Forget taxes: Insurance scarcity redefines wealth migration paths

For years, price, taxes and climate were the determining factors of wealth migration. Now, insurance availability has become the determining factor of not only where people live, but also where they store their assets.

This is what HUB Private Client is tracking, based on its high-net-worth clients. Robb Lanham, chief sales officer for HUB Private Client, recently explained some of the reasons for this shift and how to build successful client relationships.

In explaining why insurance availability is now influencing where HNW consumers live, Lanham said that few individuals in the U.S. self-insure their properties, so having access to a carrier that is willing to provide coverage is important. Some of the wealthiest individuals in the world buy homes in areas that are highly prone to catastrophic events, and those individuals want to transfer the risk to a third party, he said.

“As the cost of that protection has risen, however, it is just becoming a larger and larger consideration of their overall costs,” he added.

The process normally follows this pattern: 1) Am I able to buy insurance? 2) If so, how much will it cost? 3) Are there ways to reduce the cost? “This information allows people to make an educated buying decision with all the facts available,” Lanham said.

Depending on the level of the clients’ net worth, the money to pay for the insurance might be there, but they still don’t necessarily like to spend it on an intangible product. “Ironically,” Lanham explained, “the most desirable places to live [near the water, secluded from other neighbors, etc.] come with the most expensive insurance.”

Lanham said that insurance availability has been shifting in clients’ favor over the past 18 months. However, with increased availability has come a rise in the cost of that insurance.

“That increased cost has also come with increased options. Between more options and changing costs, clients have been using their broker partners to better understand the landscape and make more informed decisions before they purchase homes in a new geographical area,” he added.

Impact of the new reality

How is this new reality changing the order of operations of real estate purchases and moving insurance from a post-contract decision to something that is evaluated even before an offer is made?

“Buying a home is an emotional purchase,” Lanham explained, “so we like to engage as early as possible – before our clients get to a point of no return on how much they fall in love with it. Because having to back out at that point, once you find out how much insurance will cost, can be very stressful. Ideally, once clients locate a property, they give us the address, and we do research about the positive and negative attributes from a risk-management perspective.”

For example, Lanham said, HUB Private Client advises clients about factors that will improve the insurability of their homes. This allows clients to calculate any additional cost in addition to the purchase price. In some cases, this advice becomes a part of the buying agreement. For example, he said, it would be difficult to find a carrier that is willing to take on the risk for a client who is purchasing a home in Florida with a 15-year-old roof. “In that case,” he said,” we would probably have them negotiate with the seller to give credit for the roof or split the cost.”

The real estate market has evolved with the changing insurance landscape, Lanham pointed out. California, for example, now has an insurance clause built into the contract, which allows a client to evaluate the availability and the potential cost of insuring a new piece of property before they close on the sale.

“While insurance has generally been a piece of the real estate transaction,” he said, “buyers are putting more focus on what the current and long-term implications of this piece mean for the acquisition.”

Questions for HNW buyers  

Lanham said that certain geographical areas have more perils than others and those perils must be addressed up front. “Our clients in Arizona aren’t really concerned with hurricane issues, so we don’t ask them those types of questions,” he said. “Before a purchase is made, I would have a professional inspect the property to make certain that necessary risk-mitigation strategies have been implemented.”

For example, does the property have impact glass, or are there double-strapped roofs? “Those are items that will be necessary to get coverage from a carrier with a good reputation,” he added.

Clients should also partner with their broker to help develop questions specific to the geography of the new purchase. They should:

• Look at the history of the location to understand what events have happened in the past and to understand potential future exposures.
• Ask about the projects the seller has undertaken to make the home more resilient, such as adding impact glass, flood vents in the garage, drought-resistant landscaping and ember-resistant venting.

Why the wealthy are moving toward advisory relationships

In this new environment, many HNW consumers are moving toward advisory relationships. And why is that? Lanham said that insuring and protecting your biggest assets is crucial, and the last thing clients want is to deal with a claim that can’t be covered or to find out that they are at risk because they can’t get the coverage they need.

“If you can’t get certain coverage on items you need, that might influence where you keep your assets and how you live your life. Insurance is a big way to alleviate those anxious feelings, and to get it right, you must be proactive and treat it as something that has multiple options, not a binary transaction,” he said.

Until the last five to 10 years, buying insurance was a standard process, Lanham said. But over the last three to five years, the process has become more sophisticated and is crafted for each purchase. Clients now have a choice to buy insurance that is purpose-built into their goals and desires. With the opportunity to create one-off solutions, clients should factor this piece of the decision at the front end of a new purchase.

Building successful advisory relationships

Creating successful advisory relationships is a multi-step process, Lanham said. It starts with understanding the client’s goals and objectives. For example, the client who wants to get coverage on a home so that he can close on his mortgage is different from the client who says,  “I want to make sure that if something happens to my home, I will have coverage that will respond to repair any damage”.

Trying to understand the client’s risk tolerance is just as important, Lanham added. In some cases, HUB Private Client asks their clients if they would be willing to spend money on better preparing their home and then take a larger deductible on the home because the risk of loss is minimized. “This speaks to the importance of having an open dialogue so that clients can make more educated buying decisions,” he pointed out.

Lanham said that a defined road map of coverage options and limits helps set expectations and removes the unknown.

“We have seen our clients’ net worth increase at tremendous levels over the last few years. This has changed the dynamic of how they can and want to buy insurance. Successful individuals are no longer bound to traditional insurance programs.

“The ever-expanding nature of insurance structures has made it clearer than ever that having a trusted partner who understands the clients’ goals is a must have,” he said.

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Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].