What to Expect: Fiduciary Liability Insurance Premiums
With recent litigation around 401(k) plan fees and expenses, we asked expert Ryan Daniele, Vice President, Risk Transfer at MJ Insurance to discuss what we anticipate happening with fiduciary liability insurance premiums in 2021 and what plan sponsors can do to limit the premium increases.
With all the litigation with 401(k) plan fees and expenses, what is going to happen with Fiduciary Liability Insurance Premiums?
The dramatic increase in excessive fee litigation ramped up significantly in 2020 and is now creeping into almost all classes of business. Before this recent wave of claims, litigation was concentrated with higher education and large health systems. There have been over 70 excessive fee class-action suits filed in 2020 instead of just 20 filed in 2019. Previous to excessive fee litigation, premiums were very inexpensive with very low retentions, if not $0 retentions. As such, insurance carriers are experiencing unprecedented loss ratios on their fiduciary books and making adjustments.
The most significant adjustments include the addition of very high excessive fees and class action retentions. Some carriers are adding $250,000 retentions while others add retentions of $1M+ depending on the organization's size. Premiums are also increasing significantly but depend on the risk (class of business and exposure to excessive fee litigation). Rate increases have wide ranges – 5%-15% for private companies and 20%-50% for public companies depending on asset size.
This increase in litigation, coupled with historically low premiums and retentions, has led to an abrupt market correction. This issue will continue to evolve in 2021 and beyond.
What can plan sponsors do to limit the premium increases?
The landscape for fiduciary insurance will change for everyone. It has never been priced with a catastrophic claim situation in mind, but the chances of significant losses are growing by the day.
For smaller/middle market Insureds that are not in healthcare or education, we haven't seen a dramatic change to premium or retentions, especially when fiduciary insurance is purchased as a package policy.
However, for companies that have been involved in excessive fee litigation or are a larger organization or in a class that has been targeted by excessive fee plaintiff attorneys, there are a few measures plan sponsors can take to limit premium increases:
1. Complete a thorough excessive fee questionnaire and provide the insurance company and their underwriters with detailed information regarding decisions impacting their retirement plans. You want the underwriter to feel confident that the Insured's investment committee has taken all steps to ensure they manage their excessive fee exposures. Those steps include:
Establishing, following, and documenting a robust and prudent process for retaining recordkeepers and determining their fees. The process should include a review of benchmarks for recordkeeping fees using an appropriate, independent benchmark
Establishing, following, and documenting a robust and prudent process for selecting and reviewing plan investments and investment expenses. The process should include appropriate benchmarks for analyzing investment performance
Retaining qualified, independent experts to assist with fiduciary decisions
Documenting the process and rationale behind any fiduciary decision, being meticulous when deciding to use more expensive products or services and/or when going against expert advice.
2. Additionally, work with a broker who can market the risk to several different fiduciary carriers. Insurers are all underwriting this risk differently so it's important to evaluate all options available.
3. Lastly, be prepared for higher retentions. Taking on more risk may be required by the insurance company. However, intentionally increasing your retentions may offset your fixed cost associated with your insurance program, allowing for greater financial flexibility and marketability.