Key takeaways
-
Investment managers (venture capital, private equity, hedge funds, family offices and REITs) should consider a package of insurance protections
-
PI Insurance maybe required to meet their FCA requirements, but cover should also include D&O, Cyber and Crime, to guard against a range of risks
Why insurance is important for investment managers?
Having clients that are pension funds, institutional investors, and/or high-net-worth individuals means they have the financial means to litigate if they feel that your investment decisions were less than adequate.
Administrative errors, miscommunication or a poor investment decision could mean your clients pursue legal action, alleging negligence, misrepresentation, breach of duty, or breach of contract. The financial and reputational damage that can arise as a result of an allegation, even if unfounded can be severe.
Without adequate
FCA regulated insurance, investment managers may face substantial legal costs, compensation payments, and even personal liability for the directors.
Investment management insurance covers:
In the UK, the requirement for investment managers to purchase professional indemnity insurance depends on their specific activities and regulatory classification under the Financial Conduct Authority (FCA). However, it is prudent to purchase the appropriate covers to safeguard the future of the business and guard to against allegations without merit.
Professional Indemnity (PI) Insurance
Professional Indemnity insurance is the most important protection for investment managers. It provides cover for legal defence costs and compensation payments arising from allegations of professional negligence, errors, or omissions.
An example claim scenario might involve an investor alleging that their portfolio underperformed due to negligent asset allocation. Even if the claim is unfounded, the cost of legal defence can be substantial. PI insurance ensures those costs are covered, allowing the firm to continue operations without jeopardising financial stability.
Each insurer will assess your exposure differently, however the main drivers that impact your insurance premium will be:
• Income (last 12 months and estimated next 12 months)
• Required Limit of Liability and Excess
• Risk profile of the applicant
The most significant of these issues is the firm’s ‘risk profile’. Insurers are likely to consider:
• scope of services / advice;
• types of client and asset classes;
• assets under management;
• compliance confidence;
• control systems and monitoring;
• qualifications and experience for staff;
• disciplinary record;
• complaints log and claims record.
Along with a complete proposal form, it is tpyically recommend to include the following supplemental information (if available):
• latest audited annual reports of the investment manager and funds;
• latest prospectus or offering memorandum to investors of each of the funds;
• copy of the licences issued by the appropriate regulators;
• portfolio performance information for the past five years;
• copy of your standard client engagement letter;
• CV's or biographies of the principlas;
• copy of any brochures or marketing information;
• organisational chart;
• copy of ICAAP.
Directors and Officers Insurance
D&O insurance protects the personal assets of directors, officers, and senior managers if they are held personally liable for decisions made while managing the business. In the investment sector, where leadership decisions are often heavily scrutinised, this cover is common viewed as essential.
The cover can respond to claims of mismanagement, breach of fiduciary duty, or failure to comply with regulatory obligations. They also cover legal defence costs arising from investigations by the FCA or other authorities. Whilst D&O insurance will not cover criminal activity, it will provide a legal defence up until there has been a final adjudication from a court of law or admission of guilt.
Cyber Insurance
Investment managers will commonly hold sensitive client data and rely heavily on technology to execute trades, manage portfolios, and communicate with clients. This technology dependence exposes firms to cyberattacks, data breaches, and ransomware threats.
Cyber insurance can assist by offering financial protection and access to incident responses services. Most policies will provide a wide range of both 1st party costs and 3rd party liability protections. It's worth highlighting that it is common practice for professional indemnity covers to include cyber exclusions, so without the additional extension of cover an incident maybe excluded.
Crime Insurance
Can provide investment management firms protection against losses resulting from dishonest or fraudulent acts by employees or third parties. For financial institutions handling client money, the risk of insider fraud, embezzlement, or forgery is ever-present.
Crime insurance can protect direct financial losses, reimbursement of funds and the legal expenses incurred when investigating and pursuing offenders. Common examples include falsified investment transactions, misappropriation of client funds, or vendor payment fraud. Having this protection in place reassures both clients and regulators that the firm is equipped to handle the financial impact of criminal activity.
Office Insurance
If your investment management firm employs staff,
employers’ liability insurance is a legal requirement in the UK. It provides cover if an employee suffers injury or illness as a result of their work. Public liability insurance, on the other hand, covers claims from third parties for injury or property damage occurring in connection with your business activities.
An office insurance policy can also protect against damage or loss to physical assets such as computers, furniture, and documents due to fire, theft, or flood. For firms operating hybrid models, this can also extend to remote or home-office setups, ensuring seamless protection across work environments.
Specialist insurance broker
At Get Indemnity we have access to a wide range of insurers that are keen to grow their portfolio of investement managers. Our team has the experience and knowledge to understand and represent your business. We are able to secure some very competitive cover and pricing in a softening insurance market. We are specialist brokers in the following sectors:
-
Investment funds
-
Hedge funds
-
Venture capital
-
Private equity
-
Family offices
-
REITs
Conclusion
Beyond financial protection, investement manager insurance provides reassurance to clients and regulators that the firm operates responsibly and can meet its obligations should a dispute arise.
Having comprehensive insurance also enhances a firm’s credibility when onboarding new clients or seeking institutional partnerships, as it demonstrates a commitment to professionalism and due diligence.
