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Climate change is transforming the private client insurance landscape. After years of more frequent and severe extreme weather events, underwriters have taken corrective action to offset consistent, significant losses. Insurers are tightening terms, increasing rates, and pulling out of select CAT-prone zones deemed unprofitable and uninsurable.
This is the new normal. High-net-worth (HNW) individuals and their brokers need to be keenly aware of the shifting environment, understanding that insurers are permanently changing how they approach the private client insurance market.
With historic wildfires and hurricanes, property insurance markets in California and Florida are most affected by rising rates, but even those outside of traditional CAT-prone regions are seeing steep increases. This is partially to help carriers offset losses in CAT-prone states, but also because severe weather events are happening more frequently in other regions across the nation — including in Texas, Colorado, New Mexico, and Minnesota.
As we move further into our new reality, there are likely to be fewer carrier options, and policies will be trickier than ever. HNW homeowners must work closely with their broker to explore all possible coverage options.
In response to dramatic increases in premiums, more HNW individuals are choosing to self-insure. Instead of paying high premiums for full coverage, they take on more risk, buying less insurance and investing in strategic, protective risk management measures instead.
For example, those living in wildfire-prone areas—where wildfire deductibles can exceed $1,000,000—are spending on brush clearance, wildfire suppression systems, and other measures to protect the home rather than paying for a policy that would help cover rebuild costs. In the event of a disaster, homeowners will have to pay out of pocket for damages they opted to self-insure.
In an attempt to lower premiums, select homeowners may choose to purchase a homeowners policy, but limit the coverage afforded by reducing or removing other coverage options such as other structures, personal property or loss of use, while maintaining coverage for the main dwelling.
HNW individuals considering self-insurance often ask, “how much should I self-insure?”. The answer depends on how much the homeowner is willing to pay out of pocket, what they’re willing to ignore, and what they intend to do with the money that they’re not putting into premiums.
While the commercial lines insurance market is increasingly utilizing alternative risk sharing options such as captives, the private client market has yet to adopt such methods in any notable capacity. However, the insurance market is constantly evolving.
HNW individuals and their brokerage partners will continue to seek coverage options that meet their needs within the shifting landscape. Brokers and carriers are having discussions about alternative options that may help solve insurability and coverage affordability issues. As a result, private client alternative risk sharing options—including captives —may become more viable and commonplace in the coming years.
In this environment, the role of brokers in the private client space is evolving — they are becoming true advisors to HNW individuals. From this point on, private client insurance brokers need to take on a more consultative role, serving as specialists who understand the changing landscape and are able to advise individuals on how and where their money will be best spent (self-insurance vs. purchasing coverage; investing in defensive measures vs. paying high premiums for property insurance; deductible options, coverage removal options).
Brokers will need to increase the level of education they’re currently offering clients, helping them understand the new underwriter landscape. Many carriers that have left the space are not coming back and insureds must be very cautious about switching to a new entrant—new carriers are attracted to current high rates but may choose to leave once losses accumulate.
In addition, homeowners must work with brokers to understand exclusions and specific definitions within each policy. For example, in recent years, carriers in Florida have added exclusions for named storms. In wildfire-prone areas, insurers may define wildfire differently- insureds must know what applies to their wildfire deductible. Claims servicing becomes more important as policy terms become more complex.
In the new reality of high rates and lower capacity, HNW individuals will have to approach risk in new ways. Policies will only become more complicated and more restrictive. Consultative brokers can proactively offer homeowners coverage solutions that match each individual's needs and appetite for risk.
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