Insurance for Asset Managers
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What you need to know about Asset Managers insurance
Claims culture
Sadly we live in claims culture where claims against asset managers are on the rise. Depending on the relationships and structure of your fund and how clients invest, typically we would argue asset managers are somewhat protected from advisors. i.e. if a client has a financial advisor, if things go wrong, it’s usually it’s easier for the client to make a allegation of negligence against the advisor. That is still true, but in recent years we have seen an uplift in claims being made directly to the fund. Markets are turbulent and now more than ever we have see funds suspended and in some rare exceptions we see funds fail. Woodford being the most notable exam, where a run resulted in the abrupt end of the fund. If you use social media, it will not surprise you if we tell you companies are using aggressive marketing technics to encourage the public to claim against both advisors and the financial institutions they us. This is where professional indemnity insurance is so important. It ensures you have protection and the support of experts who are used to seeing claims from what some call ‘claims farming’ organisations.
Mistakes happen
Processes can be put in place; dual verifications, dual validations, but at the end of a stressful day mistakes can and do happen. Administrative mistakes can cause a fund to lose value or result in a number of clients losing money. An advisor or analyst could inadvertently increase allocation in certain asset classes or products, the market can swing quickly, and before you know it the fund is down, clients are down and claims can follow.
From a claims perspective timing is key. Mistakes can sometimes benefit the client, at other times they can be to the detriment.
We have seen timing work against a client very recently to dramatic effect:
A fund manager had intended to invest in equities for a particularly sophisticated client in July 2021. The fund manager thought that the asset classes had been adjusted and that confirmation had been received. A technical error meant the adjustment had not been concluded as the operating system had suggested. Money sat in cash rather than invested in the equities market. The market value of the intended equity investment increased 6-7% over several months. The loss to the client was evident when the mistake was discovered a few months later and for the purposes of transparency the client was informed. A professional negligence claim followed, as was expected. Compensation was agreed to put the client back in the same position as if the assets class was adjusted as indicated.
But things got worse for the fund manager. In the period shortly after the loss was discovered, the trouble between Russia and Ukraine hit the news and the markets dropped. If the mistake had been discovered later (after the markets had dropped) there would have been no loss to the client and no claim. It was a case of bad luck and bad timing.
The validity of claims against a fund manager depends on the agreement in place with their clients. In this instance, the fund manager was running an investment portfolio for a sophisticated and High-Net-Worth individual. An investment plan and course of action was agreed in writing and that plan was not actioned as agreed. The claim was black and white. You could argue that such instances should be entirely avoidable, but increasingly our reliance on technology means such mistakes are on the rise. Not because the technology fails, but because the fund manager is not using the platform correctly or fails to notice a warning message, such as ‘transaction incomplete’, ‘trade pending’ etc.
When markets are static or consistent, such mistakes can have little impact, but we live in an increasingly volatile world. The stock markets at the time of writing (February 2022) are up and down almost daily, and such volatility can exaggerate minor errors.
Again professional indemnity is crucial instances, providing support if things go wrong, and financial assistance where clients have lost money.
Processes can be put in place; dual verifications, dual validations, but at the end of a stressful day mistakes can and do happen. Administrative mistakes can cause a fund to lose value or result in a number of clients losing money. An advisor or analyst could inadvertently increase allocation in certain asset classes or products, the market can swing quickly, and before you know it the fund is down, clients are down and claims can follow.
From a claims perspective timing is key. Mistakes can sometimes benefit the client, at other times they can be to the detriment. We have seen timing work against a client very recently to dramatic effect.
Case Study
A fund manager had intended to invest in equities for a particularly sophisticated client in July 2021. The fund manager thought that the asset classes had been adjusted and that confirmation had been received. A technical error meant the adjustment had not been concluded as the operating system had suggested. Money sat in cash rather than invested in the equities market. The market value of the intended equity investment increased 6-7% over several months. The loss to the client was evident when the mistake was discovered a few months later and for the purposes of transparency the client was informed. A professional negligence claim followed, as was expected. Compensation was agreed to put the client back in the same position as if the assets class was adjusted as indicated.
But things got worse for the fund manager. In the period shortly after the loss was discovered, the trouble between Russia and Ukraine hit the news and the markets dropped. If the mistake had been discovered later (after the markets had dropped) there would have been no loss to the client and no claim. It was a case of bad luck and bad timing.
The validity of claims against a fund manager depends on the agreement in place with their clients. In this instance, the fund manager was running an investment portfolio for a sophisticated and High-Net-Worth individual. An investment plan and course of action was agreed in writing and that plan was not actioned as agreed. The claim was black and white. You could argue that such instances should be entirely avoidable, but increasingly our reliance on technology means such mistakes are on the rise. Not because the technology fails, but because the fund manager is not using the platform correctly or fails to notice a warning message, such as ‘transaction incomplete’, ‘trade pending’ etc.
Getting the right insurance
When markets are static or consistent, such mistakes can have little impact, but we live in an increasingly volatile world. The stock markets at the time of writing (February 2022) are up and down almost daily, and such volatility can exaggerate minor errors.
Again professional indemnity is crucial instances, providing support if things go wrong, and financial assistance where clients have lost money.
What you need to know about Asset Managers insurance
Claims against asset managers are rising and the structure of your fund and how clients invest impacts your risk.
What reduces your risk
Funds and investments that are accessed only through intermediaries, like financial advisors, bring lower risk to the asset manager.
Why? Because the financial advisor usually acts as a safety net. So, if your fund performs badly, it’s easier for the client to make an allegation of negligence against the financial advisor than against the asset manager.
What increases your risk
Funds and asset managers that allow consumers or retail clients to invest directly are naturally more exposed. But, although your risk is increased, it doesn’t make your business or fund uninsurable.
Funds and asset managers that work exclusively with institutional or high-net-worth investors are also higher risk, because their clients have more money to pay for claims. Ultra-high-net-worth clients, who can afford to be very litigious, are the most likely to make claims when there’s a perception of underperformance, whether it’s valid or not.
Turbulent markets are increasing claims
Turbulence across markets in recent years has caused an uplift in claims being made directly to the fund.
In volatile times, it’s not uncommon to seen funds suspended and, in rare exceptions, even fail; Woodford being the most notable example, where a withdrawal run resulted in the abrupt end of the fund.
Beware of marketing campaigns that encourage claims
Aggressive marketing campaigns, particularly across social media, are encouraging investors to claim against both advisors and the financial institutions they use, putting your business at greater risk.
With comprehensive asset managers insurance, you can be sure you have protection and the support of experts who are used to seeing claims from so-called ‘claims farming’ organisations.
How mistakes lead to claims
Processes like dual verifications or dual validations can help mitigate your risks but mistakes can still happen.
Administrative mistakes, like inadvertently increasing an allocation, can cause a fund to lose value or result in clients losing money, increasing your risk of claims.
Sometimes the timing works in your favour and a mistake benefits the client, but equally, when markets swing quickly, funds can decrease and the client experiences losses.
When markets are static or consistent, mistakes might have little impact but the world is increasingly volatile and, at the time of writing, stock markets are up and down daily, exaggerating minor errors.
Insuring against claims
Performance related claims can often be defended successfully – unless performance is catastrophic compared to the broader market – but any litigation comes at a cost, both financial and in terms of your time.
Having the financial backing and expertise of an insurer used to working with asset managers can be crucial. Comprehensive asset managers insurance provides expert support if things go wrong and financial assistance when clients have lost out.
For more information on how fund structure affects investment management insurance, please visit our news page.
Frequently Asked Questions
We know you’ll have questions about your insurance. If you don’t find the answers you need in our FAQs, call our dedicated team of expert advisers.
Asset managers
Insurance for this sector is usually purchased in a package or portfolio. This means the financial lines insurance form part of a single package with a single insurer. This is particularly common for small and medium-sized financial services companies, asset managers, financial institutions or fund managers.
The most common package combines professional indemnity, crime insurance and directors’ and officers’ insurance. Recently, some insurers have started to offer cyber insurance, and in some cases public and employers’ liability extensions.
We advise you get professional indemnity and directors’ and officers’ insurance as a minimum. In fact, depending on your Financial Conduct Authority (FCA) permissions, professional indemnity might be compulsory.
Depending on whether you handle client funds on your own platform, crime insurance might or might not add value. We can help advise you.
In recent years, we have seen an increase in claims, in part driven by social media and campaigns by some law firms, often referred to as ‘claims farmers’. These campaigns, previously focused on large investment providers, are now targeting companies of any size.
We will be able to advise but it’s worth knowing that:
- Some insurers will exclude unregulated investment products or offshore investments.
- Whilst not usually relevant to financial services unless you have an independent financial adviser or advisory department, in recent years insurers have been very concerned with advice on defined benefit pension transfers.
- Most policies will exclude claims in the USA and Canada and some insurers will restrict to UK claims only. More obvious exclusions are fraud, unless the fraud relates to an employee acting without consent or knowledge of directors and managers.
- Many insurers will ‘aggregate’ coverage meaning insurers will apply a policy cap to all claims. This can restrict cover significantly. For example, you may purchase £1,000,000 professional indemnity, £1,000,000 crime and £1,000,000 directors’ and officers’ insurance, but the insurers will apply an overarching policy limit of £1,000,000 meaning the total for all such claims will be £1,000,000 throughout the policy period. The result is £1,000,000 professional indemnity insurance can exhaust the cover, leaving directors with no cover. Sometimes, you’ll only be offered aggregated cover but with separate policy limits for each module (professional indemnity, crime and directors’ and officers’ insurance). If this is affordable it’s an approach that should be carefully considered.
It is crucial that you understand your policy excess and how it can be applied in practice because excesses for this sector can be very high, with some starting at £25,000.
It can be complicated too but we can advise you.
Some excesses will apply to “each and every claimant”. This means that if your investment portfolio suffers a sudden crash due to unforeseen external forces and you receive several claims from investors simultaneously, your excess will apply to each claimant. If you have a £25,000 excess and receive five investors complaints, that would result in a total policy excess of £125,000 for the business.
Other policies will state that claims related to the “same originating cause” are deemed to be one claim and one excess – a more favourable approach for financial services
We can cover:
- Firms on any size.
- Regulated and unregulated investment companies.
- Any firm with Financial Conduct Authority permissions, be it consumer advisory permissions or solely professional investor permissions.
- Clients that specialise in unique areas of investment advice, such as carbon credits, emerging markets and high-end real estate.
- Clients that operate in non-regulated areas such as UK property investment agency work.
If you aren’t sure if we can cover you, contact us.
There’s no straightforward answer to this but we’re here to advise.
We insure some funds that have over £100million of assets under management, but only the very largest firm could afford to buy £100million of insurance.
Your Financial Conduct Authority (FCA) requirements might determine how much you need. Depending on your FCA permissions it may be compulsory for you to have a minimum level of cover, particularly if you have exposure to consumers. That minimum for consumer-related business (advisory) is often £1,850,000.
For larger businesses, you need to weigh up the cost of insurance versus the policy limits purchased and you’ll need to consider several factors, such as the assets under management (AUM), fees charges, types of investors, class of investment, previous complaints and claims.
Some policies are determined by a percentage of funds under management, for example, if you have £100million funds under management you might purchase cover for 5% of that, giving you £5million professional indemnity.
Directors’ and officers’ insurance can be more prescriptive if your firm has external officers that support the functioning of the firm, such as professional investors. Professional investors and venture capitalists, may insist that the funds managed have a minimum level of directors’ and officers’ insurance linked to the level of investment. It’s also common for those investors to insist upon key person insurance for the lead fund managers.
Professional indemnity covers you for allegations of mistakes and negligence.
In financial services that is typically anything that is deemed to be a complaint under Financial Conduct Authority rules.
It will help you provide a formal response to any complaints and will also cover any compensation that the Financial Ombudsman Service (FOS), you or your insurers deem payable.
Typical claims include allegations of negligent advice (where applicable) or allegations of poor performance.
elements that can be included in your Asset Managers insurance package
Holistic insurance for asset managers
Professional indemnity for Asset Managers
Professional indemnity covers you for allegations of negligence. In financial services that is typically anything that is deemed to be a complaint under FCA rules. The professional indemnity will assist with the providing a formal response to any complaints, and will also cover any compensation that FOS or you/your insurers deem payable in relation to valid complaints.
Typical claims include allegations of negligent advice (where applicable) or allegations of poor performance.
Directors’ and officers’ insurance for Asset Managers
Personal protection for directors and senior managers. Directors’ and officers’ insurance provides defence costs and applicable monetary settlements in respect of claims made directly against company directors and senior managers from third parties. Complainants include shareholders, regulators, or other third party stakeholders.
Directors’ and officers’ insurance usually excludes claims from clients related to advice provided by the business, this exposure tends to fall under the professional indemnity insurance module.
Cyber Insurance for Asset Managers
Crime insurance for Asset Managers
Crime insurance primarily concerns the cash within your business, and protects business against direct losses. Crime insurance will cover theft from employees.
It will typically also funds transfer fraud, but it’s important to have an awareness of how any crime insurance interacts with cyber insurance particularly in relation to social engineering losses.
Office Insurance for Asset Managers
Office insurance is usually a combined policy, covering your business property in the office, laptops and employers and liability insurance.
It can also be extended to includes business interruption, which covers the loss of income and/or additional expenditure whilst your business is out of action because of damage to your business property.
