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Survey Report

Insurance Marketplace Realities 2021 Spring Update – Fiduciary

Financial, Executive and Professional Risks (FINEX)
N/A

April 21, 2021

Regulatory uncertainty will continue as our hard market has caught up with fiduciary liability.
Rate predictions
  Trend Range
Commercial (plan assets up to $50M): Increase (Purple triangle pointing up) +5% to +15%
Commercial (plans assets $50M to $500M): Increase (Purple triangle pointing up) +20% to +50%
Commercial (plan assets above $500M): Increase (Purple triangle pointing up) +25% to +70%
Financial institutions: Increase (Purple triangle pointing up) +15% to +50%

Key takeaway

The hard market caught up to fiduciary liability in 2020, and we expect more disruptive change through 2021 as losses and regulatory uncertainties persist.

Underwriters continue to step up their scrutiny based on disturbing trends.

  • Underwriting focus: Particularly with commercial risks, underwriters are focused on plans with assets greater than $500 million, where previously the cut-off had been at $1 billion. Insurers are seeking detailed information about fees, record keeping and investment.
  • Retentions/sublimits: Insurers are looking sharply at retentions. First-dollar coverage has become increasingly challenging to obtain. Increased retentions of six to seven figures are becoming commonplace for specific exposures, e.g., prohibited transactions/fees and broader-reaching mass/class actions. Some insurers may only offer a sublimit of liability or exclude prohibited transactions/fees coverage. Marketplace results will vary with plan asset size, plan governance and claim history.
  • Blended coverage: Many organizations, including financial institutions and private/non-profit companies, continue to buy fiduciary liability coverage as part of a package policy, but they too may be subject to the challenges noted above.
  • Buyers struggle with primary market concentration, but is some relief in sight? For many commercial risks, although a small number of insurers continue to lead most large programs, some traditional financial lines markets that have not historically written fiduciary risk have begun to enter the space and may provide limited alternatives on a case-by-case basis.
  • Rate prediction qualification: Rate increases noted above refer primarily to minimum premiums. Increases may be higher or lower depending on the insured’s expiring pricing. Minimums in price per million of coverage can vary substantially among risk classifications, particularly those involving plans with proprietary funds.

Many accounts are still viewed by carriers as challenged, particularly in certain industries.

  • Challenged classes include financial institutions with proprietary funds in their plans, whether currently or in the past, especially if they have not been the subject of a prohibited transaction claim, or if they face significant employee stock ownership plan (ESOP) exposures.
  • Smaller plans may experience less underwriting scrutiny, though this may change if smaller plans become the target of increased litigation. Excessive fees claims have been made against companies with plan assets as low as $44 million (Miller, Ben, “Behind the 2020 401(k)-Fee Lawsuit ‘Explosion’”, January 20, 2021).
  • Any organization, however, may be treated as challenged in the current environment. Underwriters may consider companies that do not have a regular cadence of benchmarking fees, have not had an RFP in several years, and/or utilize revenue sharing, to have elevated exposure.

Broader economic challenges continue to increase risks.

  • While not likely the principal cause of fiduciary pricing pressure, broader economic uncertainties contribute. Uncertainties include the pace of business re-openings post-pandemic and stubborn unemployment.
  • If the pandemic worsens, for example, with a resurgence of COVID-19 cases as the economy begins to open, the market could harden further.
  • The potential for stock market volatility accentuates ESOP risks. Although the stock market is currently up, corrections are foreseeable.
  • Cutbacks in benefits (i.e., 401(k) matches) and/or workforces may lead to claims and potentially larger class actions.

Litigation persists as regulatory and legislative developments emerge.

  • Prohibited transaction/fee claim frequency is on the rise…significantly: There were approximately three times more prohibited transaction/fee cases filed in 2020 than in 2019 — substantially more than in prior years as well.
  • Expansion in the types of claims: Prohibited transaction/fee case successes have expanded and diversified the types of claims being filed. Newer claims include those pertaining to reduced benefits due to the use of allegedly unreasonable mortality table assumptions, as well as COBRA notice deficiencies.
  • Influence of social media on stock value fluctuation: As we mentioned in our D&O report, the influence of social media in the manipulation of stock valuation and trading recently emerged like a tidal wave, leading to swift and significant swings in the stock prices of several high-profile companies. How much risk does this present to key investment options in employer plans? Is it a short-term phenomenon or will it be sustained? We will be monitoring the situation closely.
  • The change in presidential administrations has yielded changes in regulatory tone regarding environmental, social, and governance (ESG) investing:
    • In 2020, the previous administration’s Department of Labor (DOL) issued rules requiring retirement plans to prove that ESG investment options were “economically indistinguishable” from other plan options, thus ensuring fiduciaries prioritized investment return over the perceived social priorities of ESG fund options.
    • In March 2021, the new administration’s DOL announced it will not enforce the rules, saying it intends to revisit the rules and that it may issue new guidance. In doing, so, the new administration is underscoring that investor protections should derive from the accuracy and fulsomeness of risk disclosures, while discounting purported distinctions between profitability and social value.
  • Pooled employer plans (SECURE Act): The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) amended provisions of federal law, including ERISA, to establish pooled employer plans (PEPs), which allow employers to join together and delegate both investment and plan administration fiduciary obligations to pooled plan providers (PPPs). In November 2020, the DOL announced a final rule establishing registration requirements for PPPs. Companies using PEPs and PPPs should review their fiduciary liability insurance wording to ensure it is broad enough to address emerging exposures contemplated in PPP/PEP arrangements.
  • COVID-19 relief legislation:
    • In March 2021, the American Rescue Plan Act (the Act) provided pandemic-related financial support to families as well as temporary COBRA and Affordable Care Act subsidies.
    • The Act also extended funding stabilization for single-employer pension plans, modifications to executive compensation rules, as well as financial assistance for certain multi-employer pension plans.
    • We will monitor any impact the Act may have on fiduciary liability and the fiduciary liability insurance marketplace.

Buyers should keep on an eye on key loss drivers.

  • Fees/suitability: Fee cases continue to drive loss development. The cases generally assert that fees paid to financial institutions have eroded employee retirement plan assets and less expensive, non-proprietary investment options should have been offered. These suits are not limited to large plans. A wave of cases involving 403(b) plans has impacted the higher education and healthcare sectors.
  • Financial institutions: Organizations whose plans maintain proprietary funds will continue to face the most challenging renewals.
    • Have you already been the subject of claim activity? A financial institution that has already been sued may not be viewed as a better risk to a new insurer, given the possibility that subsequent claims may differ enough from the previous claim to put another limit of liability in play. Also, increasingly, incumbent insurers adjusting a claim will push for increases in premium, retention and/or restrictive language.
    • No claim yet? Not so fast: Organizations that have not been the subject of claim activity may also not be viewed as a better risk. For financial institutions with proprietary funds in their plans, currently or historically, insurers may assume that a proprietary fund-related claim is likely at some point. Incumbents may press for rate increases and restricted terms and conditions. Other insurers will likely show limited interest.
    • Opportunities to moderate and spread adverse terms over time? In some instances, adjustments in rate, retentions and other terms and conditions may come so fast that insureds may be able to negotiate ways to spread these adjustments over time.
  • Limit adequacy: With prohibited transactions/fees litigation pushing claim frequency and severity, buyers should be vigilant in reevaluating limit adequacy. The fiduciary market is steadily hardening, consistent with other financial lines markets. It might be challenging to add capacity, but opportunities are still available.

Disclaimer

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D&O Liability Product Leader
FINEX North America
Willis Towers Watson

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