Miller brings a lifetime of operational experience to helping hedge funds with insurance. It also features a global team, highly specialised in the insurance needs of alternative asset managers. Miller does work for asset management clients in London, Hong Kong and Singapore, which together have in excess of $250 billion in assets under management. Brian Horwell is Head of Financial Institutions and heads a global hedge fund-focused team that sits within a much bigger Professional Risk division.
“When we advise on professional indemnity insurance we do so from a position of having extensive knowledge of the hedge fund industry,” says Horwell. “We marry the needs of the hedge fund client with the needs of the underwriter which could be a Lloyd’s syndicate or another insurer.”
A core offering for hedge fund clients is directors’ and officers’ (or D&O) insurance. Whereas professional liability covers the limited liability of a company or shareholder, D&O covers the personal liability a director has by virtue of his fiduciary responsibilities. The big danger for directors and officers is that liabilities can be very personal in application. It means a director or officer can’t just rely on the indemnities provided by the asset management company where they are employed or by the fund where the individual is a director. Thus a director or officer will require specific protection from potential claims that could put their personal wealth at risk.
Everyone will agree the desirability of generating such protection. The more complicated part of it is ensuring that the most suitable protection is agreed. This can be more difficult than it may seem given that the wordings of insurance contracts are evolving all the time. What’s more, it is hardly surprising that innovation can be used by the clever to entrap the unwary.
“Some brokers operate this as part of an elaborate game they play,” says Horwell. “In order to always be prepared we are constantly upgrading our wordings and it is at the forefront of what we do.” But he is careful to advise clients that in addition to getting wordings right, continuity with one’s insurers is hugely important. In the absence of that any insurer may engage a lawyer to argue about the application of the policy’s terms and delay settling the claim.
“The reality is that you get what you pay for,” says Horwell. “If you abuse underwriters over a period of time, say, by moving a policy every year, the one time you make that claim you may have difficulty getting the claim paid. Having continuity with the underwriter is the best way of ensuring that your claims get paid.”
During a time when it is difficult to raise assets and performance fees have fallen off, most hedge fund managers are facing sustained cost pressure. Naturally, this gets transferred to the firm’s operating cost base, which will include insurance premiums for different types of coverage and protection. From this arises the temptation to switch underwriters regularly to save on premiums.
However, just as financial markets are cyclical, so too, is the price of different types of insurance cover. Indeed, in the current juncture prices are at historic lows. This softer end of the insurance cycle means that policy buyers have less reason to chop and change providers. The corollary is that when prices are low underwriters will be more likelyto examine policy wordings carefully and look for ways to walk away from a claim. This is where the ability of a broker to ensure that a claim is honoured becomes paramount.
“You need your broker to make sure the underwriter behaves and your claim is paid,” says Horwell. “We have the best claims team in the insurance market. We’ve won independent awards year after year for our claims service. This is what we rate ourselves on.”
A holistic approach
Miller takes a holistic approach to providing a top quality insurance service. Essentially, it is about linking hedge fund clients with underwriters and doing so in the highest professional manner.
“To sum it up, from the start of buying the insurance we seek to get a firm the best price married with the best quality underwriters,” says Horwell. “To this we bring the very best claims service in the industry. That approach goes across all our products.”
It means that Miller’s claims team works side-by-side with its account executives when an insurance programme for a hedge fund client is being designed. The coordination means that if the time comes to make a claim, clients will get it handled in the most efficient manner.
The coordination and preparation underscores Miller’s aim to resolve a client’s claim smoothly and quickly. In this respect, the firm’s track record in responding rapidly to events bears scrutiny. In 2005, after Hurricane Katrina savaged the Gulf Coast, Miller expedited a team to the US and became the first broker to settle claims arising from the disaster.
Over a century in business
Miller was founded in 1902. It has evolved into an independent specialist insurance and reinsurance broker, operating overseas and at Lloyd’s. The combination of its heritage and reputation for delivering results are unique.
As a privately owned company, Miller can focus on clients, rather than external shareholders. It also promotes continuity of service and quality, unbiased advice for clients.
Miller works with like-minded affiliate companies and correspondents globally. This size and flexibility means the firm has real market influence, but also means that senior directors stay in day-to-day contact with clients, the markets and internal teams.
As anyone setting up a hedge fund business will soon become aware, commercial insurance is treated very differently in law from, say, motor insurance. In the commercial world, ‘Go Compare’ may apply to competing proposals from competing brokers, but there is no online policy offering. Nor is there the same basic protections offered by the Financial Services Authority to consumers, though Miller is an FSA-regulated firm. For any commercial insurance buyer, the maxim of caveat emptor – buyer beware – is appropriate. This is why the expertise of the broker is the key consideration for the hedge fund client when coverage is being arranged. That expertise is then called on again when a claim arises. “We have been involved in successfully settling some of the most high profile claims in the hedge fund market,” says Horwell.
The scenario is drearily familiar enough. Lawyers for the differing parties get bogged down in minute details, fee clocks ticking. Entrenchment sets in. Frustration among clients mounts. In such a scenario, the right broker can make a difference.
“A good quality, knowledgeable broker can often break the impasse through our relationships with markets, lawyers and the clients themselves,” says Horwell. “Having a highly respected claims team is one of the most important assets we have.”
Professional risk claims
Miller’s eight strong claims team just looks after professional risk claims. They sit within a 70-strong Professional Risk division, having access to its broad range of services and expertise as required. Risk protection in recent years has become more standardised as prices have fallen, even during thepast year.
The trend hasn’t even been interrupted by events surrounding the collapse of Weavering Capital. Like US treasuries or gilts, insurers have been chasing income by writing D&O policies. But the Weavering case may still represent a turning point for D&O policies and asset managers.
“Weavering were pilloried,” says Horwell. “The point about the judgement is that the judge said the directors were ‘wilful and knowing’. By saying that, he negated the coverage provided by the funds and the D&O insurance.”
Yet the D&O insurance was one of the last sizeable assets remaining with Weavering. Thus the interest of shareholders is to have it upheld. If the appeal fails and the judgement is upheld there will be no indemnity provided by the insurers to shareholders.
“It is sending a message out,” says Horwell.
“If you are going to be a director of these funds you have to take your responsibilities seriously. This has had an impact and the number of directorships is a big issue now in Cayman.” The result is a change in how firms are behaving rather than a fundamental change in the regulatory environment.
Evolution in demand
Since 2000, there have been significant changes in how hedge funds use insurance. Only a decade ago, professional indemnity protection was bought by just a handful of hedge funds, mainly the ones with institutional investors or corporate backers.
“High net worth investors weren’t interested in insurance or retribution,” says Horwell. “They wanted performance – end of story.”
With corporate and institutional pressures rising, the demand for insurance began to grow quite rapidly. The early hedge fund pioneers hired executives who didn’t have their personal wealth and from this came a need to look for D&O insurance. As funds of funds and then institutions became more prominent investors they often required that protection be set up for directors.
“The regulatory environment, investors and the professional managers that were brought on all require this insurance now,” says Horwell. “The entry of more brokers, insurers and lawyers has seen a much more competitive environment develop. The market has moved on a lot. It has changed the environment a lot and that is why we have had to change with it.”
On future trends, Horwell says indemnity prices will start rising at some point over the next 12-24 months. But he acknowledges that with hedge fund operating margins being squeezed, getting traction for new products, such as key man insurance, will be tough. “Insurers may also seek to limit coverage for the costs of regulator investigations since it’s costing them a lot of money,” he says. “Coverage will likely be restricted. My advice to anyone is to buy now.”
Head of Financial Institutions
Horwell has worked In the insurance industry for 25 years. He spent 15 years as a leading Lloyd’s underwriter, specialising in financial risks, the professions and directors’ and officers’ insurance. Horwell joined Miller in 2002 and set up the financial services team.
Kerner began his insurance career in 1990 with Richard Lawrence syndicate. He joined Miller from James Hallam Limited in 2011. He is a specialist in professional indemnity, directors’ and officers’ liability, trustees’ indemnity, initial public offering policies and financial institutions coverage.
Ellis began his insurance career in 1983 with Sedgwick Group. He joined Miller from Aon in 2010 and is a specialist in financial services with particular focus in the investment management sector. Ellis was based in Hong Kong for five years in the 1990s.