High net worth clients and homeowners insurance: The art of insuring to value

In an evolving insurance landscape, risk managers face an uphill battle when discussing rising premiums with high net worth clients. The fear of initiating these conversations is not unfounded, as many clients, frustrated by escalating premiums, have considered reducing their coverage amounts. However, such a move could expose them to significant risks.

Recognizing the importance of maintaining adequate coverage and insuring assets to their true value, the onus falls on insurance brokers to educate their clients effectively.

“Brokers are often worried about how their clients are going to react,” said Skip Coan, senior vice president with e2Value. “No one enjoys dealing with a client who is frustrated about rising insurance premiums, but in many cases, once clients understand the reasons behind the value, the conversations become less defensive and more seamless.”

“Insurance professionals who work with high-net-worth clients already have a level of trust established, so talking to a homeowner, helping them understand why they need to increase their coverage and what’s driving the premium, they tend to be more understanding,” said Bryant Kolle, president of the Private Risk Management Association Board of Trustees. “Educating the client makes all the difference.”

PRMA is a nonprofit organization focused on educating risk managers in the high net worth space. Helping its members navigate tough conversations with clients instills confidence, a trait necessary to engage in these critical discussions.

Addressing high net worth client concerns: The importance of insuring to value

One of the prominent issues risk managers encounter is the dissatisfaction expressed by high-net-worth clients about the soaring costs of insurance premiums. What often eludes these clients is the significant difference between what they paid for their home and the amount insurance companies require them to insure it.

An example is a client who recently bought a $2 million house, yet their insurance provider insists on coverage based on a $3 million value. The pivotal consideration extends beyond the initial price the client invested in acquiring the property. Instead, the primary focus should lie on ensuring the adequacy of the coverage to replace the damaged assets with comparable materials and quality. The costs associated with construction and materials tend to escalate annually, particularly in the aftermath of natural disasters.

Educating high net worth clients: Beyond the surface of premiums

An important aspect of this discussion is the need for brokers to understand the unique features of the client's homes and possessions. This involves asking adequate questions to gain more insight into their preferences for reconstructing their home in the event of a loss. What aspects of the home make it truly unique to the client? What’s most important to them regarding the reconstruction or replacement of the house? What importance does preserving the family’s residence and lifestyle hold following a loss?

Through the revelation of these responses from clients, brokers can explain the rationale behind the seemingly higher premiums. The shift transforms the conversation from being centered on price to one that hinges on the intrinsic value of properly protecting their home.

Mitigating risks: The perils of underinsurance

Inadequate coverage for high-value properties is a precarious gamble that can expose clients to substantial financial losses should a disaster strike. To avoid this, discussing the concept of “insuring to value” during the initial data gathering meeting proves instrumental in preventing unforeseen circumstances and alleviating sticker shock with rising premiums later on.

Risk managers must master the art of explaining why accurate replacement costs for a client’s property are vital to the risk management program and how the replacement cost will be calculated and used. Although variations exist among companies, a typical assessment considers factors such as the property’s square footage, floor-specific living areas, attached decks, built-in garages, porches and the expense of replacing unique interior features. Additionally, it encompasses “soft costs” such as architectural fees and demolition expenditures.

Customizing coverage: Tailoring the safety net

No two high net worth clients are alike. Each possesses a unique assortment of assets and needs that demand a personalized approach to coverage. This realization lies at the crux of building trust with clients. By showcasing the commitment to customizing coverage according to clients’ needs, brokers pave the way for more productive and meaningful discussions.

In addition to effectively identifying the client’s priorities for safeguarding and sustaining their lifestyles, brokers must remind clients about their responsibility to consistently take measures to protect their residence against potential losses. These recommendations encompass various actions depending on the property, such as implementing a leak detection system to preempt water-related claims, installing lightning rod suppressors, clearing vegetation from property surroundings and modernizing the home’s roofing.

Identifying any significant home improvements or renovations that might result in the property being undervalued is essential. The focus should be on directing clients toward prudent decisions and safeguarding their wealth and well-being. Education equips brokers and risk managers with the tools and confidence needed to traverse this delicate terrain and steer high net worth clients toward comprehensive protection.

Diane Delaney is the executive director of PRMA. She may be contacted at [email protected].

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