Protecting financial institutions – CNA Canada unveils Asset Managers Liability Solution

“With the potential for an economic downturn, market volatility and rising inflation and interest rates, investment firms need to be well positioned to address various systemic risks,” said Abena Apraku (pictured), assistant vice president, underwriting management liability – specialty lines, CNA Canada.

“An economic downturn could affect the performance of investments, which could result in allegations of mismanagement and damage to the firm’s reputation if clients sustain significant financial loss. Claims alleging a lack of due diligence are also of concern to investment managers as investors may feel that the investment options proposed were not suited to them.”

To address the complex risks of the Investment Management sector, CNA Canada launched its Asset Managers Liability Solutions in December last year. The product, written with broad definitions and key extensions and backed by in-house experienced claims professionals, is CNA Canada’s response to the abundance of risks that threaten asset managers’ ability to serve their customers.

Asset Managers Liability Solutions offers five available coverage parts: Investment Adviser Management Liability, Investment Adviser Professional Liability, Fund Management and Professional Liability, Employment Practices Liability and Fiduciary Liability.

What are the top risks that Asset Managers face?

Asset Managers include a variety of specialists, such as registered investment advisors, hedge/alternative fund managers and their advisors, wealth managers, financial consultants, and real estate fund managers.

Some of the common risks faced by Asset Managers include:

Suitability
Breach of fiduciary responsibilities
Misrepresentation
Discrimination
Cost of corrections
Regulatory investigations
Conflict of interest
Failure to supervise

“Firms need to have strong governance practices and mechanisms in place to detect insider trading,” Apraku told Insurance Business. “They also need to apply due diligence measures when hiring, including thorough background checks on individuals; protect classified and sensitive data; and conduct internal training on conflict of interest and other issues for traders.

“Getting investigated by regulatory authorities is a significant exposure. In order to limit this, a strong emphasis on internal controls is required to prevent issues that could lead to fines, penalties, and damage to the firm’s reputation.”

Alleged breach of fiduciary duty, another common risk, could result from deviating from investment strategies or charging excessive fees. Asset managers could face errors and omissions lawsuits around such allegations, if they commit trade errors that can be costly to rectify.

How are ESG investing and cyber threats heightening risks for asset managers?

Investors are increasingly sensitive to environmental, social and governance issues, putting their funds where their beliefs and ideologies lie. But with the rise of ESG-driven investing also comes the risk of “greenwashing” – false or misrepresented information about a company’s environmental impact aimed at deceiving the public or investors.

“Investment managers can be accused of misrepresenting their investment options to make them appear more environmentally friendly,” said Apraku. “While offering sustainable investment options is a wise strategy it has also presented increased risk when investors feel an investment manager’s representations are not accurate.”

Cyberattacks are also a significant reputational risk for financial institutions. The frequency of cyberattacks on the sector has risen during COVID-19, and more than ever, companies need to be intentional about their cybersecurity strategy.

Apraku explained the impact of data breaches on asset managers: “Financial institutions are a target of cyberattacks because the stakes are high. Cyber criminals may see them as a ‘high risk, high reward’ option. These organizations need to periodically challenge their systems with penetration testing and keep up with the latest technologies to protect not only their confidential data, but also their reputation.”

Tailored, flexible insurance solutions for financial institutions

CNA’s Asset Managers Liability Solutions offers coverage for both publicly traded and private firms through its five coverage parts, which can be purchased standalone or in conjunction with one another.

On top of the CNA team’s specialized industry knowledge, it also has in-house claims professionals that are experienced in handling complex claims, including investor claims and complaints, regulatory investigations, claims for breaches of fiduciary duty, Employment Practices Liability (EPL) claims, and more.

“Our core product is primarily designed to address exposures associated with fund management, investment advice and errors or omissions” Apraku explained. “But it’s equally important for these firms to have coverage for their people working within the firm and that’s why we have EPL and Fiduciary Liability options available.”

Flexibility and convenience are what make CNA’s offering truly unique, according to Apraku. “Often, employment practices and fiduciary liability coverages are separate policies in the market, whereas we simplify this into one modular policy that addresses multiple risk areas,” she explained. “Rather than navigating through multiple policies and ensuring alignment, having one policy with multiple coverage parts is a key differentiator of our product.”

What should brokers know about the financial institutions sector in 2023?

“Brokers should expect to see some increased stress on loan portfolios and uncertainty in real estate markets as interest rates rise”, Apraku said. Financial institutions must also plan for increased digital transformation as hybrid work takes hold.

“They’ll need to keep up with evolving consumer needs because of the trend towards hybrid work arrangements. They’ll need to prepare to address supply chain storage shortages, which also seem set to continue,” Apraku said. “There’s also a growing need for sustainable investment options and products for investors. Financial services firms need to determine ways to provide new investment products, as well as make sure that they represent those products accurately.”

Finally, keeping up with regulatory changes will be a significant part of the 2023 narrative for financial institutions. Brokers and their clients will need to keep up with new regulations to avoid liabilities and strengthen the sector.

For more information on CNA Canada’s Asset Managers Liabilities Solutions, please visit cnacanada.ca.