HOW MUCH INSURANCE SHOULD I BUY?
There are some general rules that insurance brokers use when it comes to buying insurance but they don’t apply very well to RIA’s. Most brokers say that businesses should spend about one percent of gross revenues on insurance costs. However, it is better to compare claims effecting firms with similar business models then compare costs to cover that risk. When done right, you can do better than the conventional wisdom. Today we are looking at factors to consider when contemplating limits.
Should I Self –Insure?
Discussing insurance limits is like an onion that we could keep pealing all day long. But like onions, if we spend too much time pealing them we will start to cry. So I am going to hit the highlights to help you discover what is right for you. At the core is the question, “Should I self-insure?” I know you’re surprised that I have recommended this but we will circle back to that later.
What is Your Business Model?
If you are state registered with less than twenty million AUM, you will most likely be hitting minimum premium pricing. There are still levers you can use to control pricing and manage risks but just like the multibillion dollar RIA’s you really should be working with a broker that knows you and what you do. The best brokers are skilled and ready to start wherever you are and can help you make adjustments along the way.
Perhaps you are a main street financial planner who works with individuals and small businesses. What kind of assets do you advise on? If your AUM is less than a couple of hundred million, one million limit on your professional liability coverage (E&O) is sufficient. You may want to include some wire fraud protection and cyber coverage but the most important coverage is your E&O.
Maybe you are well established with many high net worth clients so you are starting to work with more alternatives. If this is your situation and your AUM is above 200 million, you want to look at two million in professional liability limits. Because of the inherent complexities of your growing organization you may need to increase limits or add coverage lines like employment practices and crime coverage.
As you grow beyond a billion dollar AUM firm you should be looking at professional liability limits with multiple million in limits. You also want to address your cyber and crime coverages. To control costs you can take a close look at the control mechanisms in place and adjust your limits based on those risks. For example you may want to limit your cost of corrections coverage, also known as trade error coverage.
If you are managing a private or public fund as either a GP or LP, not only do you want to think carefully about the limits but you want to include directors and officers (D&O) coverage. When managing a fund, you can expect to spend more in insurance because the risks are higher and you may need to carry higher limits.
Before we wrap up today, I promised to tell you when buying professional liability insurance is not the best option. I was reviewing a situation with a client managing a private fund. It turned out that nearly half of the AUM of this multi hundred million dollar fund was his own. The cost of coverage in ten years would have paid for the entire annual limit. This prospective client had the ability and willingness to set aside the limit he was purchasing. In this case, it was the right call to self-insure. Bottom line, when a client is upset and the firm does not meet its fiduciary duty are you able and willing to fund a complete and strong defense?
Today’s BPI Advice: When thinking about coverage levels it is best to talk with an insurance broker who has experience supporting the resolution to many RIA claims. You should think about the claim that is most likely to impact you…not some general rule of coverage.
Cases studies, testimonials and other information on the website are for illustrative purposes only, and may not reflect the terms of any particular insurance policies nor the coverage of any specific claims. Box Professional Insurance, LLC makes no representations of any kind regarding coverage or the specifics of any policy or claim. See your insurance carrier and policy for details on coverage, exclusions and limits.