Market update: why premiums and nonrenewals are rising
The insurance industry is in the midst of a correction due to the historic number of catastrophic events (hurricanes, wildfires, floods, etc.) and the corresponding claims from the past several years. The results of the current market have been quite disheartening for some clients: high rate hikes at best, non-renewals at worst. Even if you have not yet been affected, we want to educate you on the current market situation. So that you can better understand what is happening, why, and what you can do to mitigate the impact on your program, we convened a group of senior leaders to answer frequently asked questions.
However, before we go into the details, let’s take a step back and talk about insurance more broadly.
Essentially, the market only functions because risks are pooled, and thus transferable. To cover one person’s home (or automobile or boat, etc.), carriers need to receive premiums from all their clients in an amount sufficient to offset their total exposure.
The downside: Your rates are not just affected by your personal claim experience, but also by all those in the pool with you. Insurance can’t work if rates are only raised for people who’ve made claims. So even if you have a clean record with no claims, you could experience a renewal where your rates go up because you are in an area that overall has had large losses.
The upside: While the ‘pooling’ of risk means you will be impacted by other people’s losses, it also means that in the event you have a major loss, you will likely be paid an amount that greatly supersedes the amount you’ve paid in premium over time. Say you pay an annual premium of $16,000 over the course of 20 years, then in year 21 lose a house that is insured for $4 million due to a fire, you have still come out ahead.
Alright, now to the FAQs...
Why is the market in this current state?
While it can feel like a personal affront, especially when you are on the other end of a non-renewal, it’s anything but. Rather, there are two main instigators to the market. First and foremost, extreme weather events are on the rise in many parts of the country, as evidenced by the wildfires in the West. In fact, they have doubled in the past 17 years. The most obvious stricken areas are California and the Gulf Coast, but the Northeast and Midwest have not been immune, by any stretch.
At the same time, major cities nationwide are also struggling with the effects of an increasingly crumbling infrastructure. Aging pipes in urban buildings have led to more costly water damage claims. For example, one of our carriers have paid nearly double this decade in water losses, and the number one reason is plumbing failures.
Also, the rising cost of repair and reconstruction is also compounding already troublesome circumstances. Demand for the skilled labor necessary to rebuild now outpaces the supply, and replacing today’s high-end appliances and amenities is its own pricey proposition. In 2000, a top-of-the-line Sub-Zero refrigerator cost $7,375 (adjusted for inflation); and today it’s more than $17,000. Not to mention suitable temporary living situations are also quite expensive.
Ok, so how will this affect my premiums?
Where once we considered anything more than 10% on the high side, we now regularly see jumps of 20%-25% a year. We encourage you to contact your Account Executive regarding your specific program and how your premiums may or may not be affected.
Does the new reality impact me if I don't live in an at-risk area?
It could. Keep in mind, while you may live in an area less prone to catastrophic events, that doesn’t mean you are exempt from severe losses. Hailstorms in Wyoming, tornadoes in Texas and severe winter storms along the East, have all been areas with damaging losses over the past few years. Therefore, no area is truly immune to loss.
Even if one area within a region is not at risk of catastrophic loss, there may still be a raise in rates within that state. For example, premiums may go up on a townhouse in San Francisco because of wildfires in L.A. County. The reality is, the impact of these trends is nationwide. So, it is important to speak with your insurance broker as some markets are increasing their thresholds in certain areas and others are not writing any new business.
Is there any relief in sight?
It depends largely on science. If major weather incidents and the ensuing catastrophic losses continue or increase, carriers will then need to continue to adjust their exposure and rates accordingly. For those individuals on the West Coast, the state of California responded to the
What can I do to help myself?
To keep your premiums as low as possible, and your coverage intact, make your account look as appealing as possible to underwriters. That means sustaining small losses, utilizing higher deductibles and keeping your insurance available for catastrophic, worst-case events. This will also provide premium savings. For example, data suggests that properties with one water loss will likely realize another one soon—particularly in apartment buildings. If you put in a claim for a small water loss, you may be a riskier proposition to carriers. Therefore, taking care of small claims, could work in your favor when your policy comes up for renewal.
We also encourage you to comply with all the recommendations suggested by your insurance carrier and to pay your premiums on time. Brokers can no longer guarantee reinstatement if you cancel for non-pay.
Also, take the time to contact your broker and review all of your coverages. When acquiring new items or properties make sure you reach out to them to ensure you have the proper protection. If you still haven’t told them that you purchased a new car for your son months ago or you started investing in a wine collection – you should place a quick call and confirm coverage has been issued accordingly.
Lastly, if you live in areas with serious weather concerns and have experienced a non-renewal or a drastic rate increase, ask your broker about secondary markets. They’re not ideal, and coverage terms may not be as broad as your existing policy, but they’re better than nothing.
Anything else I should know right now?
If you plan to follow our advice and only put in claims for major losses, select policies with high deductibles. You can also get breaks on premiums by complying with any safety measures prescribed by your carrier. Even if you don’t think you need a leak detector or backup generator, putting one in anyway will maximize the credits. Hey, whatever it takes!
Always know we are here to guide you through this correction and any other insurance concerns as well. ...
A guide to protecting your family office from a cyber breach
In the messy aftermath of the massive Equifax breach, which exposed the private information of nearly half of all American adults, many concerned family offices have inquired about what to do next to protect data security. And for good reason: criminals target and obtain wealthy individuals' information in order to open high-limit credit cards, borrow directly from banks or hack into the target’s email for nefarious purposes.
That’s why we see an even greater need for family offices to systemically review their management of sensitive information and ensure that standard protections are in place. Because there is no one-size-fits-all fix—even with a cyber liability insurance policy in place—we believe peace of mind is best accomplished through a multi-pronged approach that incorporates education, risk mitigation and a judicious mix of coverage.
Step one is to ensure that all family office staff and family members are trained to avoid clicking on so-called phishing emails (a.k.a. scams) that infect computers with malware or link to a page designed to steal private data. While this sounds simple, even the savviest fall prey. After all, phishing emails were responsible for the hacks at the Democratic National Convention and Sony Pictures, and a Gmail scam was so sophisticated that it fooled techies. Accordingly, Crystal Private Client suggests hiring a reputable, white glove security firm to conduct a full review of both the family office staffs’ and family members’ devices and accounts, including social media networks. The best firms also provide in-depth training to any individuals who repeatedly engage with potentially harmful emails, and run educational sessions for the entire family. They’ll even make it fun for the know-it-all 8-14-year-olds, who are almost certainly not as careful as they should be.
Meanwhile, family offices should update their own security processes. Regularly scheduled software reviews by an IT expert are, of course, a minimum requirement. Equally important, and sometimes overlooked, is instituting a process for the movement of cash. Currently, the best practices include creating a pre-established list of employees authorized to transfer funds or initiate payments, and implementing client identification methods. A callback confirmation provision, which is akin to the protocol typically employed by financial institutions, is one example. We’ve seen many cyber criminals use a family member’s hacked email account to send a fraudulent money wire request, and without a verification process that transaction is likely to go through.
Formalizing protocol for voice and electronic transfer requests is essential, as insurance companies will require detailed explanations of these actions before issuing fidelity bonds and newer social engineering fraud coverage—both crucial. The fidelity bonds cover losses—property or financial—incurred through fraud, forgery and employee dishonesty. Social engineering fraud coverage is now considered a standard element in any private insurance policy and is specifically oriented to mass or targeted email hacking schemes. Although you might expect otherwise, these thefts are usually not covered by cyber policies.
Family offices should still consider obtaining a cyber liability policy because it provides customized assistance should a hacker steal data or hold it hostage for ransom. A breach coach, usually a law or forensic accounting firm, move quickly to a) identify what happened; b) assess the impact to the server; c) restore or repair the network; and d) do what is required to make future attacks unlikely. Without such a policy, family office officials are left to find their own experts and answers, which is not easily done nor an ideal circumstance during a crisis.
Unfortunately, those policies won’t protect the office, or family members, should the breach happen to a third party like Equifax. These companies generally have their own cyber policies and are prepared to notify those impacted, but these services were significantly overtaxed and thus unresponsive after the Equifax news. Because high-wealth (and especially high-profile) individuals often need to take immediate action, family offices should also consider obtaining identify theft coverage for each family member. Personal Insurance carriers offer a range of coverage as a supplement to homeowner’s insurance policies. Coverage features range from data restoration, cyber extortion, cyber bullying to crisis management and reputation restoration with a variety of coverage limits available. This specialty coverage can also include credit monitoring and credit freezing if—or more likely when—the next major breach happens. ...
Obtaining life insurance in the age of big data
In the digital age, the drive to protect our loved ones remains as strong as ever, but the process is once again in transition. Insurance companies aren’t far off from making underwriting decisions from the computer algorithms and vast databases that have transformed our modern lives. For anyone who wants new coverage—or to ensure that their existing policies are in order—the potential impact of the new technologies is worth understanding.
Here is what you can expect when obtaining life insurance in the 21st century.
The process is starting to get faster
Long before Silicon Valley’s algorithms and big data, insurance companies were concocting formulas to estimate life expectancy. They would deliver a price for a policy after inputting factors like age, weight, family history, medical condition and propensity to engage in risky behaviors. About five years ago, a select few insurance companies realized that their models were good enough to make some underwriting decisions without a medical exam. The firms offered speedy underwriting programs that required only an application (often online), a telephone interview, and permission for the company to gather electronic information about your health and lifestyle. These programs have become so popular today that many carriers are making them available to more customers with higher policy limits up to a $1M. In the future, parts of the process may be even quicker with talks of insurance carriers analyzing your selfie to determine whether you qualify for the best rates!
You might want to hold off on that ancestry test
While thus far scientists have only identified a few genes that indicate a heightened risk of certain medical conditions, it’s ultimately the information stored in our DNA that can best predict longevity. While none of the insurance companies in the United States force people to take genetic tests, the carrier can consider those results for underwriting IF they are part of your medical record. (Canada and several European countries have banned this practice, and a few states are considering similar rules.) For now, you should be careful about voluntarily submitting to DNA testing through services like 23 and Me. At the very least make sure they will destroy the sample. Or even better, wait until after you’ve bought your insurance policy before checking out whether grandpa’s tales of Viking ancestry are true.
Carriers know more about your life
Buying life insurance has always involved a privacy tradeoff: you allow an insurance company to ask your doctor questions and in exchange, you get to protect your family if there is an unexpected loss. Now the fine print on the insurance application also authorizes the underwriter to examine our digital personas. They are not only looking for signs of health and lifestyle risks, but they also want to double check that the information you put on your applications is accurate and complete.
These are the main types of data life insurance companies peruse, and how they might impact your application:
Past Insurance Applications. Every time you apply for life insurance, some of that information is sent to an MIB (Medical Information Bureau) data clearinghouse. So if you get turned down for insurance from one company, don’t think you can “forget” to mention your heart transplant when you apply to a different carrier—they will have access to other companies’ notes.
Prescription Drug Records. Underwriters can typically see all the drugs you’ve taken and the doctors that prescribed them. The files don’t show what conditions the drugs were prescribed for, so this data often raises more questions than answers. Some of those questions can be quite pointed, however, especially, if the company sees you’ve been treated by doctors for conditions you left off of your application.
Social Networks and the Rest of the Internet. Your insurance company knows how to use Google too. And there are a bunch of startups that scan publicly available information on social networks for evidence of risky behavior - so if you’ve posted pictures of yourself skydiving, your life insurance rates could be sky high as well. Don’t forget that behavior and lifestyle are strong indicators of life expectancy!
State Motor Vehicle Records. For people under 45, car accidents are the leading cause of death, so insurers look for any record of driving while intoxicated, reckless driving, or, increasingly, distracted driving. They even look for speeding tickets!
Help is near
While the application process is utilizing big data and adapting to new technologies, the value of life insurance remains constant and irreplaceable. The good news is that data will not stop most applicants from obtaining a good policy. However, it can add complexity. We are available to help navigate this quickly-evolving digital landscape as it pertains to your life insurance coverage today and in the future. ...