By Kenneth J. St. Onge | September 6, 2010
Serving High Income Clientele
For insurance agents, there is a lesson to be learned from Hulk Hogan â€“ particularly about the pitfalls of selling coverage to wealthy clients.
The well-known, ex-professional wrestler turned reality TV star is suing his insurance broker, Wells Fargo, over what he alleges is a failure on the brokerâ€™s part to properly minimize his liability. That alleged failure was a costly one for Hogan, whose proper name is Terry Bollea, three years ago when his teenaged son, Nick, crashed his car while street racing â€“ leaving his passenger, John Graziano, with traumatic brain injury.
The suit left Hoganâ€™s personal fortune of $30 million exposed, his lawyerâ€™s argue in court filings when â€“ after exhausting the $250,000 injury limit on Hoganâ€™s auto insurance policy â€“ Graziano and the Hogan family reached an out-of-court settlement to pay for what is expected to be lifelong medical care for Graziano.
In the Wells Fargo suit â€“ one of several filed in connection to the accident â€“ Hoganâ€™s lawyers argue that Wells Fargo failed to upgrade his coverage, left him under-insured and forced him to use own personal fortune to settle a suit with Grazianoâ€™s estate.
That suit is now pending in a federal court in Florida.
In some ways, the Hogan suit is more than just a cautionary tale or anecdote: It illustrates the unique dangers facing insurance agents and brokers who pursue high net worth clientele â€“ a segment of the personal lines market that is both highly lucrative, and highly specialized.
Itâ€™s a market that many in the insurance business are increasingly targeting to latch on to profitable business in a perennially softened market.
Due to a lengthy economic downturn that touched the highest strata of earners, even the wealthiest insurancebuyers are reconsidering their personal insurance programs. Itâ€™s a trend thatâ€™s making high net worth insurance a competitive market niche.
Eyes on Liability
Given their wealth and assets, high-net worth clients have different needs when it comes to their personal
insurance â€“ meaning the standard-issue policies donâ€™t really fit their needs. This creates an opportunity for agents to customize coverage. But the dangers â€“ such as those found in the Hogan case â€“ are of considerable consequence.
â€œTheyâ€™re over-insuring against minor threats, while under-insuring against major ones,â€ declares insurance ACE Private Risk Services in a recently released white paper and survey about the insuring affluent customers. â€œThe problem is especially acute when an affluent consumer insures homes and automobiles with mass-market policies designed for the average consumer â€“ as most do.â€
Among the pitfalls cited by ACE: liability lawsuits, destruction of high-priced homes and damage to or loss of jewelry, fine art and other valuable collections. There are also coverage and cost-related issues, such as too-low deductibles, discounts for consolidation of policies, and undervaluing contents on their personal property.
Insurance agents from around the country said that liability â€“ and in particular, umbrellas and other programs that can insulate the wealthy from lawsuits â€“ are arguably the most important, most-looked at features.
Among the high net worth set, insurance solutions tend to be customized. â€œIt depends on what the individual is really doing from an economic standpoint,â€ said John Kelly, president and CEO of New York-based Frenkel & Co., which has a sizable practice catering to high net worth clients. â€œWe have some clients that are involved in the talent industry. They are a significantly higher exposure. Then we have the people that clearly have large financial holdings. They also are members of nonprofits and directors of major corporations. Their exposures from a directors and officers standpoint and an individual standpoint are key. That needs to be covered not only by the corporation or the nonprofit organization that theyâ€™re involved in, but also the indemnifications that are given to them, and then their personal insurance.â€
Itâ€™s a common problem in insuring high net worth clients: A need for high liability limits â€“ $5 million to $10 million and up â€“ and types of risks for which standard market carriers have little appetite. According to Kelly, the economic downturn has had high net worth clients â€œbecoming more keen to understand their coverage in those areas.â€
Itâ€™s a challenge that Naples, Fla.-based insurance agent Mike Horn calls one of â€œobvious liability.â€ The wealthy, he said, â€œcan be targeted based on the kind of house they live (in), the kind of car they drive, and other tell-tale signs of wealth.â€ (Like cable TV star Hulk Hogan, for instance.) â€œIn my opinion, their biggest risk is the liability exposure,â€ Horn said.
Along those same lines, if a client has servants or employees, workersâ€™ compensation is a concern. Be they nannies, gardeners or drivers many times there is a need for workersâ€™ compensation coverage in high net worth households.
Of course, property coverage can also be an issue, particularly because of the kinds of property that high net worth individuals own â€“ such as second and third homes in exotic or coastal locations, for instance, or other items not commonly insured through traditional personal lines policies.
â€œThey might have different types of adult toys, if you will,â€ said Brian Bettini, of Southern California-based agency Allen, Bettini & Carter, an agency that focuses on high net worth clients. â€œYou can have boats. You can have very expensive cars, for example. Or you have secondary residences that are in maybe slightly more difficult locations to insure. Itâ€™s not uncommon for a high value client. If theyâ€™re living in the Bay Area, maybe they have a house here and they have a house in Tahoe or maybe Palm Springs or something of that nature.â€
There can also be personal property such as valuable artwork or expensive jewelry that would most likely be scheduled. In some cases, agents use risk management tools and plans to help choose insurance coverage for high net worth clients.
â€œWe have a risk profile that we complete for individuals,â€ said Rebecca Korach Woan, of Chartwell Insurance Services. An example: â€œFor clients with sizeable collections of artwork, we will go out and do a risk survey on site to assess the vulnerability of the collection. Weâ€™ll recommend disaster planning as appropriate and maintain close communication with advisers, both financial and legal.â€
Deductibles, too, are often much higher on property owned by high net worth clients, since wealthy clients find it cheaper in many cases to self-insure by paying for smaller exposures rather than filing claims.
Perhaps more than any other sales niche, insurance for high net worth clients is a business of referrals.
â€œIt is really word of mouth,â€ said Joe Gendelman, of Milwaukee-based Bruce Gendelman Insurance Services, an agency that specializes in high net worth clients. Gendelman said the agency doesnâ€™t advertise or cold call.
Agents said finding high net worth clients is a waiting game.
â€œItâ€™s very different,â€ said Frenkel & Co.â€™s Kelly. â€œYou have to be grounded and be branded with the high net worth community.â€
When the wealthy talk about their insurance needs, they have very specific things they seek, Kelly said,particularly discretion. â€œHigh net worth clients need to know how agents go about handling their knowledge of their asset base.â€
There are other service aspects, too, that stand out.
â€œFrom a claims standpoint whatâ€™s your claim process, how would you go about assisting them from the beginning to the end of the claim,â€ Kelly said. â€œFrom the risk management side, theyâ€™re very interested in what you can provide them with and give them new ideas as to how they can protect their assets.â€
Agents also need â€œa significant critical mass with the insurers that are key in this areaâ€ â€“ primarily Chubb, Chartis, Firemanâ€™s Fund and ACE â€“ because high net worth clients want to know that an agent can navigate the high net worth community and possesses â€œthe intellectual capital to handle and assist them with any and all questions that they may have,â€ Kelly said.
Ease is also a concern.
â€œTypically, it is ease of administrationâ€ that high net worth clients seek, said Gendelman. â€œThey want one agent and the same renewal date for all their personal insurance. Itâ€™s really the ease of doing business.â€ Convenience often trumps costs. Clients have demanding lives and want to have one agent in charge of all their needs â€“ and to be able to write one check to that agent to know that all their insurance needs are met.
In all, said Chartwellâ€™s Korach Woan, â€œwhat distinguishes brokers, or certainly us, we believe you must have both an understanding and an appreciation of the needs of the high net worth individual and the follow up that is necessary to satisfy this client base.â€
Reporting by Insurance Journal Editors Timothy F. Kirn, Stephanie K. Jones, Patricia-Anne Tom and Andrea Ortega-Wells.