Research

Insurance Marketplace Realities 2019 — Fiduciary

November 6, 2018

Rate predictions

  Trend Range
Overall No change or slightly up/down –5% to +5%
Companies with large concentrations of company stock in benefit plans No change or slightly up Flat to +12.5%
Companies without/limited company stock in their plans No change or slightly up/down –10% to +5%
Financial institutions without proprietary fund exposure No change or slightly up –3% to flat
Financial institutions with proprietary fund exposure Increase Flat to +50% (or more)
Employee (ESOP) owned firms Increase +5% to +10%
Commercial private and not-for-profit (NFP) entities No change or slightly up/down –3% to +5%

Key takeaway

Consider adequacy of limits as loss trends have been pushing up loss frequency and severity.

Expect stable pricing except on challenged classes.

  • Stable capacity: Notwithstanding recent insurer M&A activity, the fiduciary market will likely remain competitive, with over $500 million in advertised capacity. However, for asset managers with proprietary funds within their plans, it can be challenging to find willing capacity.
  • Primary market concentration: A few carriers will continue to lead the vast majority of programs. Nevertheless, other insurers may be opportunistic and competitive.
  • Blended coverage: Private/not-for-profit companies often buy fiduciary as part of a larger management liability package, with directors and officers (D&O), employment practices liability (EPL) and/or other coverages. For public companies (and large private companies), blended programs are far less common, with D&O likely separate from fiduciary. Blended coverage with EPL and/or crime, however, is a consideration.
  • Rate: Premiums and retentions are generally flat, but faced with excessive fee-suitability claims, incumbent carriers want increases (though they may settle, in part, for a higher retention). Market factors, however, are tempering those positions as new, opportunistic players may see post-claim plans as better risks. Excess rates remain very competitive. Material changes in plan assets, specifically employer stock, may result in increases in premium (and securities retention for publicly traded companies). Church plans, universities and public plans may continue to see increased rate pressure.
  • Coverage terms: Terms have largely been stable, except for challenged classes where terms have been restricted. Asset managers face higher retentions or exclusionary language related to proprietary funds. Regulatory dynamics — including those around privacy, like GDPR — may drive innovation, but we have seen less carrier innovation in fiduciary liability than elsewhere in financial lines.

Loss drivers continue to trend upward, putting pressure on insurers. Challenging risk classes will be impacted most.

  • Asset managers: Asset managers with proprietary funds within their plans will face the most challenging renewals in 2019.
    • Already been sued? Although it may seem counterintuitive, an asset manager who has already been sued will likely be considered a better risk. Nevertheless, incumbent insurers that have had to pay for a prior or pending claim will likely look to increase premium in order to recoup some of the loss.
    • No such claim yet? In today’s environment, claim-free is not a good thing. Insurers believe that for asset managers with proprietary funds within their plans, it is only a matter of time before a claim will be made. Accordingly, we expect pull back on renewal terms from the incumbent and limited interest from alternates.
    • Expect carriers to materially narrow coverage. At least one leading insurer has and will likely continue to look to broadly exclude this risk. Increased retentions are also possible. Do not expect a premium credit to be associated with any coverage reduction. Even if coverage is restricted, it is possible that premium may nevertheless remain flat or increase.
  • Are limits adequate? In an environment of rising frequency and severity, buyers should evaluate whether their limits are adequate for their exposure. Analytical tools can be instrumental in that evaluation.
  • Fees suitability: Fee-suitability litigation (cases alleging that fees paid to investment management companies have eroded employee retirement plan assets and that less expensive, non-proprietary investment options should have been offered), originally focused on very large retirement plans and sponsors, is now broadening to include record keepers and fund managers. Excessive fee-suitability litigation continues to drive severity and, correspondingly, available limits of liability. A wave of 403(b) fee cases has carriers looking more closely at universities and the health care industry. Plaintiffs are now pushing for jury trials, which could adversely impact awards and settlements.
  • Stock-related: While more than 180 stock-drop suits have been filed since 2004 and insurers remain concerned over employer stock levels, these suits have all but dried up.
  • Law: Supreme Court rulings have heightened fiduciary risk. ESOP plan fiduciaries no longer get a presumption of prudence when investing in employer securities, and plan fiduciaries have a continuing duty to monitor trust investments and remove imprudent ones.
  • Regulation and enforcement uncertainty: With the DOL’s Fiduciary Rule vacated, the SEC proposed its Best Interests Rule. The rule does not define “best interest,” but it does provide a safe harbor if certain criteria are met. 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.