Maintaining an upscale lifestyle in an era of new risks
Major economic shifts, social changes and unpredictable weather events have taken their toll on society in countless ways. High-net-worth (HNW) individuals and their families will feel the impact in 2022.
In 2022, HNW individuals and families will need to look at risk management and insurance in a whole new light: It’s no longer a commodity but an important part of protecting their lifestyle and future.
Risk management will mean assessing vulnerabilities in light of societal changes
With the past two years as a backdrop, risk management and insurance for 2022 will be anything but simple. It will entail assessing vulnerabilities regarding changes such as permanent work-from-home arrangements, increased exposure to extreme weather events, cybercrime and various pandemic-related ripple effects.
Here’s what to expect for HNW individuals and their families in 2022:
Catastrophic weather like hurricanes, wildfires and floods may get worse, increasing risk for affluent individuals and families
HNW families must assess their exposure and minimize the threat from catastrophes
1. The impact of catastrophes on insurance will reverberate
Catastrophic claims continue to plague the insurance industry, which means HNW families can expect premiums to rise and the availability of insurance will shrink, no matter where they reside, own a second home or dock a boat.
The brutal Western wildfires and increased flooding risk across Canada have made it prohibitively expensive or impossible to insure a high-priced home in an area with higher risk of flooding or wildfires.
The statistics on disasters are not comforting. Just take flooding, perhaps the most frequent natural hazard in Canada: Roughly one million buildings in Canada are at risk of flooding, with 650,000 structures at risk of river flooding and the remainder at risk of local flash floods.1 Yet less than a quarter (23%) of homes in the highest-risk areas have flood insurance.2 What’s more, the costs of repairs after a flood are rising, with experts predicting they will triple by 2030.3
In the face of increased catastrophes, HNW families must assess their exposure and act to minimize the threat if possible, first by deciding where to live and then ensuring that they are properly protected.
It is also critical to have a clear disaster plan in place that all members of your family are aware of and will follow, such as having a predetermined meet-up place in the event of a disaster. Talking with your broker is the first step to minimizing these risks.
1 Canadian Institute for Climate Choices, “Under Water: The Costs for Climate Change for Canada's Infrastructure,” September 2021.
2 Partners for Action, University of Waterloo, “Canadian Voices on Flood Risk 2020,” September 2020.
3 Partners for Action, University of Waterloo, “Canadian Voices on Flood Risk 2020,” September 2020.
Owners of multi-million-dollar homes must choose prudence over speed and convenience for insurance
2. Property insurance will be more expensive and more necessary
Society places a high value on speed and self-service. Consumers are accustomed to obtaining a homeowner’s insurance policy quickly and, in most cases, at an affordable premium.
But for those with multi-million-dollar homes, this emphasis on speed and convenience could prove to be disastrous. With catastrophic weather events on the rise, HNW households purchasing a home in a flood or fire zone can no longer expect to find insurance coverage will be available — at any price.
With catastrophe claims spiking in 20204 and even so far in 2021,5 insurance premiums for homes in high-risk areas have shot up dramatically. In addition, the replacement costs for rebuilding are higher than ever.
As a result, affluent families may want to avoid buying or building in high-risk areas. For example, HNW families whose homes have been destroyed by wildfires may not be able to secure coverage if a fire destroys a new home built in the same area.
In some cases, owners of high-value homes might have no choice but to buy higher-risk, high-cost homeowners insurance from a specialty market insurer (a non-licensed insurer that can only underwrite coverage through a licensed excess lines broker). A bigger risk is living in an uninsurable house.
4 Insurance Business Canada, “Biggest Canadian catastrophes of 2020 reveal a significant rise in risk,” March 1, 2021.
5 Insurance Information Institute, “Evolving Catastrophe Losses to Pressure 2021 Property/Casualty Underwriting Profitability, Triple-I/Milliman Predict,” August 17, 2021.
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Relocation may be a viable option for some HNW individuals with a high tax burden
3. The great "wealth migration” will expand
The expansion of working from home brings unexpected opportunities for individuals: Many are working in a location with a lower cost of living and lower provincial and local taxes than their parent company.
In fact, according to a report from Statistics Canada, the recent urban exodus has brought a record-breaking number of Canadians to suburban and even rural areas.6
And doing so can provide new tax-saving options for HNW individuals. If they own multiple residences, they can spend more time working in a low-tax, low-cost-of-living area.
For some HNW individuals with an inordinate tax burden, it may be worth considering relocation to another locale.
With more work from home and less commuting, there is less wear and tear on autos but more stress, strain and demand on home infrastructure as well as a greater desire for home improvements.
6 Mortgage Broker News, “StatsCan: Residents exiting Canada’s largest cities at record pace,” January 19, 2021.
Cybercriminals target HNW families, but potential victims usually lack a cybersecurity plan
4. Cyberattacks will continue to increase in number and intensity
Cybercrimes against HNW families are nothing new, but the increased vulnerability resulting from COVID-19 made 2020 and 2021 particularly fruitful years for cybercrooks.7
Because more individuals worked from home — and may lack the best tech defenses or training to combat it — cybercrime spiked with the pandemic. The Canadian Anti-Fraud Centre received more than 101,000 fraud reports in 2020, with $160 million in reported losses. The Centre estimates that this is only a small fraction of the real number.8 And when the numbers are tallied for 2021, the damage is likely to be even worse.
Cybercriminals focus on the family, targeting HNW families, family offices and family businesses, whether that’s through bank fraud, identity theft or ransomware attacks. However, despite these dangers, potential victims often lack a comprehensive cyber security plan.
Preventative measures include strict limits on social media, using and updating strong passwords, using multifactor identification and being vigilant in identifying suspicious emails and texts.
While only one in five respondents to a recent survey said they have personal cyber insurance, two-thirds of cyberattack victims said they would be receptive to buying personal cyber insurance if it were offered.9
7 Financial Times, “Cyber attacks multiply on wealthy investors,” March 18, 2021.
8 Canadian Anti-Fraud Centre, “Top 10 Frauds Targeting Canadians in 2020,” accessed October 18, 2021.
9 Forbes Advisor, “Personal Cyber Insurance For The Growing Risk Of Cyberattacks,” March 26, 2021.
As social inflation grows worse, plaintiffs’ attorneys may target HNW individuals for perceived or overstated injustices
5. Social inflation is driving up the cost of liability insurance
For HNW individuals and their families, “social inflation” somewhat resembles price inflation — both are beyond their control, and both can hit their pocketbooks hard.
The phenomenon refers to how claims and jury awards have climbed through an increased sense of aggrievance among the public. Often driven by social media, social inflation is most-prominently manifest in so-called “nuclear verdicts” that hit organizations for perceived malfeasance.
But HNW families shouldn’t assume social inflation is limited to juries with a vendetta against a corporation — nor should they assume that the phenomenon is limited to the United States. Plaintiffs’ attorneys may target Canadian HNW individuals for perceived or overstated injustices.
The best ways to manage risks related to social inflation include the use of umbrella policies that can cover catastrophic loss or costly legal judgments, rigorous underwriting that can limit claims surprises and remove gray areas, and improved claims management.
Moving forward in 2022
From extreme weather events to malevolent cyberattacks, risk will always exist. What’s different today is that these challenges will have a bigger impact than ever. As a result, individuals and families need to approach risks with eyes wide open, taking a diligent, thorough approach that protects hard-earned wealth and the safety and security of home and family.
HNW individuals are in a good position to access experts and take proper precautions. Working with the right insurance broker will help determine the best options for renewing and potentially enhancing coverage — not to mention an enhanced understanding of risk management.