RIA E&O Insurance: State-of-the-Market Q3 2020

For the first time in many years, the casualty insurance market’s boat is getting rocked; the entire commercial insurance market on a macro basis, and, specifically, E&O for Investment Advisors.

Just this month of October, two separate underwriting groups notified our office of their intent to begin an exit withdrawal of all E&O placements (new and renewal) for Investment Management and other Financial Institution accounts.  Thankfully, those two underwriters are more peripheral players with relatively minor market penetration.  Yet, across the board, all markets and all casualty lines are increasing rates and attempting to carve-back broader terms and conditions.  Below, please find a Professional Liability (E&O) pricing trend graph from Feb-18 through Sep-20 (click to enlarge):

Note:  This graph reflects average renewal pricing movements across all accounts.

What has happened to cause these changes to the E&O market?  Call it the “Perfect Storm”.  There are both macro and micro variables as follows:

1. MACRO: Reinsurance Marketplace Pain from Global Catastrophes (CAT).  In a way, the “buck stops” with the reinsurance groups.  Reinsurers are insurance underwriting companies who insure risks offset by front-line insurance underwriters.  They do so on both a macro (what is called “Treaty Reinsurance”) and micro (“Facultative”) basis.  These are the guys who really “take it in the shorts” from global catastrophes (hurricanes, wildfires, earthquakes – pandemics).  CAT losses amounted to roughly $370B from 710 natural catastrophes in 2017-2018 – the second-highest figure ever recorded.  And now in 2020, these underwriters are reserving for estimated Covid claim damages upwards of $100B (primarily business and event interruption claims).  Why would this affect E&O pricing for Investment Advisors?  Because Financial Institution risks borne by front-line underwriters are, as well, ceded off to Reinsurance groups.  As those reinsurers must raise their reinsurance rates on all carrier risks and markets to help absorb global risks, those pricing terms trickle down to all of us.  In essence, we are all in this together – we are all insured in one, large, global risk pool.
2. MACRO: Interest Rates Near Zero.  Underwriters typically make only a few margin points on actual underwriting activities and depend on income (“float”) from invested capital reserves to increase enterprise profitability.  That investment float began drying up some years back as global governments and markets drove bond yields down, causing underwriting managers to revisit their risk-taking guidelines and pricing terms.
3. MICRO: Covid Causes Shareholder and Investor Lawsuits – Market Volatility.  Separate from the $100B Covid claim damages stated above, Management Liability, Directors & Officers, and Investment Management Liability claims have skyrocketed – both in numbers and severity.  D&O, specifically, is experiencing 25-50% pricing increases due to bankruptcies, insolvencies, balance sheet concerns, layoffs, and general underwriting anticipation of further losses to come.  Investment Management Liability pricing terms are not experiencing quite as dramatic swings, yet still greater than recent years before.  The largest national underwriting pool of RIA accounts, for which our firm is the largest national broker, normally receives two claim submittals per month on average.  During March-April-May, total submitted claims were 32 for that period; an unprecedented 533% increase in Investment Management Liability claim activity.

What is ahead?  Predicting the future of the insurance market is somewhat akin to predicting the future of the S&P 500.  Nobody knows.  That said, while it is impossible to predict how underwriters may react and anticipate risk developments, one can somewhat forecast expected pricing trends based on actual underwriting losses and reserves.  Still, as shown above, there are several variables and unknowns.  Our expectations?  We foresee that pricing will slightly (10-15%) continue to harden over the next 2-4 quarters and then level out.

Golsan Scruggs is an insurance brokerage firm operating throughout the United States specializing in investment advisor E&O errors & omissions insurance (aka professional liability insurance) for RIA registered investment advisors. As one of the largest insurers of RIA firms in the U.S., we have a dedicated staff that understands the risks of the financial services industry and delivers superior results.  We make the underwriting process painless.

At Golsan Scruggs, we believe it is incumbent upon us to earn the right to be appointed as your insurance and risk-management agent. Our RIASURE process exists to serve that purpose.

Our RIASURE Review will analyze your fiduciary exposures, provide rate details and comparisons, and provide a contract comparison. No application required.

To obtain your complimentary RIASURE Review, please provide the following information or contact us at (800)273-5883. Fields marked with * are required.