Despite a tough economy, the high net worth sector is resilient and primed for future prosperity. A large proportion may be under-insured, however, which is providing plenty of scope for savvy insurers to promote their specialised policies

The high net worth market has long been recognised as one of the most untapped sectors in the insurance industry.

Over the past two decades, the number of high net worth individuals in the UK has soared. Datamonitor figures show this sector grew by more than 10% to almost one million people in 2004 alone. The financial meltdown has taken its toll, however. According to Capgemini and Merrill Lynch’s ‘2009 World Wealth Report’, the number of high net worth individuals in the UK has fallen by more than a quarter over the past year.

But despite these gloomy figures, long-term forecasts show this sector remains ripe for future growth. The Hiscox ‘Wealth Review 2008’ reveals that 1.5% of the UK’s population, or 430,000 people, are classified as millionaires, and this is set to more than double by 2020.

Cash in hand

Cunningham Lindsey’s head of property, Colin Ganson, believes that while the high net worth sector has taken a hit, it remains largely insulated from the economic downturn. He points out that many top-end clients have retained their wealth in terms of insurable assets. “If you look at the typical Sunday Times Rich List, some people have lost a lot of money. Nobody is immune from the recession,” he says. “But a lot of it is paper-based money. They still remain high net worth clients.”

And while liquid assets have declined in value, many high net worth individuals have begun to transfer their wealth into tangible assets such as art, gold bullion, jewellery, antiques and collectable cars. According to the Datamonitor report, ‘Wealth Management in the UK 2008’, such alternative investments are expected to rise from current levels of 19% to 21% by 2010.

Datamonitor financial services senior analyst Susan Ellis believes this is pushing up valuations in the insurance sector. “As wealthy investors see the increased attraction of collectable assets to safeguard their wealth, this is having a knock-on effect in the insurance industry,” she says.

Shifting tiers

The market is split roughly into three categories; the mid net worth (or mass affluent), high net worth and ultra-high net worth. Key players include specialist insurers Chubb, Hiscox, Sterling, and Oak Underwriting, which tailor products exclusively for this market, and household insurers AIG, RSA, Brit Insurance, Aviva, HSBC and Zurich. Chubb and Hiscox remain dominant in the top range of the high and ultra-high net worth sectors.

While there are different views in the insurance industry about what classifies worth in each category, Chubb offers three levels of entry to its personal insurance policies, reflecting these tiers of insurable wealth. The Initial contract caters for the mid net worth individual with a property worth at least £200,000 and household contents valued at £75,000 and above. In this category, an average premium ranges from £1,500 to £2,000.

The high net worth Masterpiece product is available for those with properties worth £500,000 or more with a minimum of £150,000 worth of contents, and has a premium spend of up to £10,000.

This year the insurer defied the dire financial forecasts to launch prestige policy Signature to cater for ultra-high net worth individuals with multimillion-pound properties and contents. “Some people said we were stupid to launch our Signature product during the worst recession in living memory. But we have actually seen double-digit growth,” Chubb’s personal lines manager, Simon Mobey, says.

He concedes, however, that there have been shifts in the lower tranches of the market as high and mid-range clients have begun to scout for better deals. HSBC Insurance Brokers’ executive director of estates and private client, Andrew Jobson, agrees customers are starting to scrutinise their policies more closely. “People are shopping around more and looking at their high net worth policy, wondering whether they need such wide cover.”

As a result, many high net worth individuals are downgrading to mid-range policies, while the mid net worth group have started to migrate to the standard direct market. This has led to a downward pressure on pricing in a bid to retain custom. “Business levels are actually up compared to this time last year,” Mobey says, “but this has been due to revised pricing that has seen us become a lot more competitive.”

Up for grabs

While these shifting categories pose a problem for market players, the lack of product penetration in large areas of the market remains the major barrier to expansion. Lorega’s chief executive John Sims, formerly personal lines manager at Chubb, believes the industry serves as little as 30% of the total market. “The vast majority still reside with standard products with standard insurers on a direct basis, and they are in the wrong markets.”

The Hiscox Wealth Review shows that 2.5 million homes, or one in ten, can be classified as wealthy, with an average household income exceeding £88,000. In addition, almost half of professional workers earn at least double the national average salary. The Review highlights that nine out of ten, however, do not consider themselves as wealthy. It follows that a considerable percentage of high net worth households run the risk of being under-insured.

Hiscox’s head of art and private clients, Austyn Tusler, believes that targeting this under-served sector is the best way to offset the challenges confronting market players. “The opportunity for insurers is in finding new customers who are not currently buying specialist high net worth policies,” he says.

In theory, brokers remain well placed to target this market, with Datamonitor figures showing that they control 85% of the levels of distribution. Greater FSA regulation has increased costs for brokers and made heavy investment in the mid net worth market difficult, however. “The hoops brokers have to go through to get people on the books is a lot different to ten years ago,” Sims says. This pressure has intensified as insurers have started toying with alternative marketing and distribution strategies. Meanwhile, market leader Hiscox has expanded into direct distribution channels.

Stiff competition

The broad consensus is that more insurers are likely to develop direct platforms for mid and some high net worth packages, because the risks in this sector do not require the same level of underwriting as other high and ultra-high net worth products. “The market is not as complicated as some insurers and brokers have made out,” Sims adds. “I think it is only a matter of time before it gets more commoditised.”

But key players are confident that brokers will remain a vital presence in this market. Despite Hiscox’s foray into direct distribution, Tusler says brokers remain a core part of the insurer’s strategy.

HSBC’s Jobson warns, however, that these extra challenges mean that brokers need to remain on top of their game when attracting and retaining clients. “Brokers who give advice are critical. But they need to know the market in order to advise which insurer is most appropriate for each client. They need to be actively involved in negotiation and risk management,” he says. “Clients are very keen to receive the right advice. But some brokers don’t give that advice.”

Overall, the industry remains confident that there is potential for growth, and the onus is on insurers and brokers to increase product penetration in an under-served market. It seems that, while the recession has rocked this sector, the groundwork for a thriving niche remains very much in place. IT

The typical high net worth individual

The average UK high net worth person is a 52 year-old male, with a significant number falling into the 51–65 age band, and came into wealth through inheritance. He invests heavily in alternative investments, with 19% of his portfolio allocated to these products, and is expected to increase his exposure to this category to 21% in the next two years.

He favours investment in Europe and North America, and is also very interested in emerging market equities and funds. He is particularly focused on tax optimisation and his financing needs, and has a markedly lower knowledge of financial products than his European counterparts.

Face-to-face relationship management is very important to him, and he is reliant on recommendations from someone he knows in choosing wealth managers.