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Article | FI Observer

Breach of Mandate: Past lessons for asset managers

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Henry Keville | April 27, 2020

The impact of the COVID-19 pandemic is not only affecting how we go about our daily lives but it is also forcing all asset managers to closely re-evaluate their risks.

It now looks likely there will be a global recession in 2020 but how long and how severe may it be? The financial markets are in turmoil and the potential for an increase in the number of claims against financial institutions is ripe.

A reminder of past downturns and related claims for asset managers

For asset managers, recessions and/or stock market falls have historically caused a large increase in claims notifications.

An increase in notifications is not necessarily a concern straight away as many of these claims, driven by perceived poor investment performance, can simply be defended because of the prevailing market conditions especially considering COVID -19. Unless asset managers have been negligent in their duties owed to investors then these types of claims are unlikely to incur large costs. However, another type of claim that often follows economic downturns is the breach of mandate event. The graphs below show the percentage of the overall claims notified to Willis Towers Watson that related to breach of mandate events, comparing the claims that occurred during the financial crisis and the years following it.

Breach of Mandate Events Graph. The graph shows the percentage of the overall claims notified to Willis Towers Watson that related to breach of mandate events, comparing the claims that occurred during the financial crisis and the years following it.
Percentage of 'Breach of Mandate' Claims Notifications

Source: Willis Towers Watson proprietary claims data

Investors tend to not be concerned about a breach of mandate when the investment returns are good. However, when the tides turn, and results are disappointing, investors will look to recoup their losses. Breaches of investment/fund mandates are often losses that are more straight forward to evidence for investors in circumstances where the alleged breach is a matter of fact, rather than opinion. This has resulted in these losses being the most costly event type for UK asset managers, as evidenced in the graph below. A concern for asset managers should be that a recession following a significant stock market fall could herald the return of the breach of mandate events.

The title of the chart is ‘Number of claims vs Average size of loss’. This graph shows the evidence of these losses being the costliest event type of UK asset managers.
Asset Manager Loss Events

Source: Willis Towers Watson proprietary claims data

As well as breach of mandate claims, many asset managers will want to know where they might find insurance coverage for business interruption cost, the consequences of decisions they may have to make to protect their employees, customers and others—or failure to comply with the law or changes in laws, rules and regulations and heightened risks from communications. At Willis Towers Watson, the team is on hand to help asset managers and their senior managers navigate the challenges which lie ahead.

A few considerations for senior managers who are charged with Investment Management insurance

  1. Familiarise yourself with the policy terms contained under the differing insurances with focus on the how and when to notify claims and/or circumstances which could give rise to claims.
  2. Start thinking about your insurance renewals well in advance especially since negotiations with insurers are going to take considerably longer.
  3. Expect further pressure on premiums and retentions from insurers.
  4. Be ready to address insurer’s questions around business continuity management, liquidity, changes to governance, etc
  5. Insurer counter party risk – a fresh review of insurer financial strength and the quality of its underwriters/claims teams should form part of core renewal discussions.

All asset managers will continue to be affected by the COVID-19 pandemic and resulting market turbulence. How managers approach and handle a firm’s response to the pandemic is critical. The best managers will be those who apply the lessons learnt from the past market falls, such as likely breach of mandate claims, with the emerging challenges faced with COVID-19 to proactively manage risks faced now and for the foreseeable future. Remember hindsight is always the judge but rest assured, well executed decisions senior managers take now, will make a huge difference to their businesses.

Contacts

Senior Risk Insight Analyst, FINEX GB

Lead relationship manager — Asset Management

Henry specialises in the development of bespoke management liability product solutions and program designs for the asset management sector.


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