the insurance gap349ab54c3b58919c6638-ff70f51d4942f2bbd11ba0e41cfec577.r51.c… · the insurance...

The Insurance Gap - Why the Wealthy are Underinsured

© Spectrem Group 2019

The Insurance GapWhy the Wealthy are UnderinsuredA Spectrem Group Whitepaper



© 2018 Spectrem Group. All rights reserved.© 2019 Spectrem Group. All rights reserved.

• Spectrem conducts ongoing research with wealthy investors, retirement plan participants and financial advisors.

• 15,000 to 20,000 wealthy households participate in Spectrem’s research each year.

• Our research is conducted online, via focus groups, telephone interviews and one-on-one in-person interviews.

• Client satisfaction studies, customer experience and advisor research is conducted on a custom client basis.

Voice of the Investor

In-depth segmentation provides insights on wealthy investors to enhance providers’ and advisors’ revenue growth.

3

About Us



IntroductionThe relationship between financial advisors and their clients is complex. It’s also confusing to investors. This is becoming increasingly true because many investors are hoping to go to one expert to solve all of their financial needs. Insurance, which is driven by complex laws and regulations, is often not addressed by financial advisors who focus on investments. While many financial advisors may provide access to life insurance and annuities, there are very few investment-focused advisors who provide access to property and casualty or excess liability insurance.

Focused on the investments, attitudes and behaviors of wealthy households, Spectrem recently reviewed the amount of excess liability coverage held by wealthy investors and found that wealthy investors often have a significant gap in excess liability coverage. This may be due to a lack of understanding of this insurance and the inability to link it to their overall net worth. It may be because of the inability or failure of investment-focused advisors to include this as part of an overall financial planning process.

This white paper will discuss the amount of property and casualty insurance, as well as excess liability coverage, held by wealthy households. It will highlight for financial advisors of all types the need to ensure that wealthy households truly understand the risks to their overall financial health for failure to properly insure.

Copyright Notice: This material is for use only by the individual receiving this report. No part of the report may be photocopied, duplicated, displayed or distributed in print or electronic form to other parties without the prior written consent of Spectrem Group.



The Wealth MarketThere are currently more than 10 million households in the U.S. with more than $1 million of net worth (not including the value of their primary residence, “NIPR”). Approximately 1.4 million households have a net worth exceeding $5 million of net worth NIPR and only 173,000 households have a net worth NIPR in excess of $25 million. Hereinafter, these groups will be referred to as Millionaires ($1 million -$5million net worth), Ultra High Net Worth or UHNW ($5 million - $25 million net worth) and $25 Million plus households.

As you can see above, 31.2 million households have a net worth in excess of $100,000 NIPR. These households are often referred to as the Mass Affluent. For purposes of this report, the focus will be on households with $1 million of net worth and above.



The Investor-Advisor RelationshipMore than half of Millionaires use a financial advisor of some type. As wealth level increases, the likelihood of using a financial advisor also increases.

55%

45%

Yes No

Do You Have a Financial Advisor?

Millionaires

70%

30%

Yes No

UHNW

88%

12%

Yes No

$25 Million Plus



The Investor-Advisor RelationshipIt’s interesting to note that Full Service Brokers remain the financial advisor of choice for most wealthy households, although Financial Planners, Independent Investment Advisors (“RIAs”) and Investment Managers have increased in usage in the last decade.

29%

15%

11%

12%

11%

8%

8%

6%

7%

7%

4%

4%

3%

1%

1%

37%

15%

11%

22%

16%

11%

7%

15%

8%

8%

3%

4%

7%

1%

1%

19%

11%

11%

17%

12%

2%

6%

1%

1%

7%

1%

7%

Full Service Broker

Independent Financial Planner

Investment Manager

Accountant

Discount Broker

Independent Investment Advisor (RIA)

Mutual Fund Co. Representative

Attorney

Banker

Insurance Agent

Friend or Family Member who is not a professionaladvisor and not included above

Other Professional Advisor

Private Banker/Bank Trust Officer

Robo Advisor

Family Office Representative

MillionaireUHNW$25 Million Plus

Types of Advisors Used to Manage Assets

It’s important to note that “Insurance agents” are rarely the primary financial advisor for a wealthy household. Generally, these households only purchase property and casualty, along with excess liability, from these agents. Life insurance may be purchased from an “Insurance agent” but is generally purchased through a primary advisor, depending on the advisor type.



Property Casualty InsuranceProperty and casualty insurance, often referred to as “homeowners” insurance, protects your home and the items within your home against threats such as fire or theft. Additionally, it may help protect you if someone is injured in your home or if you cause damage to someone else’s property. Approximately 81% of wealthy investors own property/casualty insurance. Most investors believe that they have insurance that provides for the replacement value of their home as opposed to a policy that is capped at a specific amount. Unfortunately, sometimes homeowners aren’t sure of the type of policy they may have or may be confused by the policy. It’s important that their financial advisor also reviews the policy to make sure that the investor understands their coverage.

81%

19% 77%

13%10%

Replacement value Capped at a specificamount

Don't know

Axis

Title

Property/Casualty CoverageHave Property/Casualty Insurance



Excess Liability InsuranceWhile only a few wealthy investors have experienced damage to their property due to a natural disaster, the benefits of insurance are an important means of wealth protection. Investors who own excess liability insurance are also more likely to have experienced a natural disaster or situations such as burst pipes or flooding that have caused damage to their house or property.

Have Experienced the Following That Has Caused Significant Damage to Your

House or Property

2%

4%

11%

3%

7%

76%

1%

3%

10%

3%

5%

80%

Wildfire

Earthquake

Hurricane

Tornado

Other

None of the above

Have ExcessLiability InsuranceDo Not Have ExcessLiability Insurance

Have Had Any of the Following Cause Damage

to Your House or Property

21%

6%

3%

10%

7%

62%

17%

5%

2%

8%

6%

69%

Burst pipe

Ice dam leaks

Flooding from melting snow or ice

Flooding from severe rainstorms

Other

None of the above



Property Casualty InsuranceBelow you can see a comparison of the property values for investors with more than $1 million of net worth and a comparison of the coverage for those who have capped insurance policies. Keep in mind that the value of the home includes the lot. The value of the home is a lesser value. Capped Property Casualty

Insurance Amount-By Primary Residence Value

8% 14%20% 18%

2%1%

3%3%

46%

2%

12%

50%

18%

11%

55%

23%18%

77%

15%3%

Less than $500K $500K - $ 999K $1MM - $1.9MM 2MM - $4.9MM $5MM - $9.9MM $10MM -$14.9MM

$15MM or more

Less than $500K

$500K - $999K

$1MM - $1.9MM

$2MM - $4.9MM

$5MM - $9.9MM

$10MM - $14.9MM

$15MM or more

Don't Know

100%

Primary Residence Value

Capped Property/Casualty Insurance Value

Note that for those investors with homes in the $2MM-$4.9MM range, more than a third have coverage of less than $2 million. Depending on the value of the lot versus the home, this may be appropriate but should definitely be reviewed. Similarly, for those with homes in the $1 million-$1.9 million range, more than a quarter of investors have homes insured for less than the residence value.

If a client has a capped amount of property insurance, advisors should discuss with their client if the capped amount provides adequate protection. It’s also important for advisors to make sure that clients who claim to have replacement value actually have such a policy.

Capped Property Casualty Insurance Amount

-By Primary Residence Value

8% 14%20% 18%

2%1%

3%3%

46%

2%

12%

50%

18%

11%

55%

23%18%

77%

15%3%


$15MM or more

Less than $500K

$500K - $999K

$1MM - $1.9MM

$2MM - $4.9MM

$5MM - $9.9MM

$10MM - $14.9MM

$15MM or more

Don't Know

100%



Capped Property Casualty Insurance Amount

-By Primary Residence Value

8% 14%20% 18%

2%1%

3%3%

46%

2%

12%

50%

18%

11%

55%

23%18%

77%

15%3%


$15MM or more

Less than $500K

$500K - $999K

$1MM - $1.9MM

$2MM - $4.9MM

$5MM - $9.9MM

$10MM - $14.9MM

$15MM or more

Don't Know

100%





Excess Liability InsuranceExcess liability insurance provides protection when regular policies have exhausted the benefit allowed. This is a method of protecting wealth. Only slightly more than half of investors with a net worth over $1 million own excess liability insurance. A third have purchased this insurance directly from their insurance company (generally the insurance company that has their property insurance) but over half have purchased this protection from an insurance agent. Generally, insurance agents provide the investor with some recommendations and guidance regarding the amount of the policy they should hold. However, financial advisors should also be aware of the protection their clients have.

Have Excess Liability Insurance

54%

35%

11%

Insurance agent Directly frominsurance company

Don't know

Axis

Title

Purchased Excess Liability Coverage From

54%42%

4%

Yes No Don't know

Excess liability insurance is meant to protect against exactly what the name implies, any excess liability that remains after the underlying policies are exhausted. Those underlying policies can be business/employer liability, auto, homeowners, watercraft, and many others. The excess liability protects the net worth of the insured from having their own assets be attacked in the event of a catastrophic loss. Wealthy investors need to be aware of the threat posed by failing to have this type of coverage.



Excess Liability InsuranceWhen asked why they purchased excess liability insurance, wealthy investors cited two primary reasons. The first is for an automobile accident and the second is for an injury that would occur on their property. Those two reasons drive the two-thirds of investors who purchase this type of policy. Less than 10 percent of wealthy investors purchase excess liability insurance for issues with a pool, boat, slander, private staff issue or protection for being a member on a not-for-profit board. All of these issues are important for financial advisors to discuss with their clients. Additionally, those with a pool or boat also need to be encouraged to purchase this protection.

Most Likely to Cause Usage of Excess Liability Coverage

74%

47%

11%

6%

4%

4%

2%

7%

Auto accident

Injury on property

Incident with at home pool

Boat accident

Slander

Member of not-for-profit board

Private staff incident

Other



Excess Liability InsuranceIndividuals who purchase excess liability insurance look at life with a slightly different lens than those who do not. Those who own excess liability insurance are more concerned about health, retirement and financial issues on average than those individuals who have not purchased excess liability insurance. Their real estate holdings have an average value that is significantly higher than those who do not have excess liability insurance.

Concerns

46%

17%

24%

28%

42%

54%

60%

45%

25%

42%

20%

50%

24%

43%

19%

22%

30%

37%

48%

54%

41%

23%

35%

19%

43%

23%

Maintaining my current f inancial position

Losing my job or spouse losing their job

Concern regarding business entity I own

Being able to retire when I want to

The financial situation of my children or grandchildren

My own health

The health of my spouse

Having someone care for me in my old age

Getting adequate help and advice to allow me toreach my financial goals

Family health catastrophe

Having enough money to leave to my posterity

Spending my final years in a care facility

Myself or my spouse being forced into retirementbefore we are ready

Have Excess LiabilityInsurance

Do Not Have ExcessLiability Insurance



Excess Liability InsuranceThe gap in excess liability coverage for wealthy investors is apparent when looking at net worth compared to the level of excess liability insurance held. Two-thirds of investors with a net worth NIPR of $3 million to $4.9 million have excess liability insurance coverage of $1 million-$2 million. For those at the upper end of the scale, this creates an exposure that isn’t covered for a specific amount.

Two-thirds of investors with a net worth of $15 million-$25 million have excess liability coverage of $5 million or less. That gap in coverage levels could result in a catastrophic loss. Over half of investors with a net worth of between $5 million and $7.49 million have excess liability coverage of $2 million or less.

Excess Liability Insurance Value- By Net Worth

76%

19%

3%

1%

0%

0%

66%

25%

6%

2%

1%

1%

57%

37%

5%

1%

0%

1%

43%

36%

16%

4%

1%

0%

45%

35%

12%

6%

2%

0%

29%

38%

16%

11%

4%

1%

$1MM - $1.9MM

$2MM - $4.9MM

$5MM - $9.9MM

$10MM - $14.9MM

$15MM - $19.9MM

$20MM or more

$1MM - $2.9MM $3MM - $4.9MM

$5MM - $7.49MM $7.5MM - $9.9MM

$10MM - $14.9MM $15MM - $25MM

Investors need to be educated on how to determine the appropriate levels of excess liability coverage. That can be challenging for the nearly 40 percent of investors who purchased their coverage directly from an insurance company without using an individual agent. Property and Casualty providers need to work with these wealthy clients to ensure that the level of coverage that is being purchased will adequately protect them. The financial advisor working with the household on their investments also needs to be aware of the amount of coverage held by the investor.



SummaryClients know that the amount of coverage is a critical consideration when purchasing insurance, as it is the second-most important component considered when purchasing insurance. This is only exceeded by the financial strength and stability of the insurance company. How suitable the products are is the third most critical component of the decision-making process. It is critical for financial advisors of all types, from insurance agents to financial planners, to make sure that wealthy households are properly insured.

Investors know that having the right amount of protection and the correct types of policies is essential in protecting their net worth from unforeseen events. Yet sometimes they choose to underinsure (“That will never happen to me”, “it costs too much”) or they simply don’t understand how insurance policies work (“too much paperwork” , “it is all babble to me”). It is up to the companies and agents to review the levels of excess liability coverage being purchased to ensure it provides what the client is looking for. It is also critical for the primary financial advisor of a wealthy investor to review the coverage held by their client.

24 Id., pg. 4425 Id., pg 1826 Spectrem, Attracting Millennial and GenX Investors, 2016, pg. 44



The Insurance GapWhy the Wealthy are Underinsured

A Spectrem Group Whitepaper

Randy Wostratzky Director, Wealth Markets and Retirement Research & Consulting,

Business Development and Marketing Phone: 224-544-5353

Email: [email protected]

For more information visit our website!www.spectrem.com

the insurance gap349ab54c3b58919c6638-ff70f51d4942f2bbd11ba0e41cfec577.r51.c… · the insurance...

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