The views expressed in this article are not necessarily those of the FIA. The article below was supplied by the 2018 FIA Partner, Elite Risk Acceptances.
Why wealthy people should be insured like a business entity
The latest AfriAsia Bank South Africa Wealth Report reveals that South Africa is home to 43 600 high-net-worth individuals (HNWIs) – those who hold net assets of at least US$1 million – a figure that experienced a significant annual increase of 8%. While still relatively small in number, these HNWIs currently hold over 40% of total private wealth in the country.
These individuals face unique insurance and personal risk management challenges – particularly in the high-crime climate we find in South Africa. As a result, HNWIs gravitate towards different insurance products; products that are better suited to their families’ more complicated risk management needs and relatively less obvious needs for cover against low-value risk lexposures.
We find, then, that the real risk for these HNWIs might be in over insuring against minor threats, while underinsuring against the major ones unique to their situation. In this sense, it stands to reason that the risks faced by individuals in the high-net-worth space are not too dissimilar to those faced by a well-established business.
Underinsurance, for example, increases exponentially in the high-net-worth space due to the very high sums insured we see on buildings and contents, and these personal lines policies can be even higher in premium than the average commercial account.
However, the key benefit of tailor-made insurance – whether it be for HNWIs or high-net-worth businesses – is largely centred on streamlining the relationship between needs and cover.
We believe the high-net-worth insurance market in South Africa offers real growth opportunities for brokers who can provide the high level of expertise and personal service demanded by this segment. But in order to do that effectively, it is absolutely vital that the key risks faced by HNWIs are properly understood. Other risks that HNWIs share with businesses are:
- Higher security risks
Security at home and during travel, including the risks of political turmoil and global conflict, remain a top concern for both HNWIs and businesses. For wealthy families with complex risk exposures, especially considering the environment of violent crime in South Africa, it is highly recommended that a security expert be consulted with – not dissimilar to security consultants contracted by businesses.
These experts typically provide a full risk assessment that would minimise any security breach, such as home intrusions, a cyber-breach or any other issue that could put the family at risk.
- Sensitivity around depreciation of the rand
A uniquely South African risk often underestimated by both HNWI and businesses is the impact of the depreciation of the rand on the replacement value of their high value assets. More specifically, we are referring to imported motor vehicles such as exotic cars and other collectable items such as jewellery, Persian carpets and art.
We therefore warn our policyholders to continuously monitor the value of their movable assets where there is a potential currency risk and to adjust the values upwards where the cost of replacing these items have appreciated.
- Employee-related risks
Like a business, HNWIs hire a number of employees to help run their households. Employees bring about risk exposures related to inside job armed robberies and threat of force to the insured families.
Policyholders should adopt the same stringent hiring practices that a business adopts when hiring as well as terminating employees. Practices should include background checks, on boarding protocols, regular performance reviews and the like.
- Ownership of assets
Lastly, HNWIs tend to own assets in names of private entities such as trusts, companies, and closed corporations. It is crucial that brokers work closely with their clients to understand the ownership structures of all assets – as they would for insuring a business with multiple entities – to ensure that insurance coverage is properly coordinated and adequate risk protection is being provided.
Given the high values at risk, their complexity, and the need for a bespoke service, the wealth insurance segment is far removed from the high-volume personal lines market. This growing market segment, in our opinion, requires specialist underwriters and brokers to effectively service their complex needs.
Taking into account the clear trend of continued growth of HNWIs in the local market, high levels of underinsurance and relatively low penetration of specialist underwriters, the high-net-worth insurance market in South Africa still clearly has plenty of room to grow.