A High-Net-Worth Tsunami

How to Navigate the Surge in High-Net-Worth Homeowners Insurance Rates

Navigating the complex high-net-worth homeowner insurance market is proving to be more challenging than ever. This sector, usually known for its stability and security, is now grappling with unprecedented volatility. According to David W. Clausen, CEO of Coastal Insurance Solutions, “We are now facing the hardest market in decades. It’s a perfect storm of factors.”

Inflation and Regulatory Challenges: The Ripple Effect on High-Net-Worth Markets

In the world of insurance, it’s not uncommon for premiums to trail inflation by a substantial period, often years. Insurers must produce extensive data to regulatory bodies, demonstrating the justification for rate increases.  By the time new rates are issued, they often reflect the economic conditions of years prior, rather than the reality of the current state.

In additional to inflationary pressure, various other factors have contributed to the increasing levels of market instability. These include soaring costs of reinsurance, skyrocketing construction expenses, and an array of regulatory hurdles.  The tightening grip of regulatory constraints on insurance rate hikes is putting immense pressure on insurance carriers. In addition, the concentration of high-value properties in catastrophic prone areas exacerbates the issue. As reinsurance rates increase without corresponding rate relief for the carriers, the result is fewer choices for coverage and higher premium for the consumer.

Excess and Surplus: The Shift Toward the Non-Admitted Market

With pressure to find coverage options for consumers, brokers have been increasingly forced into the non-admitted, or excess and surplus lines market. Traditional (admitted) high-net-worth policies are bound by state regulations and must receive state approval for rate increases, however in the non-admitted market, carriers are not required to file rates, affording them greater flexibility.

Clausen has seen a major shift, stating, “In past years, we only approached the non-admitted market for high-risk properties with a history of claims, or poorly maintained beachfront homes. Now, we find ourselves placing even the most pristine, claim-free high net worth account in the non-admitted market when admitted carriers are not willing to offer terms.”

A recent strategic move by AIG, one of the largest high-net-worth insurers, exemplifies the mounting challenges in the market. AIG and private equity partner Stone Point Capital have created Private Client Select Insurance Services (PCS), an independent Managing General Agency (MGA) to serve High Net Worth and Ultra High Net Worth markets. In doing so, AIG has moved its high-net-worth home insurance business out of the admitted market.

Tackling Water Damage Risks in High Value Homes: The Crucial Role of Prevention Measures and Precise Policy Language

High value homes are generally built to withstand wind, particularly newer homes that adhere to modern building codes. However, water damage often proves more problematic. Water entering through damaged roofs and windows, or pipe bursts can lead to significant damage. It can foster mold growth on expensive building materials and ruin valuable contents, sometimes even exceeding the value of the home’s structure.

Water damage, the loss leader in the high-net-worth insurance segment, is under intense scrutiny. Pure Insurance reported in 2021 that that more than half of its home insurance losses came from water damage, most of which were incurred during Hurricane Ida and Winter Storm Uri. Unlike in the standard property market where water losses are generally sub-limited, in the high-net-worth space, there is typically no such limit.

High value home insurance policies cover more expensive materials and specialized labor than that of a standard insurance policy, prompting insurers to reassess property valuations more often while also offering incentives for consumer risk participation such as higher deductibles or deductibles written as a percentage of the dwelling coverage.

Another emerging trend sees insurers urging clients to install automatic water shut-off devices. These devices monitor water flow within a property, sound an alarm when a leak is detected, and shut down the water supply to prevent further damage.  Clients that do install an approved device are usually eligible for a discount to offset the cost of the device and installation.

Brokers Bear the Brunt: Commission Cuts and Client Discontent Impact HNW Insurance Advisors

The situation has become difficult for both clients and brokers, who for years navigated a market where a single insurer typically took on the full limit of an account. “Compared to five years ago, when insurers eagerly competed for a new account, we now see more rejections than approvals,” said Coastal CEO David W. Clausen.  The trend has evolved over the past 2 years. Chubb, PURE, Cincinnati, and AIG continue to be leading figures in the high-net-worth insurance market, with Nationwide Private Client and Berkley One following the trail.

The rising rates and property valuations in the high-net-worth insurance market affect more than just homeowners; they are also reverberating through the private client broker community. As insurance carriers grapple with the challenging circumstances, brokers are finding their commissions being squeezed.

However, the diminishing commissions are only part of the brokers’ challenges. As premiums continue to rise in response to increased construction and reinsurance costs, clients’ satisfaction levels are inevitably dropping. The once-stable landscape of the high-net-worth insurance market has grown increasingly tumultuous, with rate increases and property revaluations sparking frustration and concern among policyholders.

Brokers, acting as intermediaries between insurance companies and policyholders, find themselves caught in the crossfire. They are the ones often delivering the unwelcome news of rate hikes and increased property valuations to clients. This news is difficult for many policyholders, who are not accustomed to double-digit rises in premium in consecutive years.

“As a client advisor and advocate, it’s the brokers responsibility to make sure their clients are getting the best value.  After that, effective communication about market dynamics and what to expect moving forward is imperative,” says Clausen.

Seeking Balance in the High-Net-Worth Insurance Market

Carriers, reinsurers, brokers, and industry leaders all agree that the path to equilibrium in the high-net-worth insurance market will be long and difficult. The factors disrupting this market echo those affecting many other competitive markets, but solutions are delayed due from the regulatory nature of the insurance industry.  Several elements need to stabilize before any semblance of balance can emerge.

“We’re in the midst of a perfect storm. Construction costs have soared, inflation continues, reinsurance rates are climbing, and we’re witnessing record weather-related claim payouts…all without a commensurate response in rate,” explains Clausen. He continues, “The high-net-worth insurance sector is robust, but before it can regain its capacity, carriers need appropriate rate adjustments to catch up with the compounding reinsurance and construction expenses that they have already incurred. It’s going to take a few years,” Clausen concludes.

Compare High Net Worth Insurance Package

To combat a tightened market and raising rates, it’s more important than ever to partner with a broker who access to a full suite of carriers suited to your unique needs. The team at Coastal Insurance works with high value homeowners across the country to provide coverage solutions, even in a hard market. Reach out to our experienced advisors to access our exclusive suite of carriers and compare customized quotes. Our team of state licensed insurance advisors will help you compare rates from the finest insurance high net worth insurance companies like Chubb, Pure, Cincinnati, AIG, and National General.

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