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June 23, 2011 at 10:38 am #2372
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