As regulators become more aggressive in their pursuit of rogue hedge fund managers, insurers are increasing premiums to protect hedge funds from the costs of investigations and lawsuits.
Carriers are quoting average rate hikes of 5 percent to 10 percent for directors and officers (D&O) and errors and omissions (E&O) insurance after more than two years of price cuts, according to analysis by SKCG Group.
“More insurers entered this area in 2010, but some carriers are pulling back in 2012, which is resulting in an increase in rates,” president and COO of SKCG Richard Canter told Insurance Networking News. “During first quarter 2012, some insurers restricted coverage and increased premiums for those hedge funds that exhibit poor performance, large redemptions and public relations image issues but the better run funds won’t see a change in pricing until late 2012.”
For a small hedge fund with $200 million in assets under management, managers are paying $75,000 a year for $5 million of coverage.
A larger hedge fund with $4 billion in assets under management is currently spending $300,000 a year for $20 million in coverage.
“The expected increases are not based on fear mongering,” Carter said. “It’s actuary-based from the insurers’ perspective based on size of fund and investment strategy. It’s up to the individual underwriter to accept the risk.”
Insurers are responding to expectations of a more aggressive approach by regulators towards Wall Street as fraud and debacles such as MF Global continue to dominate the headlines and force carriers to pay out more claims. The SEC is focusing on compliance issues, including insider dealing and the role of expert networks, while the FBI says it has enough information to keep its investigations of suspected illegal insider trading at hedge funds going for at least five more years.
“It’s a matter of insurance companies finding the right pricing for anticipated claims. Investigations are expected to increase by 60 percent in 2012,” Canter said. “Insurers are doing the right thing. They are in business to make profit, otherwise they won’t put their capital at risk.”
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