Asset managers face myriad of disruptive forces and regulations

Asset managers face myriad of disruptive forces and regulations | Insurance Business Canada

Asset managers face myriad of disruptive forces and regulations

This article was produced in partnership with CNA Canada

Bethan Moorcraft, of Insurance Business, connected with Rachel Firestone, financial institutions underwriting manager, at CNA Canada, to discuss the insurance needs of asset managers.

Asset management in Canada is in a period of rapid change due to macro economic developments like rising interest rates and inflation, the fallout from the COVID-19 pandemic, shifting investor preferences, regulatory developments and advancing financial technologies companies and cryptocurrencies.  

In 2021, Canadians saw the highest rate of inflation since 1991, as the market contended with the COVID-19 pandemic, supply chain disruptions, volatile energy prices, rising housing costs, and more frequent and severe weather events.  

Inflationary pressures have continued so far through 2022, with a 6.7% increase to the consumer price index (CPI) year-over-year in March, according to statistics Canada. To combat soaring inflation, the Bank of Canada has made several interest rate hikes, which follow a prolonged low interest rate environment. 

“Inflation reduces consumer spending power, thus impacting asset managers in the form of decreased investment capital,” said Rachel Firestone (pictured), financial institutions underwriting manager at CNA Canada. “Retail clients, in particular, may not have as much money to save or invest during periods of inflation.”

A volatile market, driven by economic uncertainty (including short-term rising inflation and interest rates),  drives asset managers to re-allocate capital in their portfolios, from public equities into private equity, real estate and private debt instruments.

“Asset managers are currently shifting away from public equities because of volatility in the market,” said Firestone. “Instead, they prefer alternative investments, such as real estate equity, which is more stable and generates sound returns.”

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CNA’s Financial Institutions (FI) claims adjusters in the US have noticed a connection between the years with market equity corrections – which Charles Schwab defines as a drop in the S&P 500 Index of at least 10% - and high loss ratios on the FI portfolio.  

“This is interesting because portfolios experienced great returns over the last few years, specifically in the public equity market. Recently, the public equities market has transformed into a high volatility space. Given the correlation our team has noticed, we expect to see increased claims activity in 2022 and for years ahead,” Firestone explained.

In periods of high market volatility, claims revolving around trade errors – known as cost of corrections or ‘fat finger’ claims – as well as suitability issues and failure to disclose information, are more often seen. For example, when marketing a new fund, clients have to be careful in their disclosure documentation. The offering document should clearly and concisely explain the investment objectives, redemption policy, leverage used, conflicts of interest, fees and compensation to the manager and any risks associated with investing in the fund. If the disclosure document is not accurate, both the fund and investment advisor can be liable for failure to disclose information.

“Other evolving areas which we are monitoring closely in the asset management space are in the complex cryptocurrency arena, the evolving fintech landscape and environmental, social, and governance (ESG) practices and disclosures.” Firestone added.

“ESG is now highly prioritized - not just by asset managers, but by all businesses,” she emphasized. “Some of our asset manager clients have pledged net-zero carbon emissions in their investment portfolios by 2050 and are revaluating their investments to confirm if they also have ESG disclosures. There’s been an explosion of interest in ESG-related products as well, such as funds that focus exclusively on ESG initiatives.”

Navigating this myriad of disruptive forces and regulations can be challenging for asset managers – so having the right insurance protection and partner is key. In recent years, the FI marketplace in Canada has hardened, with many primary carriers increasing rates, reducing capacity and restricting coverage. But new capacity is on the horizon.  

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In 2022, CNA Canada will be launching a brand-new primary policy for asset managers, complementing its existing excess solutions. The new broad-based form is slated to be ahead of the curve in terms of coverage enhancements and its ability to respond to emerging trends in asset management.

“Our product will be an upgraded version of the CNA US product,” Firestone revealed. “We’re incorporating coverage requests from brokers directly into the standard Canadian base form, limiting additional endorsements and broadening the base form. It will be market leading, as it will encompass certain coverage enhancements not yet seen in the Canadian marketplace.”

CNA Canada’s delivery of the asset management product will revolve around strong relationships with both brokers and clients, built around honesty and transparency.

Firestone explained: “Our underwriting team will work together with brokers and clients, meeting them directly with the expertise of our claims team. The topics brought to the meetings give clients a strong understanding of the risk landscape and the issues at the forefront of insurers’ minds. Currently, that might be ESG disclosures or cryptocurrency exposures.

“Our claims team will shed light on the current trends for asset managers. As a former broker, I know from experience that bringing in the specialized expertise from claims adds value to clients. We’re here to support our clients throughout the whole lifecycle of the policy. Hopefully, they don’t experience a claim, but we’ll be there before, during and post-claim to help guide them along the way.”