Against the backdrop of ongoing challenges and continued concerns in the economy over the last few years since the onset of the 2008 financial crisis, the market for providing insurance offerings to clients in the high net worth segment around the region has been making great strides, albeit quietly and unobtrusively. Mr Martin Wong of Jardine Lloyd Thompson, Singapore says this market is already in the US$5 billion premium league and believes that it will only grow bigger.
In the high net worth (HNW) industry where confidentiality and discretion ranks very high, most if not all of the top named bulge bracket wealth management firms have unassumingly but very successfully, developed robust platforms to engage their clients on discussions in wealth planning that incorporates the unique characteristics and benefits of insurance solutions.
Whilst private client advisers in developed HNW markets such as the US have already been applying life insurance concepts in their client engagements since the 1990s, it was only in the early 2000s that this was introduced to clients in Asia.
I recall that the markets back then experienced some success, though on a somewhat limited scale. Institutional buy-in was challenging, and client receptiveness was very stiff, to say the least.
This was probably because there was unfamiliarity to the terrain. There was also no shortage of solutions to present to clients with particularly when the markets in general were on an uptrend.
Perhaps also to a certain extent, there was some discomfort in fusing the notions of insurance into the lexicon of the private banking domain.
A combination of events
Notwithstanding the often quoted expression that insurance has to be sold and not bought, there were contributory developments that provided an opportunity for underwriters and insurance intermediaries to demonstrate their origination and delivery capabilities to the meet the needs of the HNW segment.
Economic depolarisation
With the collapse of the US financial markets followed by concerns in the Eurozone, one of the key observations was the fact that private client advisers needed to help their clients prepare for the unexpected.
What was just purely academic about markets being correlated has all been thrown out of the window as clients experienced first hand how a downturn in one part of the world can and will have a major impact on their businesses and portfolios.
A contraction of 50% in a client’s business simply means that in the unexpected demise of their clients, their net asset value which was intended to be eventually distributed would have been significantly compromised.
Catastrophic exposures
If economic risk was not complicated enough, a whole host of tragic events have highlighted the absolute need to plan for contingencies, especially when all else goes south.
Japan’s triple whammy of earthquake, tsunami, and then nuclear implosion resulted in the tragic loss of lives. In addition, the financial consequences on businesses and the lost investments, all of which wiped away millions if not billions of dollars of wealth, have not been insignificant - wealth, which took years to build up.
The recent floods in Thailand and Australia, and earthquakes in China, India, and Indonesia, all beckon private client advisers to implement measures to preserve their clients’ wealth even if it is suddenly taken away from them.
Market volatility
The fact that economic cycles have become compressed requires a more enlightened approach to risk management. If there is a severe and prolonged market correction that impacts their investments, short-term hedging instruments will only be able to provide muted support.
Client advisers now require a long-term liquidity solution so that there will be absolute peace of mind that whilst waiting for the markets to recover, any unexpected demise of their clients will not jeopardise their clients’ wealth accumulation plans.
Mortality risk
What was once upon a time a taboo subject has now become an open item that is discussed with HNW clients.
Given that a significant number of HNW clients are also successful entrepreneurs, the second and third generation family members involved in the home grown business generally have tertiary level education and are well travelled. Therefore, client advisers can now address the labyrinth of what-if’s in a family business or family office, and advocate the multi-dimensional applications of life insurance in a wealth distribution context.
The dynamic nature of risk is then the obvious conclusion when we synthesise these factors together. Risk management is therefore not static but multi-dimensional. And in managing these uncertainties, life insurance has developed to become an entrenched wealth planning tool to safeguard, preserve, and ultimately transfer the assets of clients. The key to driving scalability in client adoption therefore lies in the effort of educating clients on the practical applications of this solution.
Market scale and opportunity
In a similar fashion in which the private banking industry is fragmented, the Privatbancassurance market is also low in visibility in terms of gauging the magnitude of the business. Some consulting firms have made efforts in this regard providing useful research into business models, product offerings, success factors, distributions systems…etc.
Going by annual booked premiums, the general consensus provides estimates ranging from US$3 billion to $4 billion. In my interaction with the markets, I am inclined to conclude that the market is bigger and should be in $5 billion league with a 25% compound annual growth rate (CAGR). Two reasons drive me to believe so.
Firstly, the number of insurance companies operating in this segment has expanded significantly. There are now over 10 insurance companies providing underwriting services for HNW clients, with a variety of solutions. This augurs very well for the private banking industry that usually adopts an open architecture model. And with the partnership of a broking intermediary, private client advisers are able to provide their clients with 1) access to best-in-class pricing, 2) second or third underwriting opinions, and 3) capacity for diversification for super jumbo policies of $50 million in face amounts, and beyond, for syndicated placements. Therefore, unless a client is medically boarded out, there is no reason why he or she will not be able to successfully obtain the coverage needed.
Secondly, the individual ticket sizes of premiums booked have increased over the last five years. Where the market would have then considered a US$1 million single premium as a big case, the deal sizes are on average today between $3 million to $5 million, with an increasing number of underwriting mandates for $10 million and above. This, together with the intensification by private banks to give equal priority to the wealth preservation aspect of a client’s portfolio (and not just focussing on wealth accumulation), has increased participation and penetration rates amongst private client advisers in appropriating and espousing this solution, as a key risk optimising strategy, when they screen their client book.
Placing our clients at the centre
The heart and soul of this proposition lies in the mathematics that the intrinsic merit of life insurance provides liquidity fulfilment in a way that quite frankly, cannot be replicated by any other financial product.
I have been told before that the super rich ie the Ultra High Networth (UHNW) clients do not need insurance. At a recent client event, I had the honour of evaluating this concept with the chairman of a listed company. He told me that this application was very useful to him given an exposure in his own personal balance sheet and that he would like to schedule a medical exam to set in motion an underwriting offer for himself. Therefore I am not entirely convinced that UHNW clients have no need for life insurance.
Our clients are successful because they are smart, and if there is a solution that can meet their needs, I am convinced that they will be able to attribute value to the plan. Just like the HNW segment, adoption by UHNW clients will eventually find its trajectory and grow.
Conclusion
By continually keeping the needs of our clients at the forefront, the HNW insurance segment is well positioned to expand further. One only needs to review the multitude of reports and analyses on the amount of wealth being created in China, the growth of the Non-Resident Indian (NRI) markets, and the yet to be reached clients in Indonesia, Singapore, Malaysia and around the region.
Clearly, by providing an integrated platform that combines sophisticated life insurance with trust, asset management and financing capabilities, the ability to deliver quality life insurance programmes to the HNW and UHNW segment will help clients eliminate what may perhaps be the biggest risk of all, which is the risk of not having any life insurance.
Mr Martin Wong is General Manager, Private Client Services South East Asia at Jardine Lloyd Thompson, Singapore.