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Hedge Fund Management & Professional Liability Insurance; Are Costs Really Declining?


Date: Thursday, May 12, 2011
Author: Louis D’Agostino, Partner & SVP of Iron Cove Partners, LLC Hedge Fund Insurance Specialist

It is an absolute certainty that more and more hedge funds of all shapes and sizes are buyers of liability insurance protection. This is mostly due to increased due diligence on the part of the investor base and mandates to carry said coverages. Institutional investors have always had a reputation for having really stringent risk management guidelines and mandates. In light of the various investment scandals and numerous investment frauds, even individual high-net worth and qualified investors request that each fund group carry certain insurance protection. This wasn’t always the case.

There are a variety of news articles and marketing pieces circulating that suggest pricing for hedge fund/private fund management and professional liability insurance has been steadily in a decline over the past (12) twelve months. It is most certainly true that there a number of specialty insurance markets and new insurance companies that are now willing to underwrite to hedge fund risks, hence providing more insurance capacity and driving down pricing (we will see how long these newer markets stay around after a major fraud or industry loss). That being said, underwriting remains a highly subjective process and pricing really is specific to a particular risk. Underwriting Factors attributable to pricing include but are not limited to:

  • SEC Registration;
  • Operating History;
  • Bios and Resumes of the Principals and PM’s;
  • Investment Objective and Strategy;
  • Past Performance;
  • Quality of Service Providers; &
  • Assets under Management, etc.

On average a $5mm policy would cost anywhere between $80,000 to $150,000 annually. The subsequent layer of insurance would be priced at 75-80% of the primary policy for the exact same amount of coverage. As an example, a $10mm insurance program with a $5mm primary policy priced at $100,000 and a $5mm excess of the $5mm priced at $75,000 would cost $175,000 annually. The rate per $1mm of coverage would be $17,500 ($175,000/$10).  While this example acts as a decent barometer, it is by no means “the norm”. The market appetite for any one particular risk, will dictate how much coverage the marketplace is willing to provide and the excess percentage rates that will apply. Lets make one thing certain, at one point the price per million of coverage has a floor.  Meaning no matter how big or small the risk, there is a minimum price any one carrier will charge in order to put up their capacity. Given, it is unfair to say that larger funds pay less per million due to a number of variables, namely excess rating factors. If a carrier is on an insurance program at a much higher attachment point (i.e. $10mm excess of $50mm) there is less risk for them versus the company that underwrites the 1st $5mm of coverage.

The reality is that your insurance broker/representative needs to pre-underwrite your risk and have the wherewithal to articulate the risk appropriately to the marketplace. In some cases, the need also exists to facilitate face to face underwriter meetings in order for the carriers to really get comfortable with the account as a whole. The appropriate pre-meeting preparation inclusive of a meeting agenda and a list of carrier questions/concerns, can really go a long way with new business or renewal negotiations, hence effecting price.

The main point here is that, the underwriting process is a highly subjective one whereby pricing fluctuates based on market appetite and specific corporate underwriting criteria. Actuarial models or computer algorithms that push out quotes for complex financial risks do not yet exist nor will they in the foreseeable future. The good news is that there is currently more capacity and limits of liability which will naturally encourage competition and drive down prices assuming the risk is desirable.

Source: Iron Cove Partners, LLC is a Division of The Whitmore Group, Ltd. (“ICWG”) ICWG is a leading provider of risk management and insurance solutions to companies engaged in the arena of financial services. With over 22 years of experience, ICWG has over 80 dedicated insurance professionals committed to our mission. Click here for our Financial Services Overview. For additional questions or comments, contact Louis D’Agostino, Partner, SVP; louisd@ironcoveins.com/516-267-6179.