News...
High Net Worth: Holiday Homes
Out
of sight, out of mind
06/11/2008
POST Magazine, View From The Top
Holiday homes, by definition, are often left empty
for long periods leaving them at risk of burglary and susceptible to water
damage. Jane Bernstein reports on the added problem of underinsurance in the
overseas property high net worth sector.
A lack of appropriate levels of cover continues to be a challenge for those
insuring overseas holiday homes. High net worth customers are generally perceived
to be more aware than others of the value of their property and contents and
the need for financial protection. But there remain some fundamental problems
that are leaving HNW customers at risk of underinsurance.
New research from Zurich Private Clients reveals worrying statistics regarding
holiday homes. This claims that one in 10 second homeowners do not have any
home contents insurance and another 11% do not know if their insurance is
adequate. So why is a customer base, which is usually well-informed and aware
of insurance requirements, letting standards slip when it comes to their holiday
homes?
Nick Brabham, head of private clients and special risks at Zurich, points
out that: "People invest in a second home for enjoyment and sometimes
they forget the more mundane things they still have to do." Mr Brabham
adds that this is also evident in risk management attitudes. "People
tend to forget the natural precautions they would take when living in the
UK - such as fitting the right locks or not leaving windows or patio doors
open at night."
While most HNW policyholders will be aware of the need to insure expensive
items, such as art work or jewellery, Justyn Larcombe, divisional director
of private clients and fine art at RK Harrison, emphasises that many are still
underestimating the value of general contents. He explains: "Second homes
tend to be places where items accumulate - whether it's expensive suits, shoes,
or handbags - and are not reviewed regularly. People may not stop to think
how much they are actually worth."
For many the key challenge is to focus the customer's attention on exactly
what they are storing at their overseas homes. For example, RK Harrison says
it has created a customer friendly form for its clients, which aims to facilitate
this. "The form accompanies every renewal - whether new or existing business,"
explains Mr Larcombe. "It divides the property into separate rooms and
encourages customers to devote 15 or 20 minutes to taking note of what they've
got."
Ann Owen, head of the AIG's private client group, firmly believes that risk
appraisals are a vital tool in the insurer's armoury. Ms Owen emphasises that
it is important to ensure holiday homes, as well as those in the UK, receive
a visit so that a proper risk assessment can be carried out. "The visit
also includes a look at risk management measures such as fire protection and
security," she explains, adding: "These places can be unoccupied
for a lot of the year."
HNW experts also point out that homeowners purchasing standard rather than
specialist policies remains a key cause of underinsurance. Indeed, lack of
awareness about the existence of the HNW insurance market is still a challenge
for the industry. Jerry Finch, proposition manager for household at Norwich
Union, highlights the complexity of distribution and says customers can get
confused by price comparison sites. He emphasises the crucial role of the
broker in directing property owners to the right cover. "The market sitting
predominantly in the intermediary channel is very much the right place for
it to be," he adds.
Confusion reigns
Sarah Greenland, associate director of personal insurances for Sterling Insurance,
points to the potential for confusion, particularly around the mid net worth
sector. She says customers need to check the limits of cover and observes,
for example, that there tends to be a more restrictive unoccupancy period
on standard policies.
Those customers who buy insurance from the insurers based in the same country
as their holiday homes, rather than UK providers, may also be at risk of underinsurance.
UK insurers tend to emphasises the inherent pitfalls in going down this route
- such as linguistic barriers and differing legal and tax issues. According
to Ms Greenland, while some insureds do place their business with local providers,
"this is the exception rather than the rule". She concedes that
local insurance can be cheaper but adds that often it will not include certain
standard covers you would expect from a UK policy.
Iain Farries, household underwriting manager at John Holman & Son's, agrees:
"The cover provided by a domestic carrier is generally more restrictive
but cheaper than that provided by a UK insurer." He explains that most
clients tend to consider cover more important than price - although in view
of the current financial climate this may become less so.
Ms Owen believes UK clients prefer to keep all their policies together. "It's
a huge selling point. They don't really want to deal with one insurer in the
UK and another in the US," she asserts, adding: "They tend to want
to deal with one broker and usually one insurer as well so that the insurer
understands their whole portfolio."
Laurent Schonbach, overseas household underwriter for Hiscox, asserts that
clients are "fundamentally" better off insuring second homes in
the UK, emphasising issues such as service standards, regulation and language.
"The failings of local policies are quite a big issue," he says.
As a case in point, he observes: "A lot of people rent out their properties
so the third-party liability cover is quite important in case somebody gets
injured in your house while it's being rented out. Yet, as an example, under
Portuguese policies, you normally get EUR75,000 to EUR100,000 of liability
cover; we give £5m. A provision of EUR75,000 is nowhere near enough
for even a small claim."
Mr Brabham cites subsidence as another useful example: "Subsidence cover
is something the UK market has provided for many years and people have come
to expect it as part of their policy. But if you buy a policy elsewhere in
Europe, you may well find it is not included. It's a question of buyer beware."
Adrian Saunders, head of the private client services team at Marsh, agrees
clear communication is crucial: "It's about making clients aware of what
is available and also what sorts of issues they might face if they choose
to insure locally." So is there enough awareness among home owners that
they can approach UK insurers for their cover or do many still believe that
a property must be insured by a local provider?
"There is some awareness but not enough," comments Mr Schonbach.
He says a common misconception is that it is illegal to buy cover from the
UK for an overseas property. He adds that customers may feel under pressure
to buy locally, particularly where the banks and mortgage lenders appear to
package the insurance with the loan. In fact Hiscox has come across this problem
so often it has drafted a standard letter for customers to forward to the
relevant bodies.
It has also published a 'buyer's guide', which provides the following advice
to customers: "Don't forget to insure your property and make sure you
are aware of the level of cover you are buying. Don't be pressured by the
estate agent or notary to pay for a policy you don't understand. If you're
not familiar with the local language choose an insurer that can provide you
with a policy and claims support in English."
Some UK insurers and brokers are tackling potential competition from domestic
providers by establishing a presence overseas in the form of local offices.
RK Harrison has recently formed links with local estate agents in Italy. The
broker also hopes this initiative will prove to have added benefits. "By
helping with their overseas property, we then get access to other UK covers.
So they come to us with their property in Italy and they potentially might
turn into a customer who has a million pound rebuild property in Ascot,"
explains Mr Larcombe.
Despite the ongoing underinsurance issues, there is consensus that a far greater
problem for HNW properties overseas remains managing the risks of security
and damage. Ms Owen explains that water damage is the main cause of loss -
both in terms of frequency and severity. "With unoccupied properties,
that is always the biggest risk," she observes, "It far outweighs
burglary. Holiday homes are often unoccupied for long periods but it is up
to us to ensure the client has the correct risk management."
She goes on to explain that managing the risk may involve ensuring someone
visits on a daily or weekly basis, and that the property is fitted with water
leak detectors, which turn the water off in the event of a leak. "We
really champion these things and clients are generally receptive because they
understand their properties are exposed," says Ms Owen.
In addressing the whole spectrum of challenges for HNW clients with property
overseas, the general consensus is that communication is key, as is understanding
the client. "You have to look at the individual client and the complexity
of their lifestyle and what they need," says Mr Saunders, adding: "What
is important is having regular dialogue and a consistent relationship."
Mr Brabham emphasises: "We very much try to keep the communication ongoing
so that if we see an increase in risks, we will certainly let the customers
know." The point is echoed by Ms Owen: "You have to keep communication
lines open," she agrees. In fact, this willingness to keep customers
informed was exemplified this summer when AIG Private Clients wrote to its
customers to warn them of gangs operating in the Balearics who were specifically
targeting HNW individuals. "We weren't trying to frighten people. We
just wanted to let them know of the risks and to advise them, for example,
to keep their jewellery locked in the safe at night - or to consider not taking
it at all," explains Ms Owen.
Mr Finch points to the importance of the broker in keeping the customer informed.
He observes: "The client and the broker are more than likely to be on
first name terms. This type of relationship means the standard of dialogue
is much higher than the usual interaction around new business and renewals,
for example."
Insurers and brokers in the HNW sector have spent many years getting the message
across to HNW individuals that they should place their insurance with the
specialists. This is particularly pertinent where overseas holiday homes are
at stake. A certain level of expertise and experience is a prerequisite when
handling high value second homes and without the specialist knowledge, clients
are vulnerable to inadequate risk management and underinsurance.
THE HOTTEST NEW HOLIDAY LOCATIONS
A holiday home in the Mediterranean is still the ultimate dream for most of
us, but times are changing. A recent Hiscox study found that Dubai and Egypt
are the unexpected up and coming hotspots for holiday homes in non-English
speaking countries after traditional Western European favourites such as Spain,
France, Italy and Portugal. Dubai in particular has become increasingly popular
in recent years, with celebrities like David Beckham, Robbie Williams and
Brad Pitt adding their names to the list of holiday home owners. Eastern European
destinations such as Bulgaria were considerably less popular in Hiscox's survey,
failing to make an appearance in the top 10 despite being considerably closer
than Dubai and Egypt and with reportedly good investment potential. Property
in Croatia is still extremely affordable with experts predicting a rise of
200% to 300% in the next few years. Similarly, prices in Poland and Bulgaria
are steadily climbing.
