Some people are good at retirement. I am not. It must be inherited, since my Dad started a business after he retired and sold it when he was 95 years old!
Thus I was receptive four years ago, at age 70, when my daughter and our now partner approached me with an interesting business plan. Their research uncovered a big hole in the market, specifically that most of the resources in the property/casualty industry were dedicated to commercial lines, resulting in significant “benign neglect” on the personal side. We decided to create a P/C brokerage focused exclusively on personal lines for the high net worth client.
Any low-margin business is difficult to launch. P/C is particularly challenging, because there are so many brokers already in the field and they all have pre-existing relationships. We were fortunate to successfully carve out a niche. Here are some of our lessons learned that might be helpful to those already in this business, and to those contemplating entry into it.
Protect Your Flank
If you are like most P/C brokers, most of your compensation is derived from commercial policies. Nevertheless, you should be as aggressive and proactive in reviewing your clients’ personal policies as you are when reviewing their business policies. Otherwise, your client relationships — and your reputation — are at risk.
We found dramatic shortcomings, and mispricings, in 92% of the personal policies we reviewed so far, which include homeowners, automobile, watercraft, valuable articles and excess liability. Many of these portfolios are not being reviewed annually. Often, they are put on “automatic pilot” for a number of years. Yet clients’ assets are constantly in flux - as are the insurers who are active in different sectors of the high net worth market. Comprehensive annual reviews of personal coverage should be requisite.
Examples Of Significant Gaps In Coverage
We are amazed how many wealthy people still carry an excess liability policy (also called an umbrella policy) of only $2 million or $5 million, particularly since the cost to increase the coverage to $10 million is usually quite low, often measured in hundreds of dollars, not thousands. Brokers should also price out higher limits, considering the increasing size of verdicts and the fact that wealthy people are targets for liability lawsuits whether they carry sufficient insurance.
Likewise, despite the proliferation of lawsuits around sexual harassment, wrongful termination and age discrimination -- from lawyers representing nannies, housekeepers and gardeners -- brokers often ignore EPLI (Employment Practices Liability Insurance), even though it costs only hundreds of dollars.
Speaking of “excess,” we come across many brokers who ignore “excess” amounts of contents and other structures coverage, which are often set by generic formulae, then inflated each year by 6%. We see expensive collectibles that are not separately insured. Combining scheduled and blanket valuable articles coverage can avoid gaps in protection, as well as provide optimal pricing. In addition, many brokers do not follow up with their clients to update appraisals. And we often see brokers set inappropriately low deductibles, resulting in higher-than-necessary premium outlays.
Proactive Risk Management
Many brokers are diligent in helping their clients implement risk mitigation strategies for their businesses, but not so when it comes to their clients’ personal risks. Brokers often pass the baton on personal portfolios to administrative employees who simply do not possess the technical knowledge, nor the communications skills, to effectively deal with strategic issues.
I asked a number of high net worth insurers, and some of the more sophisticated brokers, what they considered the single biggest deficit in the personal lines segment of this industry. Without exception their response was the lack of proactive risk management. Such strategies should not only be discussed with clients at the inception of the relationship, but the annual reviews should focus on those strategies not yet implemented as well as new technologies emerging in the market.
Examples Of Proactive Strategies
Non-catastrophic water losses (damage from toilet leaks and the like) can produce extreme inconvenience, as well as expense. Such losses account for more than 45% of some insurers’ claims. Advancements in technology can now detect abnormalities and automatically shut off the main water supply. A lot of these technologies are relatively inexpensive, and most insurers will help clients pay for them with credits on their premiums.
I wrote earlier about increasing umbrella coverage to help protect against lawsuits by personal staff. How much better if you can avoid such lawsuits? Top insurers maintain relationships with various investigative services and security consulting firms, and can even offer complimentary background checks to high net worth clients.
Last year was one of the most dreadful in history for catastrophic claims in the U.S. This year is predicted to be even worse! Leading insurers offer complimentary services to help protect families, homes and property against wildfires, hurricanes, floods, winter storms and earthquakes. Many brokers have not informed their clients of, nor enrolled them in, these complimentary programs.
Hurdles To Entering — And Excelling — In This Niche
A major hurdle is cost. Personal lines offer brokers relatively small revenue compared to the relatively high cost for the appropriate talent. The good news is that this is a “sticky” business, with level renewal commissions. Once you acquire clients, they tend to stay with you. Over time the annual renewal stream can create a nice business.
The bad news is the flip side of the “sticky business” coin. Clients are more resistant to change brokers than we had anticipated. Despite the deterioration of portfolios as a result of “benign neglect,” and despite the lack of proactive risk management, we still find some clients hesitant to disrupt their existing broker relationships. Sometimes it is because the current broker has done a good job for the client’s commercial insurance, which outweighs their underperformance on the personal lines. Sometimes the broker is a neighbor, golf buddy or relative. Sometimes the current broker just pleads hardship, and the client feels guilty terminating the relationship.
The combination of high cost for top talent, low margins and client hesitancy to change brokers leads me to two conclusions, applicable to both current brokers who want to “cover their flank” by building their capacity, and to entrepreneurs who are considering entering this business. First, you need to be prepared for a significant upfront investment. Second, you will need much “P&P” – patience and persistence!
Counter-intuitively, we are finding the pandemic environment to be advantageous to our business. Clients are very focused on their “safety nets.” Wealthy people do not feel as wealthy as before, so they are more receptive to exploring ways to save money. And they have time. Pre-COVID-19, it was sometimes like pulling teeth to get prospects to send us their policies. Now the policies show up overnight. And they are willing to Zoom with us as soon as our analyses are ready!
Specialization is part of our complex world. The P/C industry is an ancient one, and in some ways stuck in ancient practices. Commercial insurance and personal lines are very distinct animals. Yes, we have learned some expensive and painful lessons in launching our boutique. But it feels good to add significant value to clients, and to enjoy the deep relationships that ensue.
For me, it is a bonus to build another business, particularly with my daughter. It keeps me young! My Dad — a blessed memory — was right when he told me after I retired the first time: “Sonny Boy ... go get a job!”
Paul Silberberg is chairman and CEO of Concierge Insurance Solutions, Wynnewood, Pa. He may be contacted at [email protected].