BY MARK E. RUQUET
In the midst of a crisis, buyers of property-casualty insurance will want more coverage for their increased potential exposure, but some insurers may become reluctant to sell it because of the increased perception of risk.
According to insurance brokers, such sentiments are now evident in the markets for director and officers liability insurance and errors and omissions coverage for hedge fund and private equity managers, in the midst of economic turmoil gripping the financial sector. However, the emergence of the current situation is not affecting both equally simply due to the different nature of the two types of vehicles.
The major difference is that hedge funds do not take an active role in the management of a portfolio company like private equity investors do, said Michael J. White, senior vice president, financial institutions industry leader of the Executive Risks practice of Willis HRH, a unit of Willis Group Holdings.
Private equity is usually broader coverage and extends to outside directors who are appointed to company boards, he said. “With hedge fund coverage, you are not envisioning a risk of the fund going out there and actively asserting itself or getting involved in the management of another company,” Mr. White noted.
Some hedge funds can be activist and try to influence management at a company, but that is very different from controlling its operations, he said.
Likewise, Michael Klaschka, managing principal of the Management Risk practice for New York-based Integro Insurance, said insurance contracts for private equity firms differ primarily because of exposure arising from the advice and management the private equity fund is involved in. Some hedge funds may see their coverage extend beyond the managers to outside directors liability, where the fund has named a director or directors to a company’s board.
“Hedge funds are a good business to be in because they value a broker who knows what [he or she] is doing since most of these funds don’t have risk management departments,” Mr. Mr. Klaschka observed. “Typically, the chief financial officer or general counsel or compliance officer got stuck with the job and that is where we provide a lot of value.”
Despite the general soft market and observations that rates continue to decrease in the professional liability area, in the financial services segment, the market is taking a different turn, the brokers noted.
“Markets are constricting and reducing capacity, increasing premiums and especially retentions in this space,” according to James O’Brien, managing director and co-leader of Aon private equity and transaction solutions practice in New York. This is happening in the face of increased claims and litigation driven by the financial crisis and general economic downturn, he said.