When it comes to professional lines risks and exposures, the rules of the game are ever-changing. The world of professional insurance is incredibly nuanced and complex. Business risks and coverage needs can vary dramatically, from industry to industry and from business to business. This is particularly true for businesses that fall under the category of “financial services” — like banks, private equity firms, investment banking firms, insurance companies, real estate companies, and fintech companies, just to name a few.
What Makes Professional Lines for Financial Services So Complex?
According to Michael De Feo, Jencap Senior Vice President and financial sector insurance expert, “Financial institution risks are some of the most complicated types of professional risks. Their policy forms are much more tailored and bespoke, and they require more negotiation than any other professional lines policies I’ve dealt with in my career.”
There are a number of reasons why this is the case. Here are just a few:
Financial institutions don’t fit neatly into a single professional lines product or business class.
Because every type of financial institution is so different, they each have their own professional lines insurance product. Take a bank, for example: insurance companies have individual policy forms dedicated to bank liability, bank directors and officers (D&O), bank errors and omissions (E&O), etc. They also have underwriting teams or departments completely dedicated to banks. Those forms would look very different for a hedge fund, financial advisor, or a venture capital firm — and they’re likely handled by completely different underwriters or teams within the insurance company who only work with those specific financial institution types.
This kind of product and policy variation between different financial institution types makes it very difficult for agents to operate at the retail brokerage level. De Feo explains, “If you’re operating as a generalist agent that has to cover every class of business that walks in the door, you may only see a handful of financial institution risks over the course of a year — and that handful might include three investment advisors, a bank, a real estate company, and a finance company. Because they are all so different from each other, it’s very difficult for a retail agent to really become an expert in financial institution risks.”
Financial institutions can face claims from a number of different people or groups.
For most businesses, professional liability claims are brought against them by one group: clients and customers. A web design agency, for example, might get sued by a client for failing to meet an important launch date deadline. Financial institutions, by contrast, can face claims from several different groups, including clients, shareholders, limited partners, co-investors, potential investors/portfolio companies, and regulatory bodies like the Security Exchange Commission (SEC) or National Association of Securities Dealers (NASD).
According to De Feo, “Aside from possibly the public company D&O class, financial institutions have a higher regulatory exposure than just about any other D&O or E&O class of business.”
For instance, an investment advisor has clients (the investors) as well as the parties they are investing in. In addition, they’re also subjected to regulatory oversight from the SEC or their state’s securities regulator. Any of these individuals or groups could potentially bring a claim against the investment advisor for oversight, negligence, or error in judgment — and the policy needs to take that into account.
Policies may need to cover multiple corporate entities.
Some financial institutions involve several different corporate entities, which all need to be considered when drafting professional lines insurance policies. Let’s consider, for instance, a hedge fund: Put simply, a hedge fund is a firm that consists of at least one investment advisement entity, a holding company, and the various funds. This means that you could be dealing with upward of 50 different entities that all need to be covered under the same policy.
“It gets complicated very quickly,” says De Feo. “There’s not a management liability exposure just for the top-level entity. There’s a management liability (D&O) exposure for every fund and every entity involved. In addition to that, there’s a professional liability (E&O) exposure for every entity. So you could be structuring a policy that involves several different insuring agreements, as well as dozens of insured parties named under those various agreements.”
Policies may need to account for a financial institution that’s involved in a myriad of professional activities.
Typically, insurance companies have departments dedicated to individual insurance product verticals — like a bank department, a hedge fund department, and an insurance department. Each of these departments is staffed with its own team of dedicated insurance professionals and underwriters who deeply understand that one specific type of financial institution’s risks.
“This works well,” says De Feo, “until you have a financial institution client that blurs the lines and works across different financial practices. Banks, for example, have started to get involved in a number of different financial activities — like asset management, insurance brokerage, and mortgage brokerage. Or you may have an investment advisor who also offers other services, like life insurance, P&C insurance, or investment banking.”
When an insured engages in a range of different financial services, some insurance companies simply aren’t equipped to handle that on a single policy form. In those circumstances, it’s critical to have a broker who understands the markets well enough to know which will offer the flexibility needed for these policies. They also need the background and expertise to know which services should be broken up into separate policies and which should be combined in the same policy.
Jencap Knows Financial Institution Risks
When it comes to insuring risks as complex as those in the financial sector, it’s vital to partner with someone who sees and works with financial institutions every single day. At Jencap, we have an entire team of insurance brokers who have extensive experience navigating the complexities of financial sector risk placement.
“Our collaborative approach to how we work,” says De Feo, “means that we pool all our expertise. In any Jencap location, there are multiple people working in person together, bouncing ideas off of each other and sharing market knowledge. This ensures that we bring the best possible solutions to the table for our agents and their clients.”
Contact Jencap today for more information about our professional lines insurance coverage solutions and how we can support you and your financial services clients.
