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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
    Consult Insurance Solutions


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