The Financial Insurance Guide
for Investment Advisors
Asset management firms require a special expertise
in insurance product design and placement.
Investment Advisors need to be concerned when it comes to their exposure and how insurance can protect them. Since 1957, Liftman Insurance has focused on providing insurance for the investment industry. This guide aims to educate you about the risks that you face and help you understand your coverage options.
g Insurance Coverage for Investment Advisors g Insurance Marketplace Trends
g Why Investment Advisors Purchase D&O/E&O Insurance g Peer Benchmark Analysis of D&O/E&O Limits
g Types of Claims
Insurance Coverage for
Investment Advisors
These are the primary coverages that every Investment Advisor should consider:
g Directors & Officers Liability (D&O) g Errors & Omissions Liability (E&O) g Fidelity and ERISA Bonds (Crime) g Employment Practices Liability (EPLI) g Fiduciary Liability
g Kidnap and Ransom g State Surety Bond
g Cyber Risk (Privacy & Network Security)
Insurance Market
Trends
The market for investment advisor insurance is transitioning. From 2005 until 2012, there had been a soft
market. Coverage was relatively easy to obtain with enough competition to drive pricing down and allow for favorable policy language.
The market has tightened since 2012. The regulatory environment has added to the market tightening. In fiscal year 2014 the Securities and Exchange Commission's (SEC) filed a record 755 enforcement actions, up from 686 in 2013. This resulted in $4.16 billion in disgorgement and penalites. SEC Enforecement director Andrew Ceresny stated that, going forward, the Enforcement Division will continue to bring its resources to bear across the entire spectrum of the financial industry, from complex accounting fraud and market structure cases, to investment advisor and municpal securities cases, microcap fraud, insider trading and cases against gatekeepers.
Insurers have been pushing for price increases. Overall, insurers have confirmed that they cannot continue to provide pricing at the levels they have in the past. Liftman Insurance represents all of the major insurance carriers in order to provide our clients with competitive premiums and terms.
Why Investment Advisors Purchase
D&O/E&O Insurance
g To protect the entity and individuals against claims alleging a wrongful act, error,
omission, misstatement, misleading statement, neglect or breach of duty in providing or failing to provide professional services as an advisor.
g To provide defense costs. Defense expenses in claims against advisors can escalate
rapidly because of the complex nature of the litigation. In most cases, once the policy retention (deductible) is satisfied, the insurer will advance defense costs.
g The frequency of claims against investment advisors is increasing.
g The focus by the SEC includes conflicts of interest, inaccurate or inadequate disclosure,
fraudulent trading schemes, misallocation of investment opportunities, false or misleading performance claims, market manipulation, municipal securities, private equity fees and insider trading.
g Increased capital allocations from public employee pension funds and other institutional
investors may result in more claim activity as these investors may be quicker to sue when things go wrong.
Peer Benchmark Analysis of D&O/E&O Insurance
Coverage Limits
Through peer analysis and insurance market experience, an average limit/deductible range is shown in the table below.
ASSETS AVG. LIMIT RANGE AVG. DEDUCTIBLE
Under $300M $1M to $5M $25,000 to $75,000*
$300M to $900M $3M to $10M $75,000 to $150,000
$900M to $3B $10M to $20M $125,000 to $350,000
$3B to $10B $15M to $25M $250,000 to $500,000
*Deductibles can be tailored to client requirements and can be as low as $5,000 for smaller firms.
g Many firms have moved beyond traditional passive investments and now hold majority stakes
in companies and have board representation. Managers face additional liabilities when they serve on outside boards. A D&O policy can be extended to cover these outside directorship exposures.
g A D&O/E&O policy can also be extended to cover Employment Practices Liability. This
important coverage protects the firm against employee claims for wrongful termination, discrimination, and sexual harassment.
g Advisors are purchasing D&O/E&O coverage because their clients are demanding it. Many firms
g Mismanagement
g Misstatement
g Negligence
g Fraud
g Breach of duty
g Failure to perform adequate due
diligence in evaluating potential investments
g Failure to provide adequate disclosure
of the investment risks involved
g Failure to follow investment
guidelines
g Failure to invest
g Failure to redeem investor funds in a
timely and orderly manner
g Manipulation or misrepresentation of
historical performance
Types of Claims Investment Advisors are
Likely to Encounter
g Short selling
g Trading errors
g Contracting with substandard
vendors/advisors
g Conflicts of interest/related party
transactions
g Market timing/late trading
g Insider trading
g Failure to comply with ERISA
regulations
g Claims made by employees alleging
discrimination, sexual harassment, or wrongful termination
g Claims by the SEC, state Attorneys
General or other regulatory body alleging violations of rules or statutes
Pricing
Considerations for
D&O/E&O Coverage
Pricing for D&O/E&O depends on various factors. Premiums are based upon assets under management,
investment strategy (including portfolio construction, position concentration, leverage, liquidity, risk controls to mitigate loss), management team experience, compliance, trading errors, investor profile, transparency (communication with investors), and claims history.
About Liftman Insurance
Liftman Insurance has specialized in insurance for the investment industry since 1957. Investment advisors, mutual funds, hedge funds and
securities broker/dealers all rely on us to obtain broad coverage at competitive premiums. Contact Liftman Insurance today to see how you can benefit from our vast experience and commitment to client satisfaction.
Looking for more
information on
Financial Insurance?
Download our recently updated glossary – The Investment
Industry’s Guide to Insurance Coverage and Terms at
www.liftman.com/glossary
Who is Bringing Claims
Against Investment
Advisors?
g Investors g Regulatory Agencies g Competitors g Employees© 2015 Theodore Liftman Insurance, Inc. All rights reserved.
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financial insurance?
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Theodore Liftman Insurance, Inc.
Liftman Insurance Agency Co. (NC, TX, CA) Liftman Insurance Agency (NY)
