February 15, 2023 by Philip Porado
So far, wobbly stock markets aren’t sparking higher claims activity for asset managers’ liability coverages.
But the kinds of investor claims that lead to complaints against money managers often lag the equity markets’ overall performance, noted Reid Irwin, practice leader for executive risk and financial institutions at Hub International.
“Most people don’t complain when everybody’s making money,” he told Canadian Underwriter. “When the markets are down, that is when you start seeing those who are underperforming the market relative to others.”
And that can spark complaints.
Asset managers’ insurance addresses a range of professional liabilities for fund managers, fiduciaries, investment advisors and their supervisors. Policies also provide ‘cost of corrections coverage’ for errors or other mishaps that happen when trades are executed.
“That covers complaints from investors and covers [an asset manager’s] defence costs,” he said. “So, legal bills to defend any sort of complaint…and if there are any judgments that arise.”
So far, Irwin noted, insurers’ reaction to stock market volatility and the asset manager liability class of business, is resilient.
“This isn’t an environment in which the carriers have reduced coverage or increased pricing at this point,” said Irwin, “which you could argue is reflective of the claims experience.”
What could change that is the delayed nature of price reporting for specialized assets like alternative or private-equity investments (as compared to stocks).
“If you have a standard equity portfolio, you’re seeing how it’s performing [in real time]. But if you have private investments, there is a lag in reporting relative to public markets,” he said. “So, investors will need to wait longer to see bad news appear for the private investments.”
Irwin stresses insurers don’t get involved in asset managers’ compliance regimes, but noted declining markets can heighten investors’ perceptions of being placed in risky assets. That can be particularly true if investors find themselves owning investments that are difficult to sell.
“[If] they’re locked in an investment that they allege was outside of their risk tolerance, that’s when you see complaints and that’s when you see the litigation,” he said.
Which means insurers will want to see firms actively engaging in ‘know your client’ procedures designed to ensure asset managers truly understand investors’ needs. They also want to see ‘know your product’ training to make sure managers grasp which investments are appropriate for different client types.
“It comes down to ensuring that diligence is there, and that it is not just a box-checking exercise,” he said.
Right now, Irwin said the market for asset managers’ coverage as healthy and he doesn’t foresee changes to policy terms and conditions. In part, that’s thanks to Canadian asset managers’ tendency to avoid riskier trading practices seen in the U.S. and some other markets.
“It does speak to the loss quality we see in Canada [that we’re] not necessarily seeing the claims frequency that perhaps our more litigious neighbors might see,” he added.
“All the noise that we’ve seen in the financial markets [so far] hasn’t resulted at this point in a worsening claims ratio [or] loss ratio for the key carriers in the space.”
This article is excerpted from one that appeared in the February-March, 2023 issue of Canadian Underwriter. Feature image by iStock.com/Bet_Noire