Rate predictions
Rate predictions: Fiduciary
| |
Trend |
Range |
| Commercial/nonprofit (defined contribution pension plan assets up to $50M) |
 |
+5% to +15% |
| Commercial/nonprofit (plan assets $50M to $500M) |
|
+15% to +45% |
| Commercial/nonprofit (plan assets above $500M) |
|
+25% to +60% |
| Financial institutions |
|
+15% to +50% |
Key takeaway
As some carriers effectively leave the space, premiums and retentions have been increasing substantially and are likely to continue to rise well into 2022.
Underwriters continue to step up their scrutiny based on continued loss trends.
- Underwriting focus: Although excessive fee litigation has slowed from its high point in 2020, and some recent settlements have been lower, carriers are still concerned about the volume, unpredictability, high costs of defense and substantial number of pending cases. Particularly with commercial and large nonprofit (university and hospital) risks, underwriters are focused on defined contribution pension plans with assets greater than $500 million, where previously the cut-off had been $1 billion. Plans with more than $250 million receive almost as much scrutiny, and even smaller plans cause concern, as plaintiffs have started to target them. Where once formal applications were often not required, insurers are now seeking detailed information, especially about fund fees, record keeping costs and investment performance, and sometimes, plan governance.
- Retentions/sub-limits: Insurers are looking sharply at retentions. First-dollar coverage has become almost impossible to obtain. Increased retentions of seven figures are becoming commonplace for specific exposures, e.g., prohibited transactions/excessive fees and mass/class actions, with a couple of carriers seeking retentions up to $25 million. Even the non-class action retentions are generally six figures now (previously five figures). Some insurers may only offer a sub-limit of liability or exclude prohibited transactions/excessive fees coverage. Marketplace results will vary with plan asset size, plan governance and claim history, but it is a challenge to get credit for positive risk factors.
- Coverage breadth remains steady: Other than increasing retentions, carriers have not generally been restricting coverage. It should be noted, however, that terms vary more from carrier to carrier than in other financial lines.
- Blended coverage: Many organizations, including financial institutions and private/non-profit companies, continue to buy fiduciary liability coverage as part of a package policy, which in some cases has softened the marketplace challenges.
- Buyers struggle with primary market concentration, but is some relief in sight? Although a small number of insurers continue to lead most large programs, some traditional financial line markets that have not historically written much fiduciary risk have begun to enter the commercial risk space and may provide limited alternatives on a case-by-case basis (particularly if there are related primary D&O opportunities).
- However, there are not as many new markets for fiduciary as there are for directors and officers liability, and at least as many markets have intentionally priced themselves out of the sector.
- Furthermore, it seems that even the carriers with the most appetite for fiduciary liability are closely monitoring the capacity they are putting out, and the most common primary limits have fallen from $10 million to $5 million.
- Rate prediction qualification: Rate increases may be higher or lower depending on the insured’s existing pricing. Price per million of coverage can vary substantially among risk classifications, notably those involving plans with proprietary funds.
Many accounts are still viewed by carriers as challenged, particularly in certain industries.
- Challenged classes include financial institutions with proprietary funds in their plans, whether currently or in the past, especially if they have not yet been the subject of a prohibited transaction claim. However, financial institutions without proprietary funds in their plans and/or who accept relevant exclusions and/or already have elevated premiums are seeing smaller increases.
- In the nonprofit space, large universities and hospitals are seeing some of the most substantial premium and retention increases and may struggle to find placement. This is the result of a wave of excessive fee cases in this sector in recent years.
- Underwriters are focused on issues such as excessive revenue sharing, uncapped asset-based vendor compensation, expensive retail share class investments, expensive actively managed funds, lack of regular benchmarking and RFP processes. Though it may seem counterintuitive, some carriers will be nervous about potential insureds who have recently improved their processes but might be attractive targets for plaintiff firms who would make allegations about the prior period.
- Any organization may be treated as risky by some carriers, and it can be challenging to get credit for best practices.
Broader economic challenges may be increasing risks.
- Underwriters have been so focused on defined contribution pension plan risks that they have not paid as much attention to other types of plans, especially health and welfare plans. However, this could change if economic uncertainties accelerate these risks.
- Uncertainties include the pace of business re-openings post-pandemic and stubborn unemployment. If the pandemic worsens, for example, with a resurgence of COVID-19 cases as the economy begins to open, the market could harden further.
- Cutbacks in benefits (particularly retiree medical benefits) and/or workforces may lead to claims and potentially large class actions.
Litigation persists, and legislative and regulatory changes create uncertainty.
- Excessive fee claim frequency rose significantly in 2020 but seems to be slowing in 2021: Approximately three times more cases were filed in 2020 alleging breaches of fiduciary duty involving excessive fees than were filed in 2019 — substantially more than in prior years as well, but unofficial estimates suggest that the filing rate for 2021 is on pace to be 40% or 50% lower than what it was in 2020. Also, although most settlements have exceeded $10 million, several recent settlements have been under $3 million. Carriers, however, have not at this time acknowledged the frequency drop in their press releases/white papers or tempered their increases accordingly.
- Excessive fee claims against financial institutions with proprietary funds stand out: Class actions against financial institutions alleging conflicts of interest and wrongful profits in connection with investments in expensive and/or poorly performing proprietary funds continue to be a common and exceptionally hard-to-defend subcategory of excessive fee claims, resulting in higher-than-average settlements.
- We are seeing an expansion in the types of claims beyond excessive fee claims: Recent filing trends include suits alleging reduced benefits due to the use of outdated mortality table assumptions, as well as class actions involving COBRA notice deficiencies.
- Employer stock class actions against public companies are dying down, while private companies are still targeted: In the continuing aftermath of the U.S. Supreme Court’s decision in Fifth Third Bank v. Dudenhoeffer, very few employer stock drop class actions have been filed, and those few continue to be dismissed. Nonetheless, carriers remain concerned about employer stock in plans. They will often exclude employer stock ownership plans or include elevated retentions. Meanwhile, class actions against private companies with employer stock plans mostly arising from valuation issues continue to be filed and seldom dismissed.
- The U.S. Supreme Court’s decision in Thole v. U.S. Bank limits some suits: The Court’s decision finding a lack of standing in relation to a defined benefit pension plan with adequate funding that hasn’t missed making benefit payments should make it even harder for plaintiffs to bring successful suits in relation to defined benefit plans. Furthermore, some defendant corporations have had success in convincing courts to extend the holding to defined contribution plans when the named plaintiffs weren’t invested in the specific questioned investments.
- The U.S. Department of Labor has launched several plan cyber audits: In April 2021, the DOL issued guidance providing tips and best practices to help retirement plan sponsors and fiduciaries better manage cybersecurity risks. Not long after, the DOL initiated many audits regarding retirement plan cybersecurity practices.
- The evolution in regulatory attitude towards environmental, social and governance (ESG) investing continues: On October 14, 2021 the Department of Labor (DOL) published for comment a new rule which modifies the previous administration’s 2020 rule that sought to discourage retirement plans from investing in ESG-related investment options by forcing fiduciaries to justify such investments. The change is “intended to counteract negative perception of the use of climate change and other ESG factors in investment decisions caused by the 2020 Rules, and to clarify that a fiduciary’s duty of prudence may often require an evaluation of the effect of climate change and/or government policy changes to address climate change on investments’ risks and returns.” Pursuant to the new proposed rule, plan fiduciaries would be allowed to consider collateral benefits of ESG investing on a tie-breaking “all things being equal” basis and may also consider that ESG risks can directly affect financial interests as well. The proposed rule would apply the same fiduciary standards to the selection and monitoring of a Qualified Default Investment Alternative (QDIA) as applied to other designated investment alternatives, including permitting consideration of ESG factors notwithstanding that such decisions could be politically controversial.
- Pooled employer plans (SECURE Act): The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) amended provisions of federal law, including ERISA, to establish a new form of multiple employer plan (MEP) called a pooled employer plan (PEP), which allows employers to join and delegate both investment and plan administration fiduciary obligations to pooled plan providers (PPPs). PEPs and PPPs need to ensure that they have sufficient and appropriately tailored fiduciary liability insurance to address emerging exposures contemplated in PPP/PEP arrangements.
- COVID-19 relief legislation: In March 2021, the American Rescue Plan Act (the Act) provided pandemic-related financial support to families as well as temporary COBRA and Affordable Care Act subsidies. The Act also extended funding stabilization for single-employer pension plans, modifications to executive compensation rules, as well as financial assistance for certain multi-employer pension plans. We will continue to monitor any impact the uncertainty created by the Act may have on fiduciary liability and the fiduciary liability insurance marketplace.
Buyers should keep on an eye on key loss drivers.
- Excessive fees: Excessive fee cases continue to drive loss development. A growing group of plaintiff firms have been suing diverse entities, making a variety of allegations involving excessive investment and/or recordkeeping fees that result in reduced investment principle and reduced returns. Many of these class actions also allege losses due to sustained underperformance in relation to specific investment options. The U.S. Supreme Court will be considering an excessive fee case against Northwestern University in its next term, which could have broad impact, or at least provide some clarity concerning appropriate pleading standards in such cases.
- Financial institutions: Excessive fee claims against financial institutions often include allegations that plan participants were disadvantaged due to conflicts of interest that influenced the plan sponsor to include its own overpriced investment options in the plan.
- Although the first excessive fee cases seemed to focus on specific industries and plans whose assets exceeded $1 billion, in recent years it seems no plan is safe. Various public, private, multiple employer and nonprofit entities have been sued, and even plans with assets below $100 million have been targeted (although only one suit against a plan with assets below $1 billion has resulted in an eight-figure settlement).
- Have you already been the subject of claim activity? Incumbent insurers adjusting a claim will push for increases in premium, retention and/or restrictive language, which may necessitate reevaluation of the existing program. Some cautious carriers may not view a potential insured that has already been sued as a better risk, given the possibility that subsequent claims may differ enough from the previous claim to put another limit of liability in play. However, other carriers may evaluate the risk of unrelated subsequent claims as low and be interested in the risk.
- No claim yet? Not so fast: Organizations that have not been the subject of claim activity may also not be viewed as a better risk. Particularly for financial institutions with proprietary funds in their plans, currently or historically, insurers may assume that a proprietary fund-related claim is likely at some point. In general, carriers are aware of ERISA’s long statute of limitations (six years) and are therefore more concerned with past practices than they might be in connection with other policies.
- Limit adequacy: With excessive fee litigation pushing claim frequency and severity, buyers should be vigilant in reevaluating limit adequacy. With the fiduciary market remaining hard, some insureds have been tempted to cut the size of their towers, but arguably this is the wrong time to take such short-term measures. It might be challenging to add capacity, but opportunities are still available.
Disclaimer
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.
