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Survey Report

Insurance Marketplace Realities 2020 Spring update – Fiduciary

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

May 7, 2020

For now, carriers seem more concerned with fee and mortality-table litigation than they are with the impact of COVID-19.
Rate predictions
  Trend Range
Overall increase (purple triangle pointing up) +5% to +15%
Commercial companies with plan assets exceeding $500M or large concentrations of company stock in benefit plans increase (purple triangle pointing up) +5% to +20%
Other commercial companies increase (purple triangle pointing up) +5 to +10%
Financial institutions with proprietary fund exposure increase (purple triangle pointing up) +10% to +20%
Financial institutions without proprietary fund exposure increase (purple triangle pointing up) +5% to +10%
Employee (ESOP) owned firms Increase (Purple triangle pointing up) +5% to +20%
Universities/higher education (already had a fee claim) Increase (Purple triangle pointing up) +5% to +15%
Universities/higher education (otherwise) Increase (Purple triangle pointing up) +10 to +25%
Health care (already had a fee claim) Increase (Purple triangle pointing up) +5% to +15%
Health care (otherwise) Increase (Purple triangle pointing up) +10 to +25%
Other commercial private and not-for-profit (NFP) entities Neutral increase (yellow line with purple triangle pointing up) Flat to +7.5%

Our fiduciary rate predictions assume heightened financial pressure, but no fundamental breakdown in our economy as a result of COVID-19. The business environment could rapidly turn worse — in which case pricing could be much higher and capacity inadequate.

Key takeaway

For now, carriers seem more concerned with fee and mortality-table litigation than they are with the impact of COVID-19.

COVID-19 raises some specific risk concerns.

  • The COVID-19 environment could accentuate risks from company stock in plans, due to volatility in the market and precipitous drops in value.
  • Cutbacks in benefits (like 401(k) matches) may yield claims — potentially class action claims.

Even with COVID-19, it looks like relatively stable pricing ahead for most, at least for now — challenged classes excepted.

  • Stable capacity: The fiduciary market remains conservatively competitive with adequate capacity for most risks. However, financial institutions with proprietary funds in their plans, insureds with significant ESOP exposure and universities may not easily find willing capacity.
  • Underwriting focus: Expect heightened underwriter focus — and not necessarily on COVID-19. Fee litigation concerns predominate. Carriers are asking about 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 occasionally willing to be opportunistic and competitive. This concentration heightens difficulties for risk segments deemed challenged. For example, primary capacity for financial institutions with proprietary funds within sponsored plans are expected to have challenging renewals.

Coverage terms are generally stable as well.

  • Blended coverage — small and medium-sized private and not-for-profit (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.
  • Challenged classes: Carriers are looking to either raise attachment points or seek restrictions — or both. Financial institutions, universities and health care organizations will likely face substantive attempts by underwriters to materially restrict coverage in the form of limits, pricing, retentions and/or other terms.

Key loss drivers are creating upward rate pressure.

  • 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 loss 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 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.
    • 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. On the other hand, incumbent insurers adjusting a claim will want a premium increase.
    • No such claim yet? Claims-free may NOT be considered 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 who see a “claim waiting to happen.”
    • At least one leading insurer has been looking to broadly exclude this risk without any premium credit.
  • Law: Supreme Court rulings have heightened fiduciary risk. For example, in Intel v. Sulyma, the U.S. Supreme Court held that a three-year statute of limitations failed to begin to run, since “actual knowledge” was required and the plaintiff “did not remember reviewing” any of the numerous disclosures of the investment allocation that afforded the basis of the claim.
  • Are limits adequate? In our current COVID-19 environment and with fee litigation driving rising claim frequency and loss severity, buyers may benefit from reconsidering whether their limits are adequate for their exposure. The fiduciary market is firming along with other financial lines markets. The window of opportunity to add capacity may close.
  • Regulation and enforcement uncertainty: With the DOL’s Fiduciary Rule vacated, the SEC proposed its Best Interests Rule and a new DOL rule once expected before the start of the year is currently in limbo — likely awaiting the outcome of the November election. Until the dust settles, the heightened uncertainty 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 with tax qualification requirements, are no longer issued in most circumstances. Today’s employers must navigate this requirement without IRS validation.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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