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Survey Report

Insurance Marketplace Realities 2020 – Fiduciary

Financial, Executive and Professional Risks (FINEX)
N/A

November 13, 2019

The underwriting process is more challenging, as fee and investment suitability-related litigation and proprietary fund exposure continue to put pressure on this segment.
Rate predictions
  Trend Range
Overall Neutral increase (yellow line with purple triangle pointing up) Flat to +7.5%
Commercial companies with plan assets exceeding $500M or large concentrations of company stock in benefit plans Neutral increase (yellow line with purple triangle pointing up) Flat to +12.5%
Other commercial companies Neutral increase (yellow line with purple triangle pointing up) Flat to +7.5%
Financial institutions with proprietary fund exposure Neutral increase (yellow line with purple triangle pointing up) Flat to +50% (or more)
Financial institutions without proprietary fund exposure Neutral increase (yellow line with purple triangle pointing up) Flat to +7.5%
Employee (ESOP) owned firms Increase (Purple triangle pointing up) +5% to +20%
Universities Increase (Purple triangle pointing up) +5% to +15%
Health care Neutral increase (yellow line with purple triangle pointing up) Flat to +12.5%
Other commercial private and not-for-profit (NFP) entities Neutral increase (yellow line with purple triangle pointing up) Flat to +7.5%

Key takeaway

The underwriting process is more challenging, as fee and investment suitability-related litigation and proprietary fund exposure continue to put pressure on this segment.

Continue to expect stable pricing except on challenged classes.
  • Stable capacity: The fiduciary market remains competitive, with over $500M in advertised capacity. Financial institutions with proprietary funds in their plans and universities, however, may not easily find willing capacity.
  • Underwriting focus: Expect heightened underwriter focus — especially on process, policies or procedures for evaluating professional fees or investment options. Supplemental excessive fee questionnaires have become more common.
  • Primary market concentration — large and complex: A few carriers continue to lead most larger programs, with others willing to be opportunistic and competitive. This concentration heightens difficulties for risk segments deem challenged, such as primary capacity for financial institutions with proprietary funds within sponsored plans.
  • Blended coverage — small and medium-sized private and NFP enterprises: Most smaller private/NFP companies continue to buy fiduciary liability coverage as part of an executive risk package policy, which is an option many carriers offer.
  • Rate: Premiums and retentions are generally close to flat with some extreme pockets of firming (proprietary fund exposure). Opportunistic players may see post-claim plans as better risks and increase competition. Excess rates remain competitive. Material changes in plan assets, specifically employer stock, may result in increases in premium (and the securities retention for publicly traded companies). Universities, health care institutions and public plans likely will continue to see increased rate pressure due to carrier concerns over trends in 403(b) suits (see below).
Coverage terms are generally stable as well.
  • Challenged classes: Carriers are looking to either heighten attachment points or seek restrictions — or both. Financial institutions with proprietary fund exposure, universities and health care organizations will likely face substantive action to materially restrict coverage in the form of limits, pricing, retentions and/or other terms.
  • Regulatory dynamics: While fiduciary risk has seen heightened regulatory uncertainty and change — such as new privacy laws, including the EU's GDPR — we have not seen carriers innovate to provide enhanced solutions or limit coverage in response to new/heightened exposures. Restrictive changes seem to be limited to risks facing challenged classes.
While claims and losses are driving rate pressure, a Ninth Circuit decision, if upheld, may provide relief.
  • Fees/suitability: Fee cases continue to drive loss development. These cases allege that fees paid to financial institutions have eroded employee retirement plan assets, and less expensive, non-proprietary investment options should have been offered. Potential suit targets are broadening as this cottage industry grows. These suits are no longer limited to large plans. The risks represented by these cases continue to drive severity and, correspondingly, available limits. A wave of 403(b) fee cases has carriers looking more cautiously at universities and the health care industry. Plaintiffs are now pushing for jury trials, which could put upward pressure on awards and settlements.
  • Mortality tables: We are seeing ERISA claims alleging that plans calculate the amounts of non-single life annuity benefits using unreasonable mortality table assumptions, with the effect of lowering benefits below what ERISA requires. Plaintiffs in these lawsuits seek the difference between their plan benefits and their benefits calculated using the assumptions set by the Secretary of the Treasury pursuant to Internal Revenue Code sections 417(e)(3) and 430(h)(3).
  • Financial institutions: Insureds with proprietary funds in their plans will face the most challenging renewals in 2020.
    • Already been sued? Although it may seem counterintuitive, a financial institution that has already been sued may be seen as a better risk to a new insurer. Incumbent insurers adjusting a claim will want a premium increase.
    • No such claim yet? Claims-free may NOT be seen as a good thing. Insurers believe that for financial institutions with proprietary funds in their plans, it is only a matter of time before a proprietary fund-related claim will be made. Accordingly, renewal terms from the incumbent will likely look to push rate and restrict terms. Also, there could be very limited interest from other insurers.
    • At least one leading insurer has been looking to broadly exclude this risk without any premium credit.
  • Are limits adequate? In an environment of rising frequency and severity, buyers should evaluate whether their limits are adequate for their exposure.
  • Regulation and enforcement uncertainty: With the DOL's Fiduciary Rule vacated, the SEC proposed its Best Interests Rule, and a new DOL rule is expected to raise risks and increase uncertainty. Until the dust settles, the heightened risk will continue to be a challenge.
  • Governance: Developments in plan governance have heightened fiduciary exposure to potential sanctions, correction expenses and litigation. IRS determination letters, once extensively relied upon by plan sponsors to ensure that a plan document complied in form with the tax qualification requirements, are no longer issued in most circumstances. Today's employers must navigate this regulatory change and ambiguity without IRS validation.
  • Law: Supreme Court rulings have heightened fiduciary risk, and they are expected to do so again in 2020. (See An ERISA session for the Supreme Court for details.)
  • Hope! There is one potential bright spot that could change the game and relieve some rate pressure — the Ninth Circuit Court of Appeals recently ruled that, contrary to prior circuit precedent, the presence of an arbitration provision in an employee benefits plan could compel arbitration. If that precedent is not overturned on appeal, it could profoundly undermine the fee case trends.
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