How Hedge Funds Can Reduce D&O Costs

Hedge Fund Insurance

Specifically their hedge fund D&O Insurance premiums?

In a challenging market, like we’re in, many hedge fund clients have been taking higher retentions to shave off some costs on their D&O/E&O premiums.

Over the past two years, we have seen some dramatic price increases for hedge fund insurance, specifically the D&O/E&O policy.  These price increases are not specifically targeting the fund industry –  we’ve seen big increases in just about all sectors for management liability aka D&O insurance.  But a lot of fund clients are asking how can we mitigate some of these increases?

Renewal Applications

The first thing is if you’re approaching the renewal of your insurance, your current broker is going to ask you to complete renewal applications and to return them with your financials and other documents.  I know, this is a big pain in the ass.  Nobody likes to fill out forms, especially insurance forms, but these need to be done and done as early as possible.

Doing so will give your broker plenty of time to get them into the hands of your existing insurance company underwriter as well as other underwriters to solicit competitive offers.

As a side note, if your current broker isn’t using a digital application platform that doesn’t require you to input ALL your application details, but instead just requires updating certain info – then we should talk.  This time-saving process takes the sting out of renewal apps.

The point about renewal apps is that the sooner you get them to your broker, the sooner they can get to market and that helps the renewal negotiation process.

Second, and this is the crux of this post –

Tell your broker that you’re willing to consider higher retentions on this renewal.

While this is not going to have a dramatic impact on your premium, but it will lessen the blow of a big increase.

At first, I was a bit squeamish suggesting that we significantly increase retentions or deductibles two or more times.  While there is a premium saving, the increased risk the client was assuming wasn’t commensurate with the premium offset at least in my mind.

Going from a $150,000 retention to a $300,000 retention or even higher, was scary to me.  But to some hedge fund clients, this is what they were looking for.

As an example, the premium savings going from $150,000 to $300,000 retention can be anywhere between 2% and 12%.  Going higher to a $500,000 retention would increase your savings between 5% and 17% (as well as your risk).

Something to be aware of for smaller funds is that you may bump down into the minimum premium range on high deductibles and there’s a diminishing return.  What I mean by that is regardless of how much risk you’re willing to take on, underwriters want a certain minimum premium for a policy regardless of the deductible.  In one example I saw a 12% savings going from $150 to $300,000 but going to a $500,000 only saved a few more dollars – less than one point, and that was due to the minimum premium issue.

So, you’ll need to evaluate this risk.

In some instances, the fund manager will tell me that they have just one or two clients requiring that they carry hedge fund D&O/E&O insurance.  They feel confident that their strategy is solid, they execute well, they’ve never had a claim in the past, etc., so why pay the insurance company more money for what is perceived as low risk.  I get it, and that’s fine – all I ask is that you go into this with your eyes open and know all the facts.

Many fund managers really see this insurance as catastrophic coverage anyway so taking on a higher deductible is worth it for them.  And the fact that the insurance is sort of an imposed requirement by a client, taking on higher risk to lower the cost of that imposed requirement makes sense.

As I said these are rough guidelines, so you should speak to your broker during the renewal process if this makes sense for you and your fund.

If you feel that you’re not getting the attention or guidance you deserve from your existing broker relationship, why not give me a call.  As a boutique insurance broker, I am here to personally guide my fund clients through the insurance renewal process to make sure they’re seeing the options they deserve.

Thanks for watching this video or reading this post, my name is Gordon Coyle and if you’re looking for help on your hedge fund insurance, give me a call.  No pressure, no sales gimmicks just some conversation to see if I can help you and if we might be a good fit for your business insurance needs.  Click the button below to get started on a conversation and let’s see if we’re a good fit.  Thanks!

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