It has been said the only constant is change. So it goes with the E&O market for broker-dealers, particularly small firms. Four major factors have played into the decision for a few insurers exiting this year, with the most recent being AmTrust.
• Frequency and severity of Trade Error Claims resulting from the drastic swings in the market this year.
• The impact of greater than seventy firms being sued in relation to the sale of GPB products and the fact that the ultimate cost of those claims is unknown and hard to predict.
• The insurers' appetite for risk is diminished given the uncertainties ahead, and
• Most of these same insurers have borne a portion of the losses resulting from damage due to riots and fires across the nation, (these losses being the largest in history).
This is merely one season in a predictable cycle we have seen over the decades. Around 2000 we saw the beginning of a shift from traditional brick-and-mortar insurers willing to underwrite BD E&O and hold the course through several cycles, such as Transamerica and Fireman's Fund, to pop up insurers funded with capital looking for an opportunity.
The good side of this trend is the downward pressure that has kept rates from rising substantially to cover past losses. The availability of these competitive new markets has been beneficial to the BD/RIA community. These new markets are usually not looking in the rearview mirror at losses and are more focused on topline premium versus ultimate returns years forward.
The downside is the uncertainty until the new insurers emerge, which if history is any indication, should be in a month or two. These discussions are already underway.
In response to the recent exit of AmTrust, InterWeb conducted a full Market Survey of the insurers for Broker-Dealers to confirm their current appetite for risk. There is good news in that analysis.
InterWeb is a specialist in the BD/RIA E&O market and continues to be ready to serve your needs and plan the next steps with you.