Insurers are piling into the mid net worth market believing there are profitable returns. But can they adapt to the service culture and hold down costs? Michael Faulkner reports

THERE HAVE BEEN more developments in the high net worth (HNW) market in the past 18-months than in all of the other personal lines markets put together. The latest moves have seen Chubb develop an ultra high net worth offering, AIG launch a HNW division and Halifax investigate its own product. s

But it's not the super-rich that have been the focus of the greatest activity. It is the mass affluent, the upper-middle class with well paid jobs, designer lifestyles and expensive home furnishings - in insurance parlance, mid net worth (MNW).

Specialist insurer Hiscox is now focusing heavily on the MNW market. And last month Zurich launched a MNW product, Premier, to bridge the gap between its HNW and standard products.

But the MNW market is a potential minefield for those wishing to tap into its apparent riches. Critics argue that MNW cannot be crystallised into a niche market, as has been done with HNW, and question its potential profitability. They say that revenues generated will be insufficient, given the high costs of doing business, such as sending in a surveyor and improving the claims service standards.

Nevertheless, MNW individuals are seen as potentially lucrative targets by Hiscox and Zurich. The approach of both insurers is to provide the upper-middle classes with an insurance policy that contains a flavour of their HNW offerings. In essence, this amounts to providing a higher quality, more personal service, particularly in response to claims, and wider more flexible cover than is available in standard home insurance policies, such as worldwide all risks cover. But this is where their problems lie, say their critics.

The critics argue that the cost of providing the improved service and the increased claims costs arising from the wide policy wordings raise serious concerns about the profitability of MNW.

Marsh Private Clients general manager Barry O'Neill says that insurers cannot afford to provide MNW customers with the same level of service that they provide for HNW clients if they want to underwrite profitably.

"It is simple economics. Insurers don't have the resources to provide the higher level of service for all the HNW and MNW clients that they want to."

The situation is compounded, he says, by the fact that rates could begin to soften which will reduce insurers' revenues and put further pressure on their profits.

Tony Lumsden-Cook managing director of specialist HNW underwriter Oak Underwriting says that in addition to the higher administration costs of providing an MNW product, underwriters will also face higher claims costs.

He argues that the moral hazard of an MNW client - the propensity to take less care - is higher than that of an HNW client, making them more prone to make claims, both fraudulent and legitimate. In addition, the wide policy wordings do nothing to restrict the number of claims that are covered by the policy.

Higher claims and administration costs would not be a problem if a premium could be charged to reflect these increased costs. But this is not the case, says Lumsden-Cook. Where an HNW premium might cost around £1,500, an MNW premium may only be £500.

"The amount of work an underwriter does for an MNW policy and the cost of doing it are similar to an HNW policy. Couple that with the higher claims ratio, there is potential not to make a lot of profit in MNW."

Both Hiscox and Zurich recognise the cost problem associated with MNW and are channelling their efforts into tackling this issue.

Hiscox is basing its strategy on an internet-based system that it claims will increase the efficiency of delivering the product. It is also piloting other cost-saving measures, such as a low cost valuation service (see box).

And Zurich is utilising the infrastructure and distribution mechanisms of its standard product to provide a cost effective MNW product (see box).

The insurers also reject suggestions that the moral hazard of MNW clients will cause them problems. "A higher moral hazard has not been an issue in our experience to date," says Knight. "Our MNW clients are selected on the basis of the value of their contents rather than the value of their buildings - they buy things and care about their possessions. And fraud is an issue for both HNW and MNW insurers."

It is apparent that Hiscox and Zurich are approaching the MNW market from different angles. The Hiscox approach is to take its HNW product and adapt it to the MNW market using a more streamlined delivery mechanism and some of the ancillary services. In contrast, Zurich has based Premier on its standard policy and is using its mass market delivery systems to achieve cost savings. The question is whether either of these approaches will be successful.

Knight says that both specialist HNW insurers and the composites will find difficulty in adjusting to the MNW market. "The problem for insurers is deciding what type of market MNW is. Is it a mass market product or is it more akin to HNW?"

He says that HNW insurers will find it difficult to break out of the HNW mindset and provide a wider market product such as MNW. But he also says that the composites run the danger of treating MNW as too much like a mass market. "They can't use the call centre mentality," he says.

Zurich has a HNW offering, Zurich Private Clients, so it is not unfamiliar with the needs of wealthy clients.

Parry argues that basing Premier on the standard policy puts it at an advantage over Hiscox and any other specialist HNW insurer. "We will be able to benefit from the economies of scale that HNW specialists will not. And we will avoid the costly infrastructure issues that HNW insurers without a standard policy will have as they have to adapt a bespoke system."

Some, however, question whether it is possible to create a MNW niche. Lumsden-Cook describes MNW as a "marketing ploy" and says that insurers would be better off raising the value limits on their standard products rather than creating an MNW product.

"Technology won't solve the cost and claims issues surrounding MNW."

O'Neill argues the move to MNW as an indication of insurers' "desperation for revenue", and that, by trying to bring too many people from the mass market into the HNW/MNW niches, they will end up losing money.

Chubb personal lines manager for Europe John Sims warns that insurers must sufficiently differentiate their MNW products from the mass-market policies if they hope to make MNW profitable. If they not do this they will fail to persuade customers to pay the higher premiums. The ones at most risk, he says, are those adding "bells and whistles" to standard policies.

Jackie Soppett, principal of HNW broker Country Life Assurance, says that any insurer looking at the MNW market cannot afford to scrimp on its claims service in an effort to control costs.

"Any insurance company has to understand that the claims service must be better than average. When there is a claim we expect the insurer to jump. At the end of the day, I want the right qualities at the right price and I will switch insurers if that is not delivered."

Mid net worth (MNW) as a social class is predicted to grow dramatically. It is also seen as a market that is not properly catered for by insurance policies currently available.

Analyst Datamonitor says the number of MNW individuals is set to almost double by 2005 from its position in 2001. It estimated that in 2001, there were 1.9 million MNW individuals (described as mass affluent, with a net wealth of £150,000 to £500,000), and that by 2005 the number would swell to 3.6 million.

Hiscox defines MNW clients as those with contents and fine art worth more than £50,000. It calculates the market in 2003 to be 790,000 individuals and worth £500m in premium income. In 2005, it estimates the market to have grown to 1.1 million individuals, which, based on 2003 rates, would equate to £696m premium. Hiscox head of private client division Guy Knight describes MNW as an "undervalued" market. "The composite brands and building societies are not designed for it, and policyholders do not realise what it is. It is a huge grey area."

Zurich Financial Services business development director Dave Parry says: "There is an increasing segment of people who are not HNW, but are well off due to increasing incomes and larger inheritances. They have well-furnished homes and can afford more expensive things. We are looking to meet that need and provide appropriate products."

Yes, says Parry. Zurich offers the same commission on MNW as it does on standard and HNW policies. So with the average MNW premium being £1,000 compared to £350 for standard household, the mathematics come out very favourably for brokers, he says.

Parry also says that MNW gives brokers a way to differentiate their personal lines offerings from the direct products. They can offer a product that has wider cover, better claims service, and is not rated in an inflexible standardised way.

Hiscox's strategy is centred on technology, and next year the insurer will launch a new internet-based quotation system for both its HNW and MNW products. The system, currently being piloted, allows brokers to obtain a quotation from any location with internet access, such as a client's premises, and print policy documentation.

Hiscox head of private client division Guy Knight says: "It is a core part of Hiscox's strategy to control costs and speed our growth into the MNW market."

It is opening a business centre in Colchester to avoid the high costs of office accommodation in London. It is also tailoring some of its HNW offerings to meet the lower costs of the MNW market. A further cost-saving measure, due to be launched in the next couple of months, is a contents calculator. This provides clients with an estimate of the value of their contents based on the size of the house, number of rooms and number of people living there.

Zurich's MNW product, Premier, is based on the insurer's standard policy with elements of its HNW contract "blended" in. The policy coverage has been widened to worldwide all risks cover as opposed to the standard named perils, UK only. The policy covers fine art and higher value personal possessions.

The claims service also contains elements of the HNW service, says Zurich Financial Services business development director Dave Parry. "For example, policyholders may be able to use their own supplier to replace goods rather than Zurich's preferred suppliers, and a jewellery replacement service might be available in certain circumstances rather than the simple issue of a cheque."

Parry's strategy to control the costs is to exploit the economies of scale that Zurich can command as a result of its mass market product.

And he says: "It is essential for brokers to drive down costs."