How much insurance should we buy?

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There are a range of factors to consider which influence the source of claim and/or quantum of a claim, including:

 

• Legal requirement.  Consider the minimum limit required by law as an AFSL holder.  If you have retail exposure then RG126 is relevant, and at a minimum you should buy $2.5m of PI insurance.

 

• Contractual requirements.  You may have entered contracts with third parties, including clients, which specifies what you must purchase.

 

• Size of FUM.  The larger the FUM then theoretically the more money can be ‘lost’, which has an impact on size of claim.

 

• Number and complexity of mandates. The more clients/mandates the more exposure, and the more complex the mandate the more likely a possible breach.

 

• Quality of compliance program to manage conflicts of interest, especially as the business grows

 

• The nature of the investment profile.  Is there is inherent volatility in the investment mix?

 

• Use of leverage and gearing can exacerbate the size of loss.

 

• Use of derivatives.  The greater the use of complex instruments, the greater the chance of an error.

 

• Overseas exposure: In particular overseas investors (e.g. US) can increase exposure to claims.

 

• Lifecycle of the business.  Companies going through growth phase may be at risk, because resources can’t keep pace with growth, and errors can occur.

 

• Staff: the number of staff (sufficient to manage workload, especially as business grows), quality of staff (the more experienced the better), longevity of staff (turnover may be an indicator of issues).

 

• Regulatory issues.  There may be industry wide issues that impact the risk profile of client.

 

• Culture.  This is crucial.  A business can have all the compliance processes and procedures in place, but if there is a culture of ‘getting the job done’ irrespective of compliance and risk management, then the likelihood of a claim increases.

 

• Transparency.  The more transparent the operations and performance of the business, the less likelihood that errors will remain undetected and increase.

 

• Premium cost.  Ultimately, the value in purchasing additional limit of indemnity needs to be weighed against the additional premium cost.

 

Author: John Kelly
Director
Consult Insurance Solutions

 

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