Mutual Funds - An Updated
Underwriting Approach
Shelia January
Senior Vice President
Zurich North America Specialties
June 7, 2004
Presentation Agenda
• Historic Context & Risk Issues
• Current Market Conditions
• Risk Characteristics
• Policy Structure
• Underwriting Information
• Current Regulatory/Litigation Climate
• Pricing Considerations
• Insurance Marketplace
• Summary
Historic Context & Risk Issues
• Earliest Policies were written in response to insureds’
coverage needs as presented to the insurance industry
• Prior to 1988, limited offerings from the commercial
insurance marketplace
• ICI Mutual began offering coverage in 1988
• 1988-1990 - more insurers began offering insurance
products
• 1986-1990 saw enormous growth in mutual fund assets
from <$500mm to >$1,000mm; $6,900mm by y/e 2000
Historic Context & Risk Issues, cont.
• Traditionally, broad coverage was provided on
policies written for limits of $10,000,000 to
$100,000,000 (industry captive), with lower
retentions than those offered to most financial
institution risks
• Low frequency of claims
• Policy language written to coincide with regulatory
definitions, functions, and requirements
Current Market Conditions
• Currently 10 markets regularly writing coverage for
Mutual Funds and Investment Advisers, with a few
others occasionally providing some excess limits
• Approximately $300mm in available capacity for a
single insured’s program utilizing all available
sources, including Lloyds marketplace
• Prices have generally doubled since 2000, with higher
increases since September, 2003
• Retentions have increased by a minimum of 50%, and
generally at least 100%
Risk Characteristics
• Numerous entities to be covered under
policies, basically the funds and all entities
involved in the management and sales
• Heavy regulatory involvement and
enforcement without direct responsibility for
ongoing oversight
• Dependence on oversight of independent
directors
• Little direct influence of shareholders other
than “voting with their feet”
Policy Structure
• Single Limit of Liability, covering any or all of
the following:
– Mutual Fund Errors & Omissions
– Mutual Fund Fund Directors & Officers
– Investment Adviser E&O
– Service Provider E&O (service provided to
mutual funds)
– Investment Adviser D&O
– Operational Failure (also called Cost of
Corrections)
Underwriting Information
• Application
• Fund Prospectus(es)
• Plan Financials
• Form ADV
• Adviser Financials
• Fund Statement(s) of Additional Information (SAI)
• Underwriting Visit with Fund &/or Adviser Officers depends on insurer
Current Regulatory/Litigation
Climate
• Beginning in September, 2003, increasing regulations
and requirements
• SEC has increased the number and scope of audits
• Increased state investigations and enforcement
actions
• Increased costs to comply with more extensive
regulations
• Previously accepted industry practices under attack
and investigation
• Negative perception by investing public
Pricing Considerations
• Asset size
• Asset type
• Entities covered
• Coverages included
• Retention levels
• Corporate Governance
• Internal Control Structure
Insurance Marketplace
• Less support for Mutual Fund risks within some
insurer organizations
• Less support for Mutual Fund risks in the reinsurance
community, especially for the new capacity available
• Industry Captive is taking a hard line on pricing, terms
& conditions
• Not clear as to how much of the current losses will be
covered by insurance policies
• Pressure from Independent Directors to maintain high
levels of D&O/E&O Insurance
Summary
• Mutual Fund groups that have been insulated from
the recent extreme fluctuations of the marketplace
are now experiencing what other Financial
Institutions have in the past
• Coverage and capacity are still available
• Insurers are developing tools to continue to refine
their underwriting appetites and the correct risk
pricing