Flooding and the Wine Cellar

This year, we have experienced our fair share of unpredictable weather across Canada. We have heard news reports labeling some of these events as “once-in-a-100-year disasters.” However, scientists and urban planners beg to differ.  They warn that extreme weather events are here to stay and will only increase in frequency and intensity due to the effects of climate change.  Losses will be exacerbated by our aging municipal infrastructure.

For high-net-worth individuals and their families, their personal assets may be at significantly greater risk now. Many own their primary and secondary homes in areas providing aesthetic value but with significant exposure to a broad range of natural disasters. High-value homes are not their only personal asset that may be vulnerable. Items within their homes also represent significant value and add to the total exposure at stake—much more than in the average home. These include and are not limited to: fine art collections, jewellery items, expensive automobiles, antiques and fine wine.

Clearly, the limits of financial protection are critically important and in the case of those with considerable wealth, these limits can be substantial. What is also important is the right type of insurance coverage, which should be designed to specifically address the needs of your high-net-worth clients. One’s assets usually dictate the proper financial limits of insurance protection. There can be a tendency when assessing the risk-transfer needs of the wealthy to focus more on the amount of insurance than the actual insurance coverage. When it comes to insurance, it is the coverage that really counts. 

Informed Decisions

Each high-net-worth client is unique regarding their aesthetic tastes, personal passions and work-life structures. Some may collect expensive automobiles, rare pieces of jewellery, Group of Seven paintings or the latest works from the walls of an art gallery. These unique personal assets face risk exposures that are obvious to us within the insurance industry but not necessarily to our clients when they follow their passion and acquire the assets.

High-net-worth clients are used to making informed decisions, which may help to explain their success. They carefully evaluate the growth potential of different investments, purchase fine art and other valuables with a sharp sense for the financial appreciation, and assess business opportunities by discerning both benefits and drawbacks.

Yet when it comes to buying insurance, the same scrutiny is not always applied. We have all wondered why insurance isn’t accorded the same diligence given to other financial decisions and a reason might be that many insurance policies are assumed to simply be required purchases. Evidence of automobile insurance is required by provincial laws and homeowners are obligated to have insurance to secure and maintain a mortgage or a personal loan.

When a person is required to purchase something, less attention is given to the particulars of the purchase as a result of the mandate to buy it. There may not be much thought about it or questions asked. Consequently, insureds don’t make truly informed decisions.

We can argue that automobile and homeowner insurance is becoming a commodity product, requiring little need for discussion beyond the overall cost.  Certainly, the billions of dollars spent to broadcast television commercials that emphasize low price above all else could be one reason to explain why clients reach this erroneous conclusion. The truth is that no two car insurance policies or home insurance policies are the same, nor should they be.

It is especially important to make this differentiation clear to your high-net-worth customers. 

Unique Risks

As your client’s life, career and other personal circumstances change, their insurance coverage must also keep pace. All aspects of insurance tie into the clients’ life cycle. Clients at times are growing their wealth and sometimes divesting it. High-net-worth clients also encounter unique and complex risks that average income earners never encounter.  High-net-worth clients should sit down with their insurance brokers at least once a year to discuss and review the changes in their lives and how this may affect their current coverage.

There is a very real threat of being underinsured, uninsured or insured by an insurance company that is showing signs of distress.  This is also a very real business opportunity for you to maintain your client relationship and ensure your client is correctly covered.

Clients change careers, undertake expensive pursuits like collecting art and undergo major life events that can create new issues. As clients’ circumstances change, take the time to sit down with your high-net-worth clients and ask them the following questions:

• Is their insurance program broad enough to address the widest possible range of personal risks?
• Are the financial limits of the policy high enough to absorb any new exposures?
• Is the insurance company financially solvent, stable and secure?

Many high-net-worth clients have diversified their asset classes. For example, they may have invested heavily in real estate given the financial meltdown in 2008 and opportunities presented by declining real estate values in the United States.  They also continue to invest in fine art and other valuable collections.

The convergence of these investment decisions and increasingly unpredictable weather events might suggest that these investors have carefully considered the nature and extent of their insurance coverage to protect these investments.  However, we all continue to come across situations where this is not the case. 

Your Role

In many cases, clients rely on their insurance advisor to be well-versed in the needs of the high-net-worth marketplace. They expect information regarding the insurance required to transfer physical asset risks, especially in situations involving very expensive properties.

In these situations, it is important that they understand the need to insure their homes at full replacement value and that higher limits for contents will provide added protection.

It is important to note that for high-net-worth individuals, their homes are unique and often have many improvements and added features not commonly found in other homes.  People in higher income brackets need to engage in discussions with insurance advisors and insurance companies that can discern and evaluate their specific risks, and transfer these exposures via appropriate insurance coverage and financial limits.

Asking the right questions will help. Here are a few examples:

• Has your home ever experienced a sewer or drain backup? If so, what steps have been taken to mitigate this from reccurring?
• Does your home have a backflow valve or sump pump alarm system installed?
• If the power goes out for an extended period of time, is there a permanently installed backup power generator?
• Do you have current appraisals on file for your art collection? Do you have a current inventory?
• Are fine art items stored high off the floor, especially away from basement drains?

With today’s unpredictable storms, you have to prepare your client for every potential disaster.  Asking the right questions is the best way to probe and uncover what’s required to protect their personal assets.

It’s all about choice and control—accepting the fact that significant wealth requires more attention toward personal risks and the optimum strategies to manage and mitigate these exposures.  Something as seemingly simple as making a determination between scheduling each piece of fine jewellery separately or buying a blanket policy to insure the entirety at a particular financial limit of protection requires a discussion. These are not commodity products—certainly not for people of means with significant possessions and luxury features in their homes.

Indeed, insurance insists on a continuous dialogue between the insurance broker, the insured and his or her advisors.  Just because certain coverages may be mandatory doesn’t negate the reasons for a thoughtful evaluation of risks and a methodical insurance purchasing process.

Your best alternative is to take control of the situation before the next disaster strikes.

Melanie Wilcox is assistant vice president, Chubb Personal Insurance, Chubb Insurance Company of Canada. The views, information and content expressed herein are those of the author and do not necessarily represent the view of  Chubb Insurance Company of Canada or of any of The Chubb Group of Insurance Companies. The information provided should not be relied on as legal advice or a definitive statement of the law in any jurisdiction. For such advice, you should consult your own legal counsel.

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Copyright 2013 Rogers Publishing Ltd. This article first appeared in the August 2013 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.