generation-skipping transfer (GST) tax, and state-level estate tax. Estate taxes are also significant, which can make it difficult for HNWIs to protect estate values.
Private banks are increasingly focussing on insurance products
Private banks that are actively engaged in HNWI wealth management, especially in estate and trust planning, act as a direct link between insurance brokers and HNWI clients.
Since the 2008 financial crisis, investment banks have focused on strengthening insurance’s role within private banking and wealth management. This focus, combined with a growing number of specialised brokers and insurers, has led to a competitive HNW insurance market, especially in places where new HNWIs live and work, such as Hong Kong, Singapore and the UAE.
The role of insurers has evolved from product underwriting to providing marketing support to private banks, and sales support to specialised brokers.
Collectables are challenging to insure but present opportunities
A significant amount of HNWIs hold aspects of their wealth in luxury investments such as jewellery, art or wine collections – many of which require specific expertise, or their value can be difficult to ascertain.
WealthInsight suggests that the art investment market is an area which could yield some of the greatest opportunities in HNWI insurance. With traditional investment assets demonstrating high dependence on global economic conditions, investing in art offers significant growth opportunities for HNWIs. The 10-year art index performance shows the growing significance of art as an investment asset. Between 2003 and 2013, the compound annual return for the World All Art Index was 7%, which was just lower than the performance of the global S&P500 index, at 7.4%.
Being susceptible to theft, damage and lawsuits, the art market is generally one of the most promising avenues for insurance growth. A wide range of insurance products are being developed to protect lenders against the risks linked to leaving art pieces as collateral with the borrower. In 2013, for instance, Axa Art partnered with SulAmerica, the largest independent insurer in Brazil, to access the potential market by combining Axa’s expertise in art and SulAmerica’s large distribution network.
HNWI insurance generates significant levels of innovation
Catering to the complex needs of the HNWIs has resulted in notable innovative products and services.
Insurer AIG introduced wearable collections cover, a specialised insurance product for couture and designer wearable collections for HNWIs, in 2015.
Aon Private Clients (UK) launched an insurance product specifically for UHNWIs in 2014. The product allows UHNWIs to access previously unavailable high levels of life insurance cover by increasing the size and geographical scope of their life insurance limits. It is designed for international UHNWIs who have sizable assets and investments in the UK. Expansion of life insurance limits can be used effectively to mitigate the exposure of UHNWI interests in the UK.
Pure, a policyholder-owned insurer in the US, launched a cyber program for HNWIs in 2015 by partnering with the security firm Concentric Advisors to enable HNWIs to better assess, prevent, detect and respond to cyber threats.