Financial Institutions Overview
Trends, Updates, Exposures and Solutions
Presented by:
Andrew Knight
DFI Marketing Manager / FPC Practice Leader
Agenda
• Section I:
• Section II:
Sector Overview
Key Focus Areas
• Asset Management (NI 31-103 Registration)
– AMP (Asset Management Protector)
– Financial Institution Bonds
• Private Equity
– VCAP Gateway
• Mortgage Lending
– Mortgage Protection Insurance
• Section III:
Why Chubb?
• Section I:
Sector Overview
What is a Financial Institution?
• An institution that is in the business of dealing or transacting thirdparty money.
• Third-party money can be defined as cash, stock, bonds, promissory
notes, loans or many other types of negotiable or non-negotiable
securities.
• Depository Institutions: banks and credit unions which pay interest
on customer deposits and generate capital which can then be
loaned or invested to earn a rate of return from other third parties.
• Non-Depository Institutions: those firms which sell financial products
or earn a rate of return without taking deposits. Examples are
insurance companies, brokerage firms or mutual fund companies.
• Many financial institutions provide both depository and
nondepository services.
What is a Financial Institution?
1. Depository Institutions
» Banks, Finance Companies, Credit Unions, Trust
Companies, Mortgage Companies, Leasing
Companies
2. Financial Management Firms
» Investment Advisors, Stockbrokers, REITs, Mutual
Funds, Wealth Managers, Venture Capital Firms,
Investment Bankers
3. Insurance Providers
» Insurance Companies, Reinsurance Companies
4. Service Organizations
» Exchanges, Financial Intermediaries, Funds Transfer
Organizations, SRO’s
The Regulators
• Investment Industry Regulatory Organization of Canada
(IIROC)
• Mutual Fund Dealers Association of Canada (MFDA)
• Office of the Superintendent of Financial Institutions
(OSFI)
• Canadian Securities Administrators (CSA)
• Financial Services Commissions of Ontario (FSCO)
• Securities and Exchange Commission (SEC)
• Provincial Regulators
Products
•Directors & Officers Liability
•AMP (Asset Management Protector)
•Fiduciary Liability
•Mortgage Protection
•CANCAP (E&O)
•General Liability
•Employment Practices Liability
•Umbrella
•Financial Institutions Bonds (A, B, C)
•Property
•Electronic Computer Crime
•Group Personal Excess
•CyberSecurity
•Bankers’ Professional Liability
•Kidnap & Ransom
•BrokerEdge
•Mail & Transit
•Automobile Liability
•VCAP Gateway
•Multinational Capabilities
• Section II:
Key Focus Areas
Asset Management
• Directors & Officers are vulnerable
– Rapidly evolving regulatory environment- increased scrutiny
• Bill 198, Bill C-45
• National Instrument 81-107- Independent Review Committee
• National Instrument 31-103- New Registration Regime
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Volatility of Returns
Merger & Acquisition Activity
Cases of Fraud, Ponzi Schemes, etc
Conflicts of Interest
Breach of Investment Guidelines
Failure to perform due diligence in selection and
oversight of sub-advisors or outside funds
• Prospectus liability claims against mutual fund directors,
advisors, service providers
Asset Management Protector (AMP)
• Launched in 2009
• Designed for the asset management industry
• Customizable to asset managers who want to structure
their insurance coverage
• Able to address numerous combinations of asset
management structures and their foreign equivalents
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Directors & Officers Liability (Public or Private)
Professional Liability
Investment Company
Private Fund
Employment Practices Liability
Fiduciary Liability
Asset Management Protector (AMP)
• Who Is It For?
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Investment advisers and consultants
Wealth management firms
Mutual funds, exchange traded funds, and closed-end funds
Hedge Funds
Funds of Funds
Real Estate Investment Trusts (REITs)
Private Real Estate Funds
Asset Management Protector (AMP)
• Important Considerations:
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Understanding the Organizational Chart and who is an Insured
What is the definition of Claim?
Definition of Investment Adviser Services
Investment Company vs Private Fund Coverage
Independent Directors- additional protection
Independent Review Committee (IRC)
• Solutions
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Broad base policy wording terms and conditions
AMPlifier Endorsements
Real Estate AMPlifier Endorsements
Cost of Corrections
Asset Management Loss Scenarios
Example 1: Failure to follow investment guidelines
Example 2: Inadequate disclosure of risks
Example 3: Formal regulatory investigation of possible
trading violations
Example 4: Failure to adhere to contract provisions
Bill C-45
(Amendment to the Criminal Code)
Bill C-45 (Section 217.1 in the Criminal Code):
• Created rules for establishing criminal liability to
organizations for the acts of their representatives.
• Establishes a legal duty for all persons "directing the
work of others" to take reasonable steps to ensure the
safety of workers and the public.
• Sets out the factors that courts must consider when
sentencing an organization.
• Provides optional conditions of probation that a court
may impose on an organization.
Financial Institutions Bonds 101
• SAA Forms vs Chubb Forms
– Bond 14 vs Bond B
• National Instrument 31-103 (NI 31-103)
– Bond 24 vs Bond A
– Bond 25 vs Bond C
National Instrument 31-103
• What does this mean?
• Definition of ‘Custody’
• Sections applicable to Insurance:
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Section 4.21 Dealer (page 14)
Section 4.22 Adviser (page 14)
Section 4.23 Investment Fund Manager – IFM (page 15)
Section 4.24 Global Financial Institution Bonds (page 15)
Section 4.25 Notice of Change, Claim, or Cancellation (page 15)
– Appendix A Bonding and Insurance Clauses (page 54)
National Instrument 31-103
• Section 4.21 Dealers:
• Applies to Investment Dealers, Mutual Fund Dealers,
Scholarship Plan Dealers, Exempt Market Dealers, &
Restricted Dealers
• Must maintain a Bond with a single-loss limit in the
highest of the following:
– $50K per employee, agent, or dealing representative or $200K,
whichever is less
– 1% of the total client assets that the Dealer handles, holds, or
has access to or $25M, whichever is less
– 1% of the Dealer’s total assets or $25M, whichever is less
– An amount as determined by the Dealer’s BOD
National Instrument 31-103
• Section 4.21 Advisers:
• Applies to Portfolio Managers (the old IC/PM category)
• Must maintain a Bond with a single-loss limit in the
highest of the following:
– 1% of AUM that the Adviser handles, holds, or has access to
or $25M, whichever is less
– 1% of the Adviser’s total assets or $25M, whichever is less
– $200K
– An amount as determined by the Adviser’s BOD
National Instrument 31-103
• Section 4.21 Investment Fund Managers:
• This is meant to refer to the Fund Manufacturer/Sponsor
& not the IC/PM firm/Adviser
• Must maintain a Bond with a single-loss limit in the
highest of the following:
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1% of AUM or $25M, whichever is less
1% of the IFM’s total assets or $25M, whichever is less
$200,000
An amount as determined by the IFM’s BOD
National Instrument 31-103
The key take-away is how you define
“handle, hold, or have access to”, as that
is the trigger point for the higher insurance
requirements. In the absence of this trigger,
the required limit can be as low as $50K
(unchanged).
National Instrument 31-103
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NI 31-103 Companion Policy (CP) has the following to
say about “Custody”:
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Hold client securities or cash for any period of time
Accept funds from clients, for example, a cheque made
payable to the Registrant
Have the ability to gain access to client assets
Have, in any capacity, legal ownership of, or access to, client
funds or securities
Have the authority, such as under a POA, to withdraw funds or
securities from client accounts
Have authority to debit client accounts to pay bills, other than
investment management fees
Act as Trustee for clients
Act as Fund Manager or GP for investment funds
Venture Capital & Private Equity
• What is Private Equity?
– Private pooled investment fund, managed by a firm, to invest in
equity of private companies (portfolio companies), to generate
increased value out of these portfolio companies, and exit them
for a profit
– Fund is typically created as a limited partnership, and the private
equity firm serves as a general partners. Most of the capital is
contributed by outside institutional investors who become the
limited partners of the fund
– Value creation is generated in the portfolio companies typically
though either expansion, new produce development or
restructuring of the company’s operations, management or
ownership
– Typical exit strategies for portfolio companies are: IPO; strategic
sale or merger; failure- bankruptcy or closure of portfolio
company
Types of Private Equity
• Venture Capital
– Acquire minority interest in seed/early stage companies, little or
no revenues
– Equity investments only, rarely use leverage
– Typically take one board seat
– Make small investments in many companies
– Exit typically 3-5 years
• Buyout and Leveraged Buyout
– Acquire and take a majority interest in mature, middle-market
companies with operating cash flows
– Buyout vs LBO
– Typically take multiple seats on the board of the portfolio
company
– Make large investments in few companies
– Exit typically 2-3 years
Venture Capital & Private Equity
• Claims Trends
– Mostly arise from portfolio company related transactions
• Bankruptcies/Insolvencies
• M&A Activities
• IPOs
– Claimants are typically interested third parties of portfolio
companies
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Shareholders
Employees/Management
Creditors
Business partners
– Typical Allegations
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Breach of fiduciary duties
Fraud
Breach of Contract
Misrepresentation
VCAP Gateway
Chubb’s new Venture Capital Asset Protection (VCAP)
Gateway Policy is designed to respond to the evolving
needs of venture capital and private equity firms
• State-of-the-art policy that:
– Incorporates broadest coverages available
– Streamlines coverage for the entire private equity model
• Provides coverage for:
– Everything that a Private Equity firm is;
– Everything that a Private Equity firm does; and
– Everyone that does those things
VCAP Gateway
Insuring Clause 1- Management Liability Coverage
Insuring Clause 2- Management Indemnification Coverage
Insuring Clause 3- Professional Liability Coverage
Insuring Clause 4- Outside Directorship Liability Coverage
Insuring Clause 5- Organization Liability Coverage
VCAP Gateway
The Firm’s People
• Insured Person includes:
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Advisory Board members;
More industry specific terms ie venture partner, EIR;
In-house counsel;
Shareholder Representative;
The foreign equivalent; and
Automatic coverage for any nature person (including independent
contractors) who has a written indemnification agreement with an
insured organization
VCAP Gateway
The Firm’s Activities
• Private Equity Venture Investing includes:
– The creation, management and dissolution of a Private Fund or
Investment Holding Company by an Insured;
– Any act by an Insured for Portfolio Company related to a loan;
– Advisor/other activities by an Insured for an Organization or
Portfolio Company;
– An Insured’s sale or purchase of securities issued by a Portfolio
Company;
– Investment/portfolio management or asset allocation services for
a Private Fund;
– Selection/oversight by an Insured of outside service providers;
– Activities by an Insured or others (for whom the Organization is
legally liable) as a Shareholder Representative;
– Acts by an Insured as Controlling Shareholder
Mortgage Protection Insurance
Who Buys It?
Banks, Lenders, MICs,
Why Buy It?
• Primary purpose of coverage is to protect the mortgagee in the event
that the collateral is damaged and there is no insurance to repair or
replace the building
• In event of a significant uninsured loss, the borrower may be unlikely
to continue making mortgage payments
• If the mortgage goes into default, the owner of the mortgage has the
right to recover their outstanding mortgage balance
• If there is damage to the property, the value of the collateral may not
be adequate to pay off the mortgage balance
Mortgage Protection Insurance
Mortgage Holder’s Interest Insurance
• Mortgage Impairment –borrower’s responsibility to
place insurance
• Mortgage Errors & Omissions –lender’s
responsibility to place
• Mortgage Holders’ Liability Insurance
ie. Seller/Servicer Liability
ie. Real Estate Tax Liability
Foreclosed Property Insurance
• Forced Placed Property Insurance
Mortgage Protection Insurance
Mortgage
Impairment
or E&O
Lender believes
hazard insurance is in
force and that it
protects their interest.
But, it’s not or it
doesn’t!
Valuation is
“Mortgage Holders’
Interest”.
Forced
Placed
Lender knows that
hazard insurance
is not in force or it
does not cover
their interest.
Valuation should
be replacement
cost.
Foreclosure
Lender has taken
action and
exercised their right
to take title or take
deed in lieu
possession.
Valuation should be
replacement cost.
Mortgage Protection Insurance
Mortgage Protection Insurance
Mortgage Impairment Valuation
• The most we will pay for loss or damage in any one
occurrence is the lesser of the following:
– The amount of loss or damage (minus other
insurance proceeds);
– The amount of your mortgage holder’s interest; or
– The applicable Limit of Insurance shown in the
Declarations
– NOTE: This goes for Mortgage Holder’s Interest
Insurance and Mortgagee Errors and Omissions
Insurance
Mortgage Protection Insurance
Forced Placed/Foreclosed Valuation
• Subject to the Limit of Insurance for Foreclosed Property shown in
the Declarations, Foreclosed Property is valued at the lesser of:
a. the full cost to repair the Foreclosed Property at the time of the loss
or damage, at the same location and for the same use or occupancy,
without deduction for physical deterioration or depreciation; or
b. your Foreclosed Property Financial Interest (as defined- which also
takes into account an adjustment to appraised market value).
• Subject to the Limit of Insurance for Forced Placed Property shown
in the Declarations, Foreclosed Property is valued at the lesser of:
a. replacement cost; or
b. the unpaid principal balance on the mortgage or loan
Mortgage Protection Insurance
• Fire damage to vacant residence
• Homeowner Vandalism- mortgagor is in process of
defaulting/vacating residence and decides to damage the property
first ie arson, taps are left running or damage to walls, cabinets,
bathrooms, etc
• Resultant mould subsequent to water damage that was not attended
to
• Lack of Winterization – water damage and subsequent freezing due
to expansion and bursting of frozen pipes due to absence of heating
in winter months
• Trespassers- Vandalism- attractive nuisance
• Vagrants living in and vandalizing vacant homes
• Grow Operations
*Note the above are examples of typical loss scenarios and
coverage may not necessarily apply in some cases
Section III: Why Chubb?
Why Chubb?
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Dedicated Financial Institutions Underwriters
Financial Strength- A++ AM Best Rating
Best-in-class Product Offerings
Local and Global Claims expertise and
reputation
• Market Knowledge
• 7th Consecutive year as #1 Crime/Fidelity
Underwriter (SAA) and one of the largest
writers of Financial Institutions locally and
Globally
Contacting Chubb
aknight@chubb.com
416-359-3222 ext. 4507
Product Information and Applications:
www.chubbinsurance.com
Legal Disclaimer
• Chubb refers to the insurers of the Chubb Group of
insurance Companies. This literature is for informational
purposes only. Whether or to what extent a particular
loss is covered depends on the facts and circumstances
of the loss and the actual coverage of the policies as
issued.
• Claims examples are based on actual cases, composites
of actual cases, or hypothetical situations.
• The information provided herein should not be relied
upon as legal advice or a definitive statement of the law
in any jurisdiction. For such advice, an applicant,
insured, listener or reader should consult their own
independent legal counsel. No liability is assumed by
reason of the information contained herein.