ELITE ADVISOR BEST PRACTICES
Property and Casualty Insurance for the Affluent
Here’s how to help your affluent clients avoid the 10 most common insurance mistakes.
By Ernest Clark
- Affluent clients have unique property and casualty insurance needs due both to their exposure to risk and to the types of assets they own.
- Direct writers and some independent agents are not well-suited to serve the affluent market's distinct needs.
- Affluent clients need property and casualty coverage that provides appropriate replacement of property and adequate liability coverage in the event of a loss.
- Wealth managers can add significant value to their client relationships by providing property and casualty insurance consultation to their practices.
Addressing a client’s property and casualty insurance needs can be a great way to demonstrate your firm’s expertise and value, but first let’s take a look at common mistakes the affluent make regarding their property and casualty insurance and some commonly misunderstood property and casualty terms.
Property and casualty insurance is provided in the marketplace by direct agents, independent agents and brokers. Many advisors lack an understanding of the affluent client’s property and casualty insurance needs and the limitations of direct writers and independent agents to serve the affluent market.
Direct agents work, write policies and sell products for only one insurance company. Generally, direct agents are licensed only to write policies in one state.
Independent agents sell for multiple companies but represent the insurance company.
Brokers servicing the affluent market represent the client, not the insurance company. They sell multiple insurance company products and are usually licensed in every state.
10 common property and casualty insurance mistakes made by the affluent
Wealth managers can add significant value to their client relationships by providing property and casualty insurance consultations as part of their practice. We find that wealth managers are well-positioned to educate affluent clients so that they do not make the following common property and casualty mistakes.
1. Failing to understand policy coverage terms
When asking the affluent about the amount and type of property and casualty policy coverage they hold, advisors typically hear the refrain “I do not know.” This usually means they have placed too much trust in their property and casualty insurance agents. They appear to have adopted their agents’ cost versus benefit relationship, rather than their own equation between personal wealth protection and cost.
2. Making a decision based solely on price
Making a decision by merely selecting the lowest price can lead to underinsurance. Consider the quality and amount of coverage carefully, not just the price quoted by the insurance provider.
3. Buying reduced coverage
Buying reduced coverage will lower the cost of the insurance, but it may not transfer the appropriate risk from the affluent individual to the insurance company. In addition to buying lower dollar amounts, we also see the affluent buying reduced coverage in areas in which they suffer a high frequency of claims. Common examples of buying reduced coverage include:
- Low liability coverage
- No umbrella coverage
- No or low water backup coverage
- No or low flood coverage for a basement
4. Filing small claims
Insurance companies’ pricing of risk includes the frequency of prior claims, not the severity of the claims. They expect to pay the large, catastrophic claims. The number of small claims such as a $50 car-towing claim or a $100 windshield-repair claim will affect pricing from insurance companies.
5. Choosing a deductible that is too low
Agents working with the affluent understand that the savings from higher deductibles can pay the cost of higher amounts of coverage. Other agents are focused on low deductibles to avoid the client being out of pocket on a claim. The affluent market is willing to pay a higher deductible, but seeks a higher coverage amount to protect its assets. We recommend the following rule of thumb: a five-year payback period (the increase in the deductible is greater than five times the annual premium savings). Insurance companies may waive the deductible if the claim is in excess of $50,000.
6. Assuming all agents have the same capacity
Direct agents, independent agents and brokers have different resources and expertise. Direct agents represent one insurance company, whereas brokers specializing in the affluent may use up to 20 insurance companies to build pricing competition. They may also be able to position a particular risk to an insurance company in a way that secures a lower premium. For example, a broker may be able to classify a home owned on adjoining property as a detached guest house to the client’s estate rather than classifying it as a separate residence.
7. Choosing an agent based on product rather than the consultative process
Some agents sell property and casualty products, while other agents focus on creating property and casualty solutions. Because affluent clients have special needs, they are better served by an agent with a deeper consultative process.
8. Not scheduling collectibles
Affluent families may acquire collections of wine, cars, jewelry, silverware or fine art. The basic policy limits the coverage on these items to a certain dollar amount. The amount of coverage can be increased by adding a rider that lists the collectables by item. The type of coverage may be written to cover disappearance, breakage and loss outside the home.
9. Not carrying flood coverage
Basic property and casualty insurance includes fire coverage, while flood protection is an additional coverage. According to the Federal Emergency Management Agency, “There is a 26 percent chance of flooding during a 30-year mortgage, compared to a 9 percent chance of fire for buildings in high-risk flood areas.”
10. Not purchasing uninsured motorist coverage
For a small cost, uninsured motorist coverage may be added to an excess liability umbrella. This coverage has many benefits, such as allowing policyholders to seek claims on their umbrella policies if individuals in their cars are injured by uninsured motorists.
Commonly misunderstood property and casualty insurance terms
Affluent clients are not typically knowledgeable about common property and casualty insurance terms. The differences in these terms may significantly affect the pricing of policies, and they may also affect how property is replaced in the event of a loss. Wealth managers have a unique opportunity to educate the affluent so they may better understand and compare property and casualty proposals. We find these to be the five most commonly misunderstood terms:
1. Named peril vs. broad form
If a policy is written on a named-peril basis, the policy covers only those causes of loss specifically named in the policy. A broad-form policy covers all causes of loss unless specifically excluded. In most cases, affluent clients should have broad-form coverage.
2. Actual cash value vs. full replacement cost
An actual cash value policy pays for the cost to repair or replace the damaged property at the time of loss, less depreciation. A full replacement-cost policy pays the full cost to replace or repair the damaged property without an adjustment for depreciation. In most cases, affluent clients should have full replacement-cost coverage.
3. Similar or common construction vs. like, kind and quality
Similar or common construction loss settlement clauses exclude custom building materials and workmanship. This kind of clause would allow granite countertops to be replaced with Formica countertops. Like, kind and quality loss settlement clauses include the rebuilding of the damaged building with materials of like, kind and quality, so that granite countertops are replaced with granite.
4. Percentage increase of dwelling replacement vs. full replacement-cost guarantee
Direct writers and some agents do not know the replacement cost of the home. They insure the value the client states under a percentage increase of dwelling replacement policy. This policy pays for replacement limited to the policy dollar amount plus a stated percentage increase of dwelling replacement, regardless of full replacement cost. An agent working with the affluent will have an appraisal service value the home, consider the custom materials and distinct construction features, and insure the home under a full replacement-cost guarantee policy. This policy pays the full replacement cost to replace the home exactly as it was before the loss.
5. Market value vs. agreed value coverage on autos
Agreed value coverage protects the owner against depreciation during the policy period. Without agreed value coverage, the policy pays NADA book value at the time of the loss. Many affluent clients own cars with values in excess of NADA book value, due to low mileage, condition, garaging and a higher level of care. The agreed value is determined at the beginning of the policy year and is reset at the beginning of the next policy year. This coverage also protects the affluent with leased vehicles by setting the annual agreed value to be the remaining lease payments at the beginning of each year.
We’ve examined some of the most common mistakes associated with property and casualty insurance coverage for the affluent. Next month, we’ll address several missteps that seasoned advisors may make and we’ll introduce a consultative process to guide affluent clients through obtaining the most appropriate coverage for their particular situations.