Research

Marketplace Realities 2018: Fiduciary

November 6, 2017

    The one thing

    Uncertainty and fee cases remain the dominant concerns.
  • Stable capacity. The fiduciary market remains very competitive, with over $500M in advertised capacity. Some carriers are doubling down — expanding limits to capture more premium.
  • Primary concentration. While capacity is robust, a few carriers continue to lead the vast majority of programs — for private and public companies.
  • Blended coverage. Private companies often look to place fiduciary as part of a larger management liability package with directors and officers (D&O) and/or employment practices liability (EPL) insurance. For public companies (and large private companies), large blended programs are far less common. D&O tends to be kept separated from fiduciary, which might be blended with EPL and/or crime.
  • Loss drivers.

      Price prediction

      Overall
      -5% to +5%

      Companies with large concentrations of their stock in benefit plans
      Flat to+12%

      Companies without/limited company stock in their plans
      -10% to -3% (on excess layers)

      Financial institutions
      -3% to flat (other than FI’s with proprietary fund exposures)

      ESOP-owned firms
      +5% to +10%

      Private and nonprofit entities
      -3% to +5%

    • Fees: Fee cases, originally focused on very large plans, are now broader and include record-keepers and fund managers. Excessive fee litigation continues to dominate the exposure, driving severity and, correspondingly, client views of appropriate program size. A wave of 403(b) fee cases has carriers looking more closely at universities and the health care industry.
    • Regulation and enforcement uncertainty: Many are wondering: who will drive fiduciary regulation? While the impact of rule changes and enforcement falls largely upon FI professionals, until the dust settles, the heightened risk will be challenging to mitigate.
    • Stock drops: Over 180 stock-drop suits have been filed since 2004 and over 160 reported settled since 1997. Insurers remain concerned over employer stock levels within plans, especially relative to other asset classes.
    • Asset managers: Asset managers with proprietary mutual funds in their own 401k plans continue have materially higher exposure and continue to be a concern for insurers, with some declining such risks or seeking premium/retention increases.
    • Governance: Developments in plan governance have heightened fiduciary exposure to potential sanctions, correction expenses and litigation.
      • Gone! The compliance road map and IRS validation has been replaced with “self- service” compliance.
      • The IRS will only issue letters evidencing tax-qualified plan status for new plans,
        terminating plans and in “limited circumstances.”
      • Today’s employers must navigate regulatory change and ambiguity without IRS validation in an environment of greater regulatory and enforcement uncertainty and higher risk.
    • Law: Supreme Court rulings have heightened risk:
      • ESOP plan fiduciaries no longer get a presumption of prudence when investing in
        employer securities.
      • Plan fiduciaries have a continuing duty to monitor trust investments and remove
        imprudent ones.
  • Rate. Premiums and retentions are generally flat. Faced with excessive fee claims, incumbent carriers want increases, but market factors are pushing back as new capacity can be opportunistic in these situations — potentially seeing post-claim plans as better risks. Excess rates remain very competitive. Material changes in plan assets, specifically employer stock, may result in potential increases in premium and securities retention (for public companies). Church plans, universities and public plans may also see rate pressure.