As what appears to be another economically uncertain year dawns, it's time for affluent Americans to take stock of their financial assets and potential liabilities. As always, an annual review of personal insurance coverage is critical to preserving wealth.
Moreover, an annual review may not have actually taken place for several years. As such, it is in the best interest of your affluent clients to commit to one of the least painful of all New Year's resolutions--to sit with their risk advisor and assess their insurance coverage.
Getting your clients to fully embrace the annual review process can present a challenge. At best, some clients (and their agents) may consider the annual review a perfunctory chore. At worst, they may dismiss it entirely. In this scenario, insurance renewal policies are issued automatically without any thought to the current risks faced by your client.
Other clients may be forced to endure the hard-selling agent or broker who pushes new coverage options without considering the client's individual risk exposures at all. There are further dangers--the agent who impulsively cuts coverage (possibly at the behest of clients), leaving them without the minimum necessary protection in case of disaster. While everyone wants to reduce their annual premium, doing so should not be to the detriment of the client's interests.
Each of these scenarios represents a direct threat to wealth preservation. How does a wealth manager respond? Clients should be reminded that a comprehensive annual review deserves serious consideration. If necessary, a wealth manager can partner with the independent agent or broker that specializes in the needs of high-net-worth consumers to ensure that the review is not simply a matter of signing papers. If the current agent is unresponsive to the client's individual risk profile or is unqualified to assess their exposures or unwilling to communicate the dangers of being underinsured, it may be best for the wealth manager to recommend another insurance professional.
An annual review formulates a plan that serves to further preserve the lifestyle that may have taken your client years to attain. Consider that the insurance agent or broker is, in some ways, like a personal physician--he or she must conduct a thorough annual check-up on patients to assess their emerging financial health risks.
The annual review must not be merely a formality. It must never be a thinly veiled marketing opportunity, nor should agents willy-nilly cut coverage without considering the full impact of their actions. A better agent or broker may, however, find ways to safely reduce premium. For example, if a client has, during the course of the year, auctioned off a large inventory of antique furniture, their policy premium should reflect the reduced exposure. An annual review is the perfect time to identify such possible reductions in premium.
Another very real concern in insuring personal property is underinsurance. Any annual review needs to address this threat to wealth preservation. For example, consider the impact that fluctuating commodity prices can have on the costs associated with rebuilding a multimillion-dollar home that has been lost to fire or other disaster. As always, the case for replacement-cost coverage is demonstrable--just because the real estate market has dropped 30% doesn't mean construction costs have dropped as well.
Fine jewelry faces a similar scenario. Jewelry made of precious metals or stones that are rising in value is at risk of being underinsured. Conversely, if the market for a collector car or piece of art is slumping, purchasing a policy with agreed-value terms may be in order. This would help to ensure that a client's initial investment could be safely recouped in the event of a total loss.
Finally, in times of economic tumult, the wealthy may be more likely to face employment lawsuits from domestic staff. Rising fear and resentment of the wealthy can be fertile ground for charges of unfair labor practices and wrongful termination.
In light of the foregoing, an agent or broker can make compelling arguments as to why a client's insurance portfolio must annually be repositioned to address changing needs or shifting market conditions. Much like updating asset allocation in their investment portfolio, the annual review process is a necessary discipline.
Andrew McElwee is EVP of Chubb & Son and COO of Chubb Personal Insurance.