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Asset Managers: The importance of run-off
Background
Turbulent macro-economic conditions, portfolio rebalancing by allocators, and months of uncertainty leading up to the recently announced UK budget, and US election results have undoubtedly affected the asset management space over the past couple of years. As a result, we have seen an increase in consolidation (in addition to day-to-day acquisitions and the natural liquidation of funds) as managers from across the investment landscape seek to boost profitability.
From an insurance perspective, company acquisitions and liquidations create a critical juncture, as the risk of errors and omissions being discovered increases, and any misunderstanding of claims-made insurance may expose directors to unintentionally uninsured risk.
To mitigate these risks, companies must either:
- Ensure they put an appropriate run-off policy in place to cover any past liabilities, or
- In the absence of run-off cover, make sure that all directors are informed and understand their potential exposure to future claims.
This article explains what a run-off policy is, how it operates in practice, and why it is essential for managing these risks.
By 2027, 16% of existing asset and wealth management (AWM) organisations will have been swallowed up or have fallen by the wayside.
Claims-made basis
Professional Liability (PI) and Directors’ & Officers’ (D&O) insurance policies, are written on a claims-made basis, which means they respond to claims first made against an insured during the policy period. It does not matter when the wrongful act has taken place, assuming the policy provides full retroactive cover.* Each notification of circumstance, that may or may not develop into a claim, will attach to the policy in place at the time.
Retroactive cover
Insureds must also be aware of 'retroactive date' restrictions on the cover, which will exclude claims arising from acts, errors or omissions prior to that retroactive date. For example, that retroactive date may be the first time that the insured purchased D&O cover or the date of inception of the insured's current policies.
What is a run-off policy?
A run-off policy is a specific period following the expiry date of an insurance policy, providing the insured with an additional period for claims to be reported to insurers – as explained by the claims-made basis above. However, a run-off policy only relates to wrongful acts, errors or omissions, that occurred before the date of acquisition/liquidation, as shown in the diagram:
The purpose of this is to protect the insured and provide limited ongoing cover for past acts, and is available in the event of liquidations, takeovers, or non-renewal of the policies.
Run-off policies can be purchased for a set period of time, usually for a pre-agreed percentage of the annual premium. It is non-cancellable, and the premium is required to be paid in full to the insurer at its commencement.
What happens when there is a change of ownership?
Most policies exclude cover for acts that take place after the effective date of a change of ownership of the Insured, however, there are usually different takeover run-off options that are included at agreed percentages of the annual premium, but sometimes it needs to be separately negotiated with insurers, which can be difficult to budget for.
Why are run-off policies important?
The aim of the run-off is to protect the insured by providing ongoing cover for past acts that may be discovered during the winding-down process. This is often seen by insurers as the most high-risk period of a company’s lifecycle because this is when liquidators and auditors will do a deep-dive on the company and discover any potential complaints or liabilities that need to be addressed before a full wind-down can occur, and liquidators are legally bound to bring claims on behalf of creditors.
Run-off insurance is not compulsory, however, the FCA do reference it as part of their guidance on “Completing the application to cancel your firm’s authorisation” where they state that “For the protection of both consumers and authorised firms we require firms to have a plan in place to deal with liabilities such as redress from complaints”.2
Engage with your broker early
There is normally a requirement to request a run-off policy within a certain timeframe so we would recommend engaging with your account executive early to establish a plan for the run-off. It’s essential your board deal with run-off and settle the premium prior to the event whether liquidation or merger/acquisition as this avoids a situation where the liquidators could cancel the run-off policy once they take control of the company, thereby leaving directors exposed. Your broker should discuss timings with the insurer, as well as offsetting the premium against any return premium that is due back for any unused policy period (if the run-off occurs during the policy period).
 | Adam CoatesSenior Account Executive |
