Underwriting HNW insurance clients

Health, lifestyle, travel and financial challenges make the process of underwriting insurance for high net worth (HNW) clients more complex than for middle-income earners.

The broker dealing with HNW clients can resolve many challenges with careful communication with both the client and the carrier, according to Terry Zive, president of Toronto-based Zive Financial Inc. and a 33-year veteran of insurance brokerage, and Kris Birchard, CFP, president of Eagle Insurance Agency Ltd. in Ottawa and a 39-year veteran.

Working on health issues starts with filling in all questions on the application, even those that need to be treated later by third parties such as paramedical personnel, says Birchard. That gives the broker a clear picture and prevents exclusion from discussion of some details on the grounds of privacy considerations.

Dealing with health issues also means recognizing the following:

The lion’s share of HNW clients fall in the 55- to 75-year age range, making health issues more common. This typically leads to more invasive and detailed testing, Zive says. To resolve this challenge means encouraging open and candid discussions in order to draw out the most accurate possible application and may mean pre-examinations by doctors.

“You’re far better off to provide the insurance company with as much information as possible on the medical side so that it can make an appropriate assessment,” Zive says.

Another medical challenge can involve a contradiction of sorts. Brokers will encounter clients whose doctors have assured them that although they have a medical ailment, they do not deem it life-threatening. “You’ve got a greater chance of being run over by a bus,” insurers will say, using the classic reassurance.

However, while the doctor deals strictly from medical grounds, the insurer’s underwriter deals from statistical considerations based on mortality tables and may see the ailment as cause for declining or rating the case.

“Both are right,” Birchard says. Solutions to this conflict include discussing the application strategy with the client and warning him or her of a potential decline or rating in order to avoid untimely surprises. The broker’s homework may include working with a consultant, arranged directly or through the Managing General Agent.

Financial challenges

Financial challenges include factoring in the client’s insurance objectives, Birchard says. These may include business succession planning, such as buy-sell arrangements, and estate planning priorities, such as varying provisions necessary to equalize inheritances for offspring and philanthropic strategies.

They may also include calculating the coverage needed for an intricate series of assets—divided up into specific structures—such as one or more holding companies designed to reduce taxes, large capital gains liabilities that would arise on the client’s decease and debt repayments that become due on decease.

Resolving this effectively means calculating the funds necessary to cover all requirements and then demonstrating to the insurer’s underwriter the need for that coverage. That involves working closely with other advisors, especially the client’s accountant, and allowing more time to talk to more individuals during the information-gathering phase, Birchard says.

Even if the client is essentially healthy, his or her pastimes can become a liability, Zive points out. Affluent clients have the means and time for recreational pursuits that can raise red flags among carriers.

The client will be asked whether he or she has operated an aircraft or has been a member of an air crew in the last five years, or whether he or she has engaged in scuba diving, mountain climbing, racing or other seemingly extreme activities within the past two years.

The advisor must ensure careful use of language in applications. In one case, Zive’s client planned a trip to Mount Kilimanjaro. The expedition actually involved hiking more than mountain climbing, a distinction that made the trip less problematic in terms of the client’s insurability.

Travel to troubled areas, whether for business or pleasure, can also complicate matters. Currently, travel to the Middle East, parts of Africa or the Asian subcontinent could pose potential underwriting problems, depending on factors such as specific locale, frequency of travel and duration of the trip. Given the multicultural makeup of Canada, however, trips to these areas are quite common.

“If you’re involved in the oil business and you’re spending a lot of time in Nigeria, that could be very problematic,” Zive says. An executive who travels to Nigeria on a single trip will probably face a decline until returning, but likely face a permanent postponement if travelling there on a regular basis. By comparison, travel to Israel has become less of an issue than it had previously been.

Solutions to HNW challenges do not include shopping a case around to several insurers concurrently, Birchard warns, explaining that the ultimate decision often lies in the hands of the reinsurer’s underwriter. The fact that there are few of these companies means that an application submitted concurrently to two insurers may end up with the same reinsurer.

Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.