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Financial R&R: Insights on the Market with ICI Mutual Insurance

By Alliant Specialty

In preparation for the 2022 Investment Management Conference, March 27th – 30th, Ron Borys and Ryan Farnsworth, Alliant, welcome John Mulligan, Senior Vice President & Chief Underwriting Officer and Dan Steiner, President, ICI Mutual Insurance Company, to discuss the company’s distribution strategy, the claims environment, the current insurance market and how it works with insurance brokers on behalf of mutual clients.

Intro (00:01):
Welcome to Financial R&R a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.

Ron Borys (00:13):
Well, welcome everyone. Thanks for tuning in to the latest, episode of the Financial R&. My name is Ron Borys and I lead the financial institutions vertical at Alliant, along with Ryan Farnsworth. We're thrilled to have two special guests today from ICI Mutual. Many of you will be heading out to the ICI conference later this month, and we thought, what better way to start that session, start that event off by, interviewing two of the best intellectuals when it comes to insurance for mutual funds, Dan Steiner, president of ICI mutual company, and John Mulligan, who is the senior vice president and chief underwriting officer, both of which have been with the company for a very long time. So, Dan, John, thanks for joining us today.

Dan Steiner (00:51):
Thanks for having us.

Ron Borys (00:53):
So, Dan, I thought maybe we could start with you and give us a little background on ICI mutual. I think a lot of folks know a little bit about who you are and what you all do, but after you know, this being our 35th year of existence, maybe you can give a little background on ICI.

Dan Steiner (01:08):
Sure. ICI Mutual was formed back in 1987 under the auspices of the Investment Company Institute, which is the global trade association for the mutual fund industry. ICI Mutual itself is what's often referred to as an industry mutual insurer. That is an insurer that's owned and governed by its insureds. And that is dedicated solely to addressing and serving the insurance and risk management needs of a particular industry. In this case, 34 plus trillion dollars mutual fund industry, as you and Ryan know like successful industry mutuals serving other industries, including mutuals for law firms, colleges, and universities, ICI Mutual differs both in its structure and its mission from the commercial insurance companies with which it competes. ICI Mutual is structured and designed to provide protections and benefits for its insureds who are also its owners, particularly in the areas of coverages, claims handling insurance capacity and pricing.

John Mulligan (02:09):
Today, I mean, after 35 years of operation, as in the past ICI Mutual is the fund industry's leading provider of directors and officers, errors and omissions, liability insurance, commonly known as D&O E&O insurance, independent director liability insurance and investment company blanket bond. And today we have more than a hundred fund groups collectively manage over 60% of the fund industries, assets under management, who choose to ensure with ICI mutual.

Ryan Farnsworth (02:36):
And many of those clients are our clients as well. Right. And I think there, there tends to be sometimes some confusion around how the ICI mutual works with insurance brokers, obviously you're with us, we're playing nice in the sandbox here. Right, so can you talk a little bit about what the company's distribution strategy is, John, and how it works with insurance brokers on behalf of those mutual clients?

John Mulligan (02:57):
Yeah. Thank you for asking that, Ryan, as an industry mutual insurer, ICI Mutual is structured to work directly with representatives of its member insured, but as you noted, we certainly recognize that many fund groups have brokers like Alliant to assist them with their insurance programs. And in many cases, we can and certainly do work jointly and effectively with brokers to address the insurance needs of our mutual client. We just don't pay you. I make light of that since commercial insurers pay commissions to brokers. But I also note that in many instances, you and other brokers can and do arrange to collect a fee for service in lieu of a commission. I certainly know that you work with certain fund groups in this manner. We serve as a hub of information for the entire industry. We provide our own insured fund groups, as well as fund groups that choose not to ensure with us with an array of industry-specific information, including peer profiles on insurance limits, other information on fund industry risks and claims. We regularly share this information with Alliant and other brokers. And at the end of the day, as you noted, we're all working towards the same end to assist fund boards and advisors in making business judgments about how to best make considered decisions on insurance-related matters.

Ron Borys (04:09):
Yeah, that's great, John, and I can tell you having done this now at Alliant, and certainly, other places the industry moved to a fee-based model for 40 act mutual funds a long time ago. I think the boards governing the funds felt that was the best and most transparent approach. So, certainly never any barriers there, one of the misnomers that maybe you can clarify is do you have to be a member to work with ICI Mutual? A lot of times people say, oh, well, mutuals have members. And I know there are founding members, but maybe you can kind of just explain that structure a little bit. Because I know there's an option to become a member. Somebody wants to become a member, but it's not necessarily a requirement in order to trade with ICI Mutual.

John Mulligan (04:49):
So, ICI Mutual is a member-insured mutual insurance company. So, we have two classes of members participating members and non-participating members that the central hub is the Investment Company Institute the trade association. Members of the trade association can come to ensure with ICI Mutual, either as a participating member that is capitalizing their ownership in the company or as a non-participating member, where they just buy annual insurance pro policies from ICM Mutual

Dan Steiner (05:17):
And there's no difference between those two memberships in terms of the underwriting in terms of the claims handling in terms of the educational and risk management services that are provided. There are some differences in terms of overall voting shares as members of the company and in the ability to receive dividends, if, and when those are declared by the ICI board of directors.

Ron Borys (05:43):
Yeah, that's great. I appreciate the clarification there. So, let's move on to the fun stuff. Dan, you've been a lawyer who's been sort of practicing in this space for many years. The big question we get coming out of board season, a lot of mutual fund boards are having their renewals right now, or have their renewals coming up in the next, 30, 45, 60 days. Maybe we can talk a little bit about the claims environment and what you've seen sort of recently, certainly, a lot of different avenues to go down but maybe we can spend some time there.

Dan Steiner (06:13):
Yeah, let me just kick things off by noting that ICI Mutual has long track and shared information on all significant civil lawsuits and regulatory enforcement proceedings involving fund groups, regardless of whether the fund groups are insured by ICI Mutual and based on this information, each April, we publish an overview of, recent mutual fund industry claims developments that publications call claims trends it's available on our website at And that's a great resource for brokers, for insureds, for folks who ensure with ICM mutual, for folks who don't in terms of the recent claims’ environment. Interestingly enough we haven't seen much to date in the way of a pandemic or cyber-related claims involving fund groups, at least as regards claims involving insurance products, that ICI Mutual writes that D&O and E&O policies, ideal policies, and bonds. What we have seen is a continuation of this phenomenon.

We sometimes refer to as waves and one-offs or one-offs and waves. On the one hand, we've seen a number of one-off claims across the range of subject areas, relating to individual issues at individual fund groups. These include several lawsuits by activist investors against, closed-end funds or their directors or advisors challenging bylaw amendments adopted by the funds. We've seen shareholder lawsuits, challenging fund disclosure, including for example, a recent lawsuit alleging that a fund group engaged in so-called closet indexing, although this closet indexing suit, as it turned out, ended up being dismissed pretty quickly. And as always, we've seen some one-off regulatory investigations or enforcement actions by the SEC, we're all certainly watching closely to see whether enforcement may ramp up under what's still a relatively new SEC leadership following the change in the presidential administration.

It is important and Ron and Ryan be interested in your reaction and thoughts on this. If you take a longer-term view of our industry separate and apart from one-off claims involving individual fund groups, the industry's also been susceptible over the years to what we might call waves of claims that is to periods where multiple substantially similar claims involving substantially similar allegations are brought by the plaintiffs’ bar or in some cases by regulators against multiple fund groups. And in fact, by our count, there have been more than half of a dozen separate and distinct waves of fund industry claims so far this century, including most recently a wave of more than two dozen so-called excessive fee lawsuits that were initiated by the plaintiff's bar in the 2010s that wave charged more than two dozen fund advisors with violating a specialized provision of federal law governing the fund industry, a provision of the investment company of act of 1940 known as section 36 B. Beginning to end that wave lasted a decade. The good news for the industry is that the plaintiff's bar ultimately achieved no major breakthroughs, but many of the individual lawsuits in the wave were fiercely litigated for years, and unusually for big-ticket litigation some of the lawsuits actually went all the way through court trials at which the advisors ultimately prevailed.

Ron Borys (09:26):
Yeah, it was definitely an unfortunate time for people on the insurance side because to your point Dan, most of the times plaintiffs are bringing litigation for a purpose. And it seemed like the sort of outcome was an excessive amount of fees incurred, whether it was defense expenses or as we know what we refer to as non-party witness fees, which, which certainly was what impacted the fund-only D&O policies.

John Mulligan (09:50):
Yeah. As an aside, I would note that these 36 B lawsuits shouldn't be confused with a separate wave of excessive fee lawsuits that have received attention in the industry press, but which are brought under a completely different federal law, the employment retirement income security act, also known as ERISA, these ERISA cases, which you and Ryan well know are not directed at funds or fund directors, but they challenge the management by advisors or their affiliates of their own in-house 401k retirement plans that they have in place for their own employees. And they implicate fiduciary liability insurance, which ICI Mutual doesn't offer, rather than mutual fund D&O, E&O insurance.

Ron Borys (10:29):
Yeah, that's a great distinction in clarification, John, because like I said, those cases we continue to see them and those are probably not going away anytime soon, but certainly didn't impact necessarily the world in which mutual funds and registered investment advisors purchase coverage.

Dan Steiner (10:45):
Yeah. I mean, I think just returning to your point, Ron defending shareholder lawsuits can be a very expensive proposition for fund groups between, as you pointed out, the legal defense costs incurred by advisors or directors and officers when they're named as defendants, you have legal, you have fees charged by the retained defense experts and as you noted you have the cost of counsel for fund independent directors as non-party witnesses. The section 36 B cases, I just mentioned, for example, it was not uncommon to reach into eight figures for fund groups in individual cases. So, when you're looking at D&O, E&O insurance, and selecting insurers, that's certainly impacted the primary layers and into some of the first excess layers. So, it's worth focusing on in our view regardless of which insurer you choose worth focusing on when and how defense costs are covered and on insurance claims, handling reputation, covering them.

Ron Borys (11:41):
Yeah, that's a great point, Dan, and as we've looked at the reports that you all put out annually it's pretty consistent that the two largest areas of losses paid are in the area of defense expenses. And then the other one is usually the cost of corrections claims. And maybe we can kind of just narrow in and focus on the cost of corrections a bit. Because we know there's been certainly a lot of volatility in the market over the last two years. COVID certainly brought on some element of, volatility and then certainly what's going on in Europe with the war in Ukraine is affecting the market pretty regularly, but we also know the cost of corrections has become more than just market volatility, trade error-type losses. So, maybe we can just talk a little bit about the cost of corrections.

Dan Steiner (12:22):
Sure. And, just as a final note, just before we jump into the cost of corrections on this whole idea, the plaintiff's bar and shareholder litigation it's been with us, it will always be with us. No doubt. And there's an overview we did for those who were interested a year or two back entitled shareholder litigation in the fund industry provides a good introduction to that whole subject of shareholder litigation, ENR industry thus far, since the year 2000. It's designed for the non-specialist reader, turning to the cost of corrections, given the complexity of fund industry operations, the sheer number of transactions that take place every day. It is certainly not surprising that investment advisors sometimes commit operational errors. And I just pointed out Ron, these can come in the form of trade errors, but they can also come in a lot of other forms inadvertent violations of investment restrictions, corporate action processing mistakes, or other mishaps in the delivery of professional services, to funds and clients.

John Mulligan (13:25):
Insurance, while it's not limited to the asset management sector is fairly uncommon outside of it. In essence, the coverage is in early-stage errors and omissions coverage that facilitates an advisor's timely and efficient remediation of an operational error. It permits them to pursue insurance recovery under their D&O, E&O insurance, policy for corrective payments. They make to remedy their errors, even in the absence of conventional insurance triggering in the form of a lawsuit by the affected funder client. This coverage has been a standard feature of ICI Mutuals D&O, E&O policy for decades. And as you know, in today's market, it's also generally available from commercial insurance companies. Although the scope of coverage in terms of conditions of that coverage can vary by insurer.

Ron Borys (14:14):
Yeah. And the one thing I would add John, and certainly where, we advocate cost of corrections is the partnership between the insurer and insured right at the end of the day, when you engage and enter into a contract like this, but both sides want to resolve issues at the best possible outcome. And the cost of corrections provision allows insureds whether their funds or advisors to partner with an insurance company, identify an issue that came up and try to put that issue to bed or rest and resolve it without it becoming a more formal action, which could lead to additional costs and or reputational harm. So, I just think the cost of corrections has been and continues to be a great enhancement and a great feature, a focal point of the 40-act fund community. It certainly has spilled over and taken sort of form in the alternative space as well. And, to your point, we continue to sort of advocate that approach because we, do think it's the best way for insurers and insurers to resolve challenging situations that arise in the ordinary course of business.

Dan Steiner (15:13):
Ron and Ryan if you want to speak to this, I mean, it's certainly, I would just note for listeners, it's very important regardless of your insurer or the cost of corrections to make sure you get the notifications because it is an early-stage coverage and you really want to make sure you're working closely with your broker or your intermediary, or directly with your insurer to make sure that you let that insurer know when you have a problem. And before you make a correction.

Ryan Farnsworth (15:42):
Yeah. One of the biggest complaints we get about D&O claims is how long they take to pay generally speaking, right? But cost of corrections claims are ones that need to be paid almost in real-time. And the notification of such issues should be addressed very quickly and anticipated in advance of any error occurring and as much as we look forward to the claim’s trends report every April. Just want to note for our listeners too, you did come out with a supplemental publication, off-cycle, if you will, on the operational errors and insurance and how cost of corrections claims, I believe that was last summer. I'm sure it's still available on your website and can be downloaded for review. So, definitely, a key topic that will fortunately, or unfortunately be part of the insurance policy for many years to come as, as long as funds are trading securities.

Dan Steiner (16:33):
Yeah. And I'll tell you, it's interesting as an insurer, we of course look at both claims, frequency and claims severity, regardless of the type of claim. And over our 35-year history, we've received and paid scores of costs of corrections claims. What is interesting is while their frequency has remained relatively stable over time, what we have seen in more recent years in a marked break from our past experience is increased severity. And indeed, we've seen multiple instances of what we term high severity cost of corrections claims by which we mean claims that have involved, or that have had the clear potential to involve dollar amounts of eight figures, or sometimes even more. This is a very significant shock loss, really from an insurance perspective, when you have cost corrections claims, that severe given that multiple such claims have now occurred.

Unfortunately, we can no longer view them as Black Swan events. And indeed, recent experience suggests that high-severity operational errors may now be a risk inherent in modern fund industry operations, regardless of the strength of fund groups' operational risk management programs. Cost of corrections, like section 36 B is a complex and specialized risk, and one that is essentially limited to the asset management space. And it's not surprising it is receiving increased attention among insured commercial insurers, reinsurers and insurance brokers. And as you noted Ryan over the past year, we have done the publication. It's part of an overall campaign to assist all concerned to better understand, this risk and frankly, the underwriting and pricing challenges it presents for everyone if the coverage is going to continue to be provided well into the future.

Ryan Farnsworth (18:20):
Yeah. I mean, we spend so much time over these last few minutes talking about claims activity affecting the fund space regulatory activity. That's expected to continue not to mention the broader D&O insurance marketplace. That's been quite volatile over the last couple of years as our customers can attest, but very curious to get your perspective, because ICI Mutual has long had the tradition of being less volatile in market cycles in the broader commercial place. How has ICI Mutual and the fund industry managed the volatility of the broader insurance marketplace over the last couple of years?

John Mulligan (18:58):
Yeah, thank you and I think that the commercial insurance market's been difficult for everyone over the past few years, buyers, brokers, and insurers alike. In our specialized niche, which by which, I mean the fund industry's insurance for D&O, E&O insurance, IDL insurance, and fidelity bonds. The conditions continue to harden through 2021, and they ease somewhat to an extent over the latter part of the year, as a practical matter, the pandemic field hard market of the past 18 months has resulted in most fund groups, regardless of insurers experiencing premium increases, particularly on their D&O, E&O insurance. Typically, those are in the single to low double digits depending on the particular fund groups assets that are management claims experience and other factors with lesser percentage increases for IDL insurance and fidelity bonds, but there has been no significant disruption in insurance or reinsurance capacity that is the supply or coverage terms for any of the three products that ICI Mutual offers.

And there's been ample insurance and reinsurance capacity remaining. Like other industry mutuals, we can't totally insulate our member insureds from the impacts of hard market phases of the market cycle. But we do think that like other industry mutual insurers, ICI Mutual by its structure and design serves as a strong stabilizing presence in its market niche. So it's the temper of the volatility of the insurance market cycle for its member insurers and for the broader fund industry, I would say in this regard, it's interesting to compare and contrast mutual fund D&O, E&O insurance with what's been going on for buyers of other business insurance products, including as particularly relevant for investment advisors, standalone cyber insurance and fiduciary liability insurance, neither of which is offered by ICI Mutual, but for certainly for which you broke for our mutual clients. Do you have comments on that?

Ron Borys (20:46):
Yeah, cyber has certainly overtaken the boardroom without a doubt and mutual fund boards are, not excluded from that, but for good reason. But to date, we're still not aware of any fund complex directly. I mean, certainly, plenty of advisors and service providers have had events, cyber events, breaches, etcetera. We have not seen that spillover into the fund world itself. You never say never, right? There are plenty of things that have occurred over the years that have surprised us all with regards to risk. And that's why liability underwriting and liability risk is a very difficult thing to do. But yeah, John, are there any other key coverages that you think directors or service providers should be focusing on in the current environment outside of cyber? I mean, you certainly offer fidelity bonds. You've offered fidelity bonds for advisors and funds for a long time. We know social engineering continues to be a big area of focus and concern.

John Mulligan (21:40):
Ron, that's a good point, you raised. I mean, to date the cyber incidents in the fund industry has been low. We don't know what's going to happen tomorrow, but with regard to the breadth of protection, there are important cyber related protections offered under, the investment company, blanket bonds, and ICI Mutual and others in the market have certainly addressed social engineering risks under the fidelity bond. Again, to date, the risk has remained relatively low is likely because the fund industry has zero tolerance for fraud. And that the protections that have been instituted at fund groups are very robust, so there are protections under the fidelity bond with related it to the theft of dollars by imposters or the theft of dollars by hackers that are important risk transfer considerations but to date have not been needed.

Ron Borys (22:42):
Oh, that's great John. Dan, anything you want to cover from a D&O, E&O policy perspective, again, kind of looking at the future and where should directors be focusing their time, effort and energy on D&O, E&O coverage?

Dan Steiner (22:54):
Well, let's see John and I will tag team, see if we can kick through some of the key coverages quickly. I'd kick things off by mentioning again, coverage for defense costs. That is the legal fees and associated costs incurred by insureds and defensive claims or fund directors as non-party witnesses in claims obviously critically important. It's also important, as I mentioned to focus on whether policies make appropriate provision to advance defense costs while underlying claims are in progress and on the reputation of individual insurers for getting defense costs, reimbursed fairly and properly.

John Mulligan (23:27):
Coverage for shareholder lawsuits challenging funds perspective disclosure it's pretty much a standard coverage in mutual fund D&O policies, as it should be deed for funds and fund directors as compared to fund advisors, prospectus liability claims probably present the most significant risk for claims severity. Also, another key coverage is scope of coverage for regulatory investigations and proceedings. Some policies clearly cover informal and well as formal regulatory investigations, which can be a very important distinction as you both well know, since fund groups can incur significant defense costs during the informal phase of investigations. And because there are many reasons that fund groups, and their council may wish to try to keep an investigation informal for as long as possible.

Dan Steiner (24:10):
And I'll just wrap up by bulleting a couple of more items here, as we discussed earlier, cost of corrections coverage is a coverage that's highly valued by fund advisors, certainly worth focusing on since the scope terms and conditions of the coverage can and do vary among, insurers and among policies. For fund independent directors themselves it's important to make sure that coverage is provided for non-party witness costs and expenses. Since directors can sometimes get embroiled in lawsuits and investigations without being named as defendants and for funds themselves some D&O, E&O policies help defray expenses for the cost of shareholder, demand investigations, and certain internal investigations, which are both certainly helpful coverages. And of course, beyond the provisions of policies themselves, the overall reputation of individual insurers for claims handling is certainly key. Brokers, you folks and other brokers, outside council and others can help fund groups in these kinds of assessments.

Ron Borys (25:12):
Yeah that’s great. Well listen, we're just about out of time for those of you who are listening in and using this as an opportunity to prepare for the ICI conference that comes up later this month. Be on the lookout for Ryan Farnsworth and many others from our Alliant team, we'll have another big presence there. We love supporting this event. We think it's such, a great way for people to stay informed and keep up to date with all the things that are going on from a risk management perspective, relative, to the 40-act mutual fund space. And for those of you looking for more information on Alliant, you can visit our website at With that we'll wrap things up. John, Dan, listen, our goal is always to help our clients find the more rewarding way to manage risk. You certainly are two of the best in the business to help folks do that in the 40-act mutual fund space. We really appreciate your time here with Ryan and I and hope you guys have a great year.



Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.