The big players in the insurance broking market are almost household names, and will insure anything. This works for them, but it does leave a gap for more tailored offerings targeted at specific sectors. Howden, the winners of The Hedge Fund Journal award for the Leading Insurance Broker, are large – they are, in fact, ranked by Post Magazine as the third-largest City (EC3) broker – but they are not one of the monoliths, which has allowed them to offer more specific policies. A quick glance at their website shows just how specific this can get, with hypnotherapists and complementary therapy listed in their specific sector coverages. Outsiders might see hedge funds as a similarly obscure industry, but coverage of hedge funds has become an important part of Howden’s business.
The broker has differentiated itself in the sector by committing to it significantly. They have 25 people in London looking after the alternatives sector – hedge funds and private equity, which have a lot of crossover. This means that, although the company is relativelyyoung – the business began in 1994, and founder David Howden is still only in his late forties – Howden has one of the best developed hedge fund insurance practices available.
David Howden is still a major shareholder and CEO of Howden’s holding company parent, the Hyperion Insurance Group. In some owner-managed businesses this can be limiting, but Howden himself has driven a culture that is deliberately very corporate in nature. As Lorraine Adlam, chairman of Howden Insurance Brokers in London, says, “Our model is much more institutionalised. The culture of Howden is a very collegiate culture.”
This institutional outlook ensures that there is always support available in the case of something going wrong – which is, after all, why insurance exists. Clients are supported by a team of people, meaning that service can be consistently delivered whatever the circumstances. This is the idea behind the corporate culture: every employee acts as part of the business rather than as disparate individuals, with all of the politics that can bring. “I’m the account chairman on a lot of our major clients,” says Adlam, “but I don’t view them as my personal clients; I view them as Howden clients.”
This flat structure is not only beneficial to the clients. Adlam is keen to stress the benefits which it has for the way in which Howden works. “It is unbureaucratic; it is unpolitical; it is very meritocratic,” she says. “We empower people. If somebody comes in and they’re a graduate and they’ve got a great idea, they’re allowed to run with it. It makes it a fun place to work.”
Flexible client service
Some people want their insurer to remain in the background – Adlam tells of one large client who said, “I want to see you as little as possible” after the initial purchase of coverage. However, the standard role for Howden is to deliver comprehensive client service. This means talking to the client as much as possible, and being available for whatever they need. With some firms this can take the form of weekly contact, because constant dialogue can only be a good thing for both parties. This can mean more than timetabled reports. Some of their clients, including a top-10 European manager, ask that someone from Howden attends their board meetings to explain their policies.
The mainstays of the hedge fund insurance industry are professional indemnity insurance and directors and officers (D&O) insurance, which Howden sell as one policy in order to avoid gaps in the coverage. In the past the insurance policies for a fund have not been top of the list of priorities, but that has had to change. The financial crisis’s effect on performance has led to a closer examination of governance standards, and scandals – most notably the Weavering Capital case – have made the boards more aware of the fact that directors and officers liability insurance is more than ornamental. If the coverage is not good enough, the board members themselves could be open to personal liability in the event of failure if investors attempt to claw back some of their losses from directors accused of committing a wrongful act. This has added the extra impetus for care in examining the fund’s insurance, alongside the obvious fiduciary duty which directors owe to the fund.
“What we are seeing is fund independent directors becoming much more interested in what the D&O policy looks like,” explains Adlam. “It used to be, ‘Have we got one?’ Tick the box, put it in the bottom drawer. Whereas now they are showing much more interest in what the policy says and what the structure is. The trend now is for ring-fencing separate fund D&O cover from the manager’s programme.”
Coverage is key
In this environment, where boards are painfully aware of the dangers of an incomplete policy, precision is key. Seemingly insignificant details in a policy can mean that a claim is invalid, so the ability to give the assurance that this will not happen is a valuable asset for Howden.“Most brokers will have products that are drafted by insurers,” explains Adlam, “or they will use an insurer’s product that they have tweaked to make their version of the insurance product. We’ve got our own policy wording, so where we frequently win new business is on coverage.”
Another important aspect in giving this assurance is finding out what clients want by constantly working on their relationship with them. “For over 10 years we have had very strong relationships with the director community,” says Ed Brennan, head of hedge fund business development. “We know a lot of directors personally who believe in our brand.”
The hot topic at the moment which is causing concern in the European industry is the Alternative Investment Fund Managers Directive (AIFMD). AIFMD sets down some new regulations which have a direct bearing on hedge fund insurance: in order to address Professional Liability risks managers will have to have either set aside 0.01% of their AUM in capital, or else ensure that they have a professional indemnity policy which covers 0.9% of AUM.
Howden have drafted an endorsement to give a further assurance that compliance with AIFMD will not be a problem for their clients. Most professional indemnity insurance should, in any case, cover the requirements already, and they should not be too much of a shock for managers – although, in her involvement with the AIMA committee that looked at the initial consultation on the directive, Adlam saw proposals for more obligations which were “a lot more draconian”.
Where the directive might make a larger difference is for smaller funds who will not necessarily have the capital, but even then it should not be a seismic change. “We are seeing questions about it,” says Brennan, but “I don’t think we’re going to see a huge wave of managers coming out of the woods to buy insurance that we’re not aware of.”
Professional indemnity and directors and officers insurance is, and probably always will be, Howden’s core speciality, and they believe they can truly differentiate themselves in those areas, but they offer a range which goes beyond these basic necessities to protect against a multitude of different risks. If the clients want it, Howden will try to deliver. This applies to basic, unspecialised areas of coverage which any start-up will need – employer’s liability, travel, public liability, contents insurance, etc. These are not immensely profitable, but start-ups in particular appreciate the combined package which Howden offers which reduces the legwork they need to do at the very busy launch time. However, Howden are also prepared to try to cover more complex risks. “We are very open about trying to solve problems for our clients,” says Brennan, “trying to understand how their business works and what they are worried about. We have seen a lot of new worries come to them, and we are seeing if we can offset some of that risk for them.”
These bespoke policies can vary, and very much depend on the strategy. For instance, funds at the private equity end of the spectrum have increasingly been looking for transactional liability insurance around merger activity. A more hedge fund-specific example is a product aimed at protecting against tax liability, which might arise as a result of something like FIN 48, for instance, or uncertain or changing regulatory regimes in emerging markets.
Another theme for protection is around cyber liability. So many businesses are reliant on technology working as it should, and large amounts of money can be lost as a result of even one screen going down for an hour. For larger, unidentified problems – think NatWest’s disastrous system failure – technological problems can be catastrophic financially and reputationally. Howden’s product puts an emphasis on insurance against system failure, as well as malicious outside attacks.
“Talking to our financial institution clients, the really big risk for them is that they can’t run their business because their systems go down,” explains Adlam. “I think people are getting very very exercised about cyber attacks, about the involvement of government in cyber attacks, about organised crime, and malware, and the exposures around that very anonymous crime.” Indeed, research in this area has made Howden aware of their own vulnerabilities. “As a firm we are now looking into buying it, because having done this work it has suddenly made us realise how exposed everyone is,” says Adlam.
Most of the policies which Howden sells cover professional risks, but they are also prepared to cover some personal risks as well which are particularly pertinent to the high net worth individuals who make up much of the industry. Howden offer a crisis management policy which protects against kidnap, extortion, and similarly terrifying possibilities. Obviously this will not apply to many managers, but it is undeniably a risk in many emerging markets. “It’s amazing how few have never thought about it,” says Brennan. “It’s really something that if it is applicable to them in terms of their business operations they should just be buying as a duty of care to their employees.”
Insuring risks like these are not the core offering of Howden’s hedge fund group in the same way as PI and D&O, but it is indicative of a general attitude towards insurance which sits well with directors. Howden aim to offer protection for the myriad of risks that different funds face by responding to the needs of clients who are, after all, intimately acquainted with the concept of mitigating risk.