High Net Worth - Rates: An overheating market


New entrants are circling the high net worth arena, as it is talked up as an area of potential growth. However, as Ralph Savage reports, others claim it is a car crash waiting to happen.

Since the start of the financial crisis, public faith in markets and their ability to self correct has been shaken to the core. Given this fact, when a dominant market player complains that their sector could be overheating one might expect a chorus of approval.

Comments from Hiscox's head of art and private client, Austyn Tusler, who in November 2009 wrote in Post that the high net worth market was heading towards a 'car crash' unless its insurers moved collectively to increase rates, could be just such a case but the dynamics of this market are far from cautious. It is being talked up in numerous quarters as having significant potential growth and new entrants are circling as we speak.

Mr Tusler attempts to make his position clear: "Since 2003, there is no question that margins have been eroded. There are various headwinds including speculation that more entrants are coming into the market, which in my opinion is already overcapitalised. We are also seeing counter-cyclical behaviour, with some markets pushing things up, while others are choosing a different new business strategy around growth, which is not helping pricing for the sector overall."

Writing on the wall
Another well-established name in the high net worth space, Chubb, claims to have seen the writing on the wall some time earlier. Simon Mobey, personal lines manager for Europe at Chubb, explains. "We saw this at the end of 2006. Rates had been reducing due to new entrants into the market; increased competition and claims costs had been rising due to an increase in domestic fires — Association of British Insurers records state domestic fire claims had reached record levels around this period. In addition there were increased weather and subsidence losses; 2003 and 2006 were poor years for subsidence," he says.

From a plateaux in 2003, rates have reduced to approximately 85% of what they were seven years ago according to Hiscox. Perhaps not as dramatic a fall as that witnessed in general commercial lines but against rising property values until 2008, there is evidence of a discrepancy.

Leaders want to be seen as such and Mr Tusler declares: "We have led from the front. In late 2009 we made our position clear that we needed to change rates from 1 January and we did that. The bottom line is that we aim to be the insurer recognised for best profit in HNW and not necessarily the largest, so it's critical for us and our shareholders to return a profit."

Mr Mobey suggests that Chubb was the first HNW insurer to announce rate increases in 2007. "These were announced before the two major flood events in the summer of 2007 and the Kyrill windstorm losses at the beginning of the year," he says. "The buildings portion of the book was the area that suffered from the increased loss activity. We implemented a number of measures in the summer of 2007 — including increasing buildings rates, re-underwriting those accounts with a high claims frequency, and taking action on brokers with consistently unprofitable accounts. During the 12 months from August 2007 to August 2008, we achieved a 20% increase in buildings rates. This and the re-underwriting exercise hit new business levels but we still managed to achieve retention rates of 90% plus."

Aside from Chubb, few insurers involved are prepared to reveal the extent to which rates have risen on their book so it turns to the brokers to put a figure on what prices are actually doing. Jeremy Edwards, head of VIP client services at Bluefin Insurance Services, says: "We are seeing some premium increases from all suppliers of HNW business, from 7% to 12% dependant on the supplier. This does, however, include the automatic indexation of the buildings and contents sums insured, which again vary between 3% and 5%.

"Some suppliers are going through a process of 'non-invite' where the individual risk has a poor claims experience or the profile of the risk no longer fits their target market."

Desirable estimates
The head of Marsh's private client services, Adrian Saunders, provides estimates at the lower end. "7.5% to 10% is desirable. I would have thought it's been less than that. A blended increase of around 5% is what we've seen in general for our clients."

While Paul Macbeth, managing director of Macbeth Insurance Brokers, points out that the hard sell has begun: "If a client has claimed, you could be looking at 10% to 15% — and while it's not a massive increase as you've seen with commercial liability, in this climate it's still a chunk of money that people don't want to pay out. Even wealthy people like a bargain."

One of the other market leaders, Zurich Private Clients, entered the sector shortly before rates plateaued back in 2002 and Matthew Schofield, head of Zurich Private Clients, also confirms the insurer has been putting through rate increases. His market outlook also appears more optimistic. "For the past 18 months we've been putting rate increases steadily through our book and all the market data we've seen coming from the likes of Datamonitor suggests the HNW market is going to continue to grow over the next three to five years. Companies with a solid platform now are going to face that growth with a lot more confidence.

"Rates have reduced in the HNW market since 2003; it's a property market and it faces the same pressures and challenges around claims inflation that impact any account of this type. Rate increases will always be needed. You've got to bear in mind last year there was no specific event that undermined profitability."

Barry O'Neill, managing director at Home & Legacy, believes the current market dynamics illustrate nothing more than healthy competition: "The competition is driven by the fact this is a fundamentally attractive business. There is a good deal of nice stable risks with good sums insured and good claims history so it is very competitive and lots of insurers and underwriters are looking for a piece of it."

Level of penetration
Datamonitor's research into HNW has been endorsed by a number of commentators and includes headline figures of an estimated current premium income across the sector of £574m and a total potential market value of £1.9bn.

With that level of penetration yet to be exploited it is no wonder new entrants are lining up to join the party. There are a number of rumours circling the market, including a new managing general agency offering from the likes of Iprism — the firm's management was unavailable for comment — and a potential move by Royal Bank of Scotland Insurance, presumably tying into its retail banking network or ultra-high net worth subsidiary Coutts. A spokesperson for RBSI, however, denied the speculation, saying: "I can say that we are not currently launching any new products, but we do continually review our product range and business activity."

RSA on the other hand has answered in the affirmative and Steve Kingshott, the insurer's personal lines broker director, gives detailed plans. RSA currently has around a 5% market share in HNW and ever since its previous white labelling agreement with Chubb ended at the turn of the last decade, Mr Kingshott admits the insurer has lacked a direction or strategy. In late 2009 the company began to address this with the formation of a new unit managing claims, service and underwriting from a single site in Manchester, followed by a reappraisal of its product portfolio.

"We want to significantly grow it," he says. "I don't like to quote premium numbers but if you said we were looking to more than double the business organically over the next three years, that would be true."

At best estimate, using those Datamonitor statistics, RSA, therefore, appears to be targeting approximately £60m in gross premium by 2013. The company is now busily wooing brokers to peddle its wares. "We have a wholesaling agreement with Smith Greenfield, which works perfectly for those smaller brokers with a handful of HNW customers. Beyond that, we are aiming for 150 brokers signed up by the end of 2010."

So, where does RSA emerge in the rating environment? "In March, we revamped the product and did a complete overhaul of rates," adds Mr Kingshott. "We've become more competitive as a result — the comments made by the major player [Hiscox] — surprised me a little because HNW is a very profitable market; combined operating ratios would run at 95% typically. I think because it's an attractive market, some of the new entrants have been pretty keen on pricing and so to hold onto business brokers have had to reduce prices to make sure they kept hold of their clients. Secondly, the market is being attacked at the lower end by direct players and underwriting agencies."

As they do in many other lines of business, the major insurers like RSA, Hiscox and Zurich will seek to corner each segment of the distribution chain with a mixture of both direct and intermediated offerings. However, in an environment in which clients need convincing to accept a rate rise this could conceivably lean more towards broker sales. Mr Tusler admits as much: "All brokers are aware that the market's been increasingly competitive, but where we have tried to push rate rises through they are now sticking. Brokers have recognised that the increased revenues allow them to put more back into their own businesses. From our perspective, brokers will continue to dominate this space. There's one challenge which remains; not all insurance is the same and getting the customers to understand this and improve the education process will be very important."

In answer to the question of whether brokers will form a bigger part of Hiscox's distribution strategy than they have over the last few years, Mr Tusler says: "The opportunity exists for them to increase their share in this space."

Mr O'Neil's opinion is that customers have the upper hand, putting greater pressure on brokers. "Clients have been challenging brokers to show them they are offering the best deal — while insurers would prefer to catch more rate increases I don't think the economic environment would allow that to happen," he says.

"The opposite side of that coin is that clients don't want to sacrifice cover and there is an obvious conflict there but clients are challenging brokers to get the best deal."

Mr Macbeth wonders if current tactics from insurers could be making things harder still. "The biggest challenges for us in addition to renewal premiums going up, is the fact that excesses are on the rise and most insurers are scrapping their 0% interest free direct debit deals. Even if you are talking to a millionaire, when you are coming at them on all three fronts, it makes the discussion a little bit harder for the broker."

Financial planning
"Wealthy people are still looking to insure their property as an overall part of their financial planning," declares Bob Trott, managing director of Oak Underwriting. "It's almost as if they are regarding their insurance broker as a component part of that planning area which includes their accountant and solicitor. They aren't throwing the baby out with the bathwater and we are not seeing lapses in policy driven entirely by the cost of the premium — cover is still an important part of what an insured is seeking."

With mid net worth margins continually being eroded, particularly by direct players, the question on everyone's mind is how long HNW can continue to be seen as providing value. "I would say true HNW policies provide a huge amount of additional benefits. The area of the market that we're willing to keep an eye on is the mass affluent space," adds Mr Saunders. "There are challenges around the cost of manufacture if you are an insurer, cost of services if you are a broker and less differentiation around product."

There is only one area on which you receive universal agreement when discussing HNW — that it is notoriously expensive to service customers who have high expectations. One would hope that any other new entrants considering a plunge into HNW look further than the potential premium income possible and get their houses in order first.

Is the market ripe for new entrants? How will the HNW sector react to more capacity?

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