While economists may debate whether the global economy is in full recovery, one can see some positive signs in the activities of the wealthiest Americans.
For example, each week comes news of another record-breaking day on the stock market. At the same time, blue-chip fine art prices are in the stratosphere, with Francis Bacon’s triptych of Lucian Freud recently fetching a record $142 million at auction.
Even the housing market has at last rebounded, with prices in some parts of the country 20% to 30% higher than they were just a year ago. Add the increasing value of rare automobiles, jewelry and other collections, and it’s enough to break open the vintage champagne, although that, too, has gone up in price.
The sense of financial panic that gripped us all seems to have let go.
In this period of relative calm, financially speaking, now is an opportune time to review one’s insurance policy coverage terms, conditions and, especially, financial limits. In the same way that investment portfolios are being carefully reviewed, and rebalanced in some cases, insurance products also need the occasional once-over. With less to worry about in the financial markets, why not take a few hours to sit with an insurance agent or broker and discuss the rising exposures to net wealth and their insurance treatment.
Dan Glunt, senior VP of HUB International’s San Francisco office, recently warned that “more than capital market risk can wipe out a client’s balance sheet. An uninsured or underinsured event can do the same damage and more.”
Time for a Check-Up
Such losses are far from uncommon. Dan painted a picture of someone whose invested assets have reached $10 million, thanks to rising equity values and other asset appreciation. “The person is told by his advisor that a $10 million umbrella insurance policy is all he needs to absorb potentially catastrophic financial losses above the limits provided in his underlying car insurance or homeowners insurance,” he explains. “In truth, the limits should be commensurate with the person’s exposure to risk, not his or her invested assets.”
He’s right. The exposure to risk for affluent individuals is much higher than for more average income earners. Time and again, Dan said, “someone of wealth is rear-ended in a minor automobile accident, everyone shakes hands and exchanges their insurance company and other personal contact information. Then the rear-ended person looks up the other driver on Google and realizes he or she is of significant means. Suddenly, their neck hurts.”
Not just wealthy people require higher-limit umbrella or personal excess liability insurance. Dan has several clients who have invested substantially in startup technology companies in the Bay Area. In anticipation of a big payday when these businesses go public in an IPO, the clients are buying expensive homes, automobiles and even fine art.
“They’re picking up Teslas and Ferraris and fine art, even though their companies are completely illiquid for the moment,” Dan said. “To borrow a term from gambling, they’re ‘betting on the come,’ hoping they’ll have what they need when the big liquidity event happens in a couple or three years.”
Such individuals also need very high-limit umbrella policies. Dan explained that “If they’re in a car wreck, the plaintiff will wait to sue until the IPO scores.”
On the bright side, much higher limits of personal excess insurance are now available in the marketplace. This type of coverage also remains a great value. “If you go to a wealthy client and say, ‘By the way, you can buy another $20 million in liability coverage for $1,500 a year,’ do you really think the client will balk? Of course not,” said Dan. “There have been events where claims for bodily injury have topped $40 million. And the numbers aren’t going down.”
Tracking the Rocket
In this period of rising values for so many types of investable assets, high-net-worth individuals need to ensure that their other insurance policies’ limits are in tune with this increased worth. A Picasso that may have been valued at $10 million five years ago could be worth $15 million today. Ditto the 1962 Porsche. While nobody likes to think about financial risk, especially when times are good, this is just the time to ponder.
The reason is because we all have an inclination towards over-confidence when feeling flush. Human behavior is such that we quickly forget or dismiss harsh experiences, preferring to recall the good times.
(For more on art as an investment, see Ed McCarthy's article, To Profit in Art Market, Know Your Niches.)
The same behavior that can lead to faulty investment thinking also can undermine personal risk management. The important thing is to recognize this tendency and not let it slip by unnoticed, or have an insurance broker who diligently pursues a meeting with you to reevaluate your financial exposures.
Dan said the problem is not financial advisors, many of whom clearly understand the impact of rising or falling net worth on one’s decision-making about personal risk. “Most wealth advisors in San Francisco are extremely sophisticated, some of the best I’ve worked with,” he adds. “They’re incredibly sharp.”
But insurance protection is sometimes overlooked amid all the other issues wealthy clients must contend with. “That’s why a specialized insurance broker and insurance company are as important as a top financial advisor,” he said. “You need advice from all of them to build wealth and preserve it.”
In this regard, a close relationship is key. Just like an advisor is more than someone who knows how best to invest money, a broker is someone who knows more than how to buy the least expensive insurance. In both cases, the upsides and downsides need to be carefully weighed.
(See ThinkAdvisor's list of the 20 Most Expensive Paintings Ever Sold.)