This article from the global wealth division of Willis examines trends in how insurance plays a part in the wealth management toolkit.

As this publication tries to remind readers regularly, there is a lot more to wealth management than banking. One sector deserving attention is insurance because of how asset protection is core to its nature. Channels such as private placement insurance, for example, are worth considering. In this article, Michael Grob, a senior consultant in the global wealth solutions division of Willis, based in Switzerland, considers some of the issues. (To view an article about Willis and its developments in Asia, see here.) This article is being republished here for the benefit of WBA readers as the issues are as relevant to Asia as they are in many other regions. The views are the author's own but this publication welcomes the contribution and invites readers to respond.

Insurance in the high net worth industry is undergoing a revolution: in structure, in palette of product, and in geographic variance. The major insurance companies have been increasing capacity levels as well as the breadth of client jurisdictions covered. In both response and conjunction, major global brokers have entered the fray and are helping facilitate this. The Willis Group is the foremost of these, having established a global, HNW-dedicated division (global wealth solutions) in 2013, and having acquired 100 per cent of Charles Monat in 2014.

The role of insurance in the HNW industry is highly fragmented. This fragmentation exists along regional, segmental and product lines. Given the sea change in how the HNW industry is geared and how it attempts to service clientele, we stand on the precipice of quite drastic change to the role played by insurance.

A burgeoning of different insurance product lines - away from what has historically been a markedly parochial approach - can already be witnessed. Regulatory pressures are compelling boutique insurance companies proffering a simple product set to consolidate. Financial institutions are reviewing their distribution and referral models for insurance products. There is a marked shift to brokers and away from referring to insurers directly.  Increasing sophistication in local laws and regulations, coupled with increased cross-border activity, is requiring clients to have more sophisticated solutions.

Global insurance brokerage is becoming paramount – as a means to offer the best available solution for clientele; as a means by the referring institution to reduce contingent liability and assure itself of best standards; and to better comfort the large insurance and re-insurance companies as to the correctness and viability of their risk underwriting and distribution channels.

Fragmentation of insurance in the HNW arena

HNW insurance is characterised by enormous fragmentation. In Europe, the market can be divided into three segments – mature private placement life insurance for onshore markets (UK, Italy, France, Sweden etc), a more immature offshore PPLI industry where past advice of questionable value has unfortunately tainted most of the legitimate activities (thus the regulatory crackdown and the use of the disingenuous "wrapper" term), and a burgeoning high death benefit and universal life market.

Asia

The use of PPLI in Asia is largely unheard of. Here the region has witnessed a spectacular period of growth in high death benefit and universal life insurance products. The domestic markets in Latin America, the Middle East and Africa are generally protectionist and limited, meaning that the locally based but globally active high net worth clients’ needs can oftentimes not be met. North America has a rich history in HNW insurance domestically, but is only now awakening to the potential girth of foreign but US-connected high net worth business.

Whereas the domestic PPLI markets are typically characterised by a deep and sophisticated local broker market, the offshore insurance markets have evolved differently. The European offshore centres of Switzerland, the UK, Monaco and Luxembourg have been characterised by boutique insurance companies specialised in cross-border product, selling PPLI/wrapper directly through banks.

Some banks set up their own insurance companies, though there is a clear trend back away from this now. The Asian centres of Hong Kong and Singapore have been characterised by boutique brokerages, broking high death benefit/universal life insurance. The US has been slow to react to demand in Latin America, particularly for US-connected product, but here the boutique broker model has won out, with attention only now shifting to PPLI in addition to ULI.

Dubai has seen attention from both sides – PPLI sold by European insurers directed at expatriates and ULI through boutique brokers.

Sea change in private banking - insurance as both catalyst and solution

This regional sales model and product fragmentation is about to largely disappear. Private banking is undergoing a sea change. Regulatory pressures on industry agents, alterations in the client base, and a focusing of oversight are revolutionising the way business is conducted.

HNW insurance both provides a solution here, but is also part of this structural change. This is clientele-driven (need for more sophisticated structuring), bank-driven (competent and sizeable counter-party), and insurance-driven (credible and highest standard brokerage as distribution channel). The demands of all three segments require a global broker with scale, size and no willingness to cut regulatory corners.

Banks and financial institutions face strict regulatory oversight. They require assurance that products proffered to clients are legitimate components of a solution and investment portfolio, and they cannot themselves cover the myriad of cross-border solicitation and product issues that present themselves.

Certain insurance companies themselves are fearful of their products not always having been distributed to the highest standards. The boutique insurance companies are undergoing a phase of consolidation, some notably belonging to private equity houses. Banks cannot afford to be used as agents to hide funds, lest they and the individual employees face catastrophic consequences.

The contemporary HNW client is not an individual hiding funds “offshore” for the purposes of tax or confidentiality. The contemporary high net worth client is oftentimes a family unit, covering generations, with assets, business units and individuals scattered across multiple jurisdictions. The average client age is also diminishing, this itself an agent for a more dynamic and multi-faceted structuring approach.  

The desire is not to hide funds. Rather, the desire is to hold investments coherently, taking into account differing legal systems, regimes, moral systems (succession laws), taxation systems, and political risks. The focus is on a strategically sensible, cogent global wealth portfolio that safeguards against regional variance and safeguards or generates liquidity. In response the industry is called to proffer solutions and instruments that may be geared together.

The emergence of the global broker dedicated to the HNW segment is no surprise given this background. The emergence serves these demands: (1) the client demand for a cogent, sophisticated, non-parochial set of products and instruments; (2) the industry demand for regulatory-justifiable but commercial referrals, to global, public companies which themselves can be relied upon to remain solvent and to maintain the highest due diligence standards; and (3) the demand from the major insurance and reinsurance companies themselves.

As these increase capacity levels and the list of client jurisdictions which can be underwritten, so too does the insurance firms' need for large, solid brokers. This is to protect against infringement of cross-border regulatory and solicitation rules, and to comfort themselves as to best corporate practices.  

Insurance as a structuring instrument for the HNW client

It is exceedingly rare that insurance alone will provide a complete solution. It requires careful coordination with investment management and with legal and taxation advice. It does, though, often serve as a very powerful weapon to achieve investment growth, and to safeguard family wealth. This has long been the case in pure domestic environments. The contemporary HNW client though crosses multiple such domestic environments, and has a heightened and urgent need for solutions that counteract the negative impact of these multiple cross-border issues.

The mere proffering of a product by a single insurer will rarely meet these needs for the client. It will also heighten liability risk for the referring bank – particularly if a retrocession is taken. There is good reason why domestic insurance markets see large and reputable brokers scouring the market, and working in conjunction with banks and advisors. The HNW, global cross-border market is only more complicated.

The combination of the entry of the truly large global brokers into the fray, an emphasis on highest standards of due diligence and consumer protection, and the broadening of the available product palette is no surprise. To meet client, industry and regulatory needs, it is the only viable solution for the industry.