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Mutual Funds - An Updated Underwriting Approach

Mutual Funds - An Updated Underwriting Approach. Shelia January Senior Vice President Zurich North America Specialties June 7, 2004. Presentation Agenda. Historic Context & Risk Issues Current Market Conditions Risk Characteristics Policy Structure Underwriting Information

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Mutual Funds - An Updated Underwriting Approach

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  1. Mutual Funds - An Updated Underwriting Approach Shelia January Senior Vice President Zurich North America Specialties June 7, 2004

  2. Presentation Agenda • Historic Context & Risk Issues • Current Market Conditions • Risk Characteristics • Policy Structure • Underwriting Information • Current Regulatory/Litigation Climate • Pricing Considerations • Insurance Marketplace • Summary

  3. Historic Context & Risk Issues • Earliest Policies were written in response to insureds’ coverage needs as presented to the insurance industry • Prior to 1988, limited offerings from the commercial insurance marketplace • ICI Mutual began offering coverage in 1988 • 1988-1990 - more insurers began offering insurance products • 1986-1990 saw enormous growth in mutual fund assets from <$500mm to >$1,000mm; $6,900mm by y/e 2000

  4. Historic Context & Risk Issues, cont. • Traditionally, broad coverage was provided on policies written for limits of $10,000,000 to $100,000,000 (industry captive), with lower retentions than those offered to most financial institution risks • Low frequency of claims • Policy language written to coincide with regulatory definitions, functions, and requirements

  5. Current Market Conditions • Currently 10 markets regularly writing coverage for Mutual Funds and Investment Advisers, with a few others occasionally providing some excess limits • Approximately $300mm in available capacity for a single insured’s program utilizing all available sources, including Lloyds marketplace • Prices have generally doubled since 2000, with higher increases since September, 2003 • Retentions have increased by a minimum of 50%, and generally at least 100%

  6. Risk Characteristics • Numerous entities to be covered under policies, basically the funds and all entities involved in the management and sales • Heavy regulatory involvement and enforcement without direct responsibility for ongoing oversight • Dependence on oversight of independent directors • Little direct influence of shareholders other than “voting with their feet”

  7. Policy Structure • Single Limit of Liability, covering any or all of the following: • Mutual Fund Errors & Omissions • Mutual Fund Fund Directors & Officers • Investment Adviser E&O • Service Provider E&O (service provided to mutual funds) • Investment Adviser D&O • Operational Failure (also called Cost of Corrections)

  8. Underwriting Information • Application • Fund Prospectus(es) • Plan Financials • Form ADV • Adviser Financials • Fund Statement(s) of Additional Information (SAI) • Underwriting Visit with Fund &/or Adviser Officers - depends on insurer

  9. Current Regulatory/Litigation Climate • Beginning in September, 2003, increasing regulations and requirements • SEC has increased the number and scope of audits • Increased state investigations and enforcement actions • Increased costs to comply with more extensive regulations • Previously accepted industry practices under attack and investigation • Negative perception by investing public

  10. Pricing Considerations • Asset size • Asset type • Entities covered • Coverages included • Retention levels • Corporate Governance • Internal Control Structure

  11. Insurance Marketplace • Less support for Mutual Fund risks within some insurer organizations • Less support for Mutual Fund risks in the reinsurance community, especially for the new capacity available • Industry Captive is taking a hard line on pricing, terms & conditions • Not clear as to how much of the current losses will be covered by insurance policies • Pressure from Independent Directors to maintain high levels of D&O/E&O Insurance

  12. Summary • Mutual Fund groups that have been insulated from the recent extreme fluctuations of the marketplace are now experiencing what other Financial Institutions have in the past • Coverage and capacity are still available • Insurers are developing tools to continue to refine their underwriting appetites and the correct risk pricing

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