Geography of Risk: Helping HNW Families Trim Costs, Boost Protection

But how likely is it that all six homes will burn down or be destroyed by a natural catastrophe at the same time?  It's virtually impossible. Even the worst hurricane or earthquake couldn't destroy all the homes; they're too far apart. Thus the geographic spread of risk allows another approach to insuring the homes: treat them as a group.  Determine what the maximum possible loss to all the homes from a single event could be, and use that amount to set a blanket coverage limit. Instead of needing $30 million in coverage, the family may need only $20 million. This approach can even be used to a lesser degree when families own multiple homes in one or two states.

Moreover, the blanket property approach allows the family and insurance agent to create a customized policy with the insurance company that offers consistent coverage terms across the states, so there is less chance for confusion. Coverage terms can be written a la carte, allowing wealthy clients to capitalize on another advantage they have—the ability to accept high levels of risk, perhaps in the millions of dollars. Unique deductible amounts and special limits for perils such as flood, wind and mold can be structured to achieve often substantial savings. We've seen families reduce their costs by 50% using the blanket property approach.

Because a blanket property policy is so flexible and unique, it takes a fair amount of due diligence upfront. Wealthy families and family office managers should make sure they have partnered with a sophisticated insurance agent or broker (see my previous article for AdvisorOne about choosing one) if they are interested in this approach.  The long-term benefits of simplification, customized protection, and cost savings should far outweigh the initial work.