Liability protection for ILS funds
At JLT Specialty USA, we serve over 40 percent of the world’s largest insurance-linked securities (ILS) funds. The ILS community has grown rapidly and this change has required more sophisticated financial solutions. Working closely with our ILS clients, our team created a unique new insurance product specifically designed for ILS funds, their boards and investment managers.
We faced two main issues. First, directors and officers (D&O) and professional indemnity (PI) insurance policies that ILS fund managers traditionally purchase—to hedge their main operational liabilities—have struggled to evolve with the growing businesses and cover emerging risks. Cybercrime and international regulatory exposures are examples that further heighten the liabilities of ILS managers, in addition to the liabilities they face while managing catastrophe investments and acting as reinsurers.
The second issue involves the emerging trend around ILS capital deployment. ILS investment strategies are expanding from traditional catastrophe-based reinsurance trades, to recent retail commercial market exposures. In the commercial insurance markets, some ILS funds are now looking at ways to strategically invest their capital in emerging long-tail liability risks, such as cybersecurity, operational risk and financial loss from adverse regulatory events.
A number of our ILS fund clients are evaluating trades in the commercial markets via partnerships with retail-based managing general agencies and managing general underwriters. With these dynamic underlying investment shifts, ILS funds are assuming expanded liabilities amalgamated from their changing professional service obligations to their investors, and heightened litigation risks associated with underwriting and managing claims from commercial risk.
The challenges associated with modelling and underwriting long-tail risk versus catastrophe-based perils can be wildly different. In the commercial markets, underwriting errors in these lines more commonly lead to litigation. Claim disputes and denials of claims (even when substantiated) result frequently in suits alleging bad faith.
Currently, many ILS funds utilise D&O and PI insurance meant for traditional investment managers. Often these policies are not structured to target the unique exposures involved with being ILS fund managers, reinsurers, and essentially quasi-retail insurers. If this insurance is not properly structured, ILS funds could find themselves facing uncovered liability claims.
Born out of these two issues, JLT Specialty USA’s new ILS Protect product was created to address the specific liabilities of ILS operations, and to fill this gap for ILS managers who have shifted from the traditional catastrophe-based investment model.
ILS Protect is designed to address these issues with simple-to-read policy language. It does the following:
