1. 60 November 2014 www.meinsurancereview.com
Market Update – Financial lines
T
he Middle East has seen a substantial growth
in professional indemnity (PI) and directors and
officers (D&O) liability insurances for financial
institutions (FIs). This is driven by both regulatory
requirements and pro-active risk management by FIs. As
an example, in the UAE, the Dubai Financial Services
Authority (DFSA) requires an authorised firm in categories
3B, 3C or 4 to maintain PI insurance. The DFSA also
requires a copy of the PI insurance cover and to notify
them of any significant PI claim made.
As a Dubai-based Coverholder for a leading syndicate at
Lloyd’s of London, and an expert provider in PI and D&O
insurance for FIs, partnered with the leading provider of
claims and litigation across PI and D&O insurance in the
region, Talbot Underwriting (MENA) Ltd and Clyde & Co
jointly hosted a short seminar in the Dubai International
Financial Centre (DIFC). The well-received seminar had over
110 people attending from across the Middle East region
and from various organisations such as insurers, reinsurers,
DIFC companies and insurance brokers.
Mr Raj Gohil, Class Underwriter, heads up the Financial
Lines division at Talbot Underwriting (MENA) Ltd, and he
provided an overview of what PI and D&O insurance is
and the typical PI exposures facing all organisations. Some
PI claims made in the EMEA region were also discussed
together with the legal environment and implications of PI
and D&O liability insurance.
PI and D&O insurance in a nutshell
Everyone makes mistakes! PI insurance indemnifies the
insured in respect of their legal liability to third party
claimants resulting from a negligent act, negligent error
or negligent omission committed during the course of
business. Third-party claimants are likely to be clients and
other parties who are owed a duty of care in the exercise
of the business.
A breach of professional duty can be described
by the diagram below. The outer layers describe an
absolute guarantee and fit for purpose professional in
an organisation and claims are unlikely to trigger. As
you move inwards, the skill and care and due diligence
diminishes until you hit negligence in the centre. From a
risk management perspective, an outside consultant may
use such a method in calculating the likelihood of claim
to trigger through negligence.
D&O insurance provides indemnity for the individual
directors and officers of a company against their legal
liability to pay damages to third-party claimants as a
consequence of the third party having suffered financial
loss through the negligent act, error or omission of the
director or officer in his or her “managerial capacity”. In
other words and put simply, it is a “managerial negligence”
cover. Third-party claimants are likely to be shareholders,
employees, directors, government bodies, customers,
competitors and creditors.
Why do companies purchase PI and D&O
insurance?
Although contractually driven, there are many other reasons
as to why an FI would purchase PI and D&O insurance:
• Regulatory need;
• Stock exchange listing requirements;
• PI: Pro-active internal risk management to protect clients
business and finance;
• D&O: Preserve and enhance shareholder capital and act
in the best interests of the company;
• Third party contractually driven;
• Non-executive directorship driven and expatriate
directors driven; and
• Past occurrences (when no insurance in place) at an
organisation which may trigger an insurance claim
(note – covers will only be given from the first time the
insurance is bought).
Some of the reasons for PI claims occurring were
discussed as below:
• Poor internal operational risk management framework;
• Lack of professionalism;
• Negligence/ mistakes;
• Changing regulatory landscape;
• Lack of robust audit/ compliance function;
• Failure of proper communication;
• Greed; and
• Gross mismanagement.
Protecting financial institutions
in the Middle East
Mr Raj Gohil of Talbot Underwriting (MENA) Ltd explains why understanding
professional indemnity and directors & officers exposures is a proactive way of
managing an organisation’s business, financial and operational risks.
Proper skill and care
Fitness for purpose
Negligence
Reasonable skill and car
e
All due diligence
Absolute guarantees
Financial_Lines.indd 60 23/10/2014 11:26:28

2. 62 November 2014 www.meinsurancereview.com
Market Update – Financial lines
Global FI reinsurance market
The financial crisis which impacted on a largely global basis
with effect from the latter part of 2006 had a profound
effect on the FI business. Insurance results were extremely
volatile for US writers in 2007, principally due to sub-prime,
whereas 2008 impacted all writers to a greater or lesser
degree. However, the loss impact on XoL reinsurers was
doubled, on average, due to the gearing effect. Loss ratios
as high as 700% in 2008 were not unknown and concerns
went beyond just these at the time:
• Mass media coverage leading to management scrutiny;
• Some certain losses, for example, sub-prime, storm,
Madoff;
• Many unknowns including payment protection
insurance, Algosaibi, LIBOR, swaps; and
• Economic environment concerns including Eurozone,
double-dip and US debt.
As a result, some reinsurers withdrew from the class,
while many others materially reduced capacity from this
type of business.
The reduction in FI reinsurance capacity post-2008 led to
restricted terms and conditions, increased prices, and less
available aggregate cover, impacting 2009 and 2010 years
particularly. Thereafter, a stable but watching situation
prevailed through 2011 and 2012.
Through 2013 after material settlements, and many
settlement reductions in some key areas, it was finally
possible to better re-structure and re-price reinsurance
programmes. Finally in 2014, driven by the wider
reinsurance capacity and new markets entering the FI space,
it was possible to obtain reinsurance structures and prices
comparable to those existing pre-2006.
As to the future, it is expected that the FI reinsurance
market will be driven by the wider marketplace. If that
remains benign and competition grows, then the FI
reinsurance market will become saturated. However, if
the market turns, the FI market will see rates harden and
capacity will move away into more traditional P&C sectors.
Claims
Some of the claims in EMEA region were discussed during
the seminar, and are summarised as follows:
Breach of client mandate
• Suitability
• Inappropriate or excluded investments
• Failure to alter investments to meet stated objective
Commingling of client funds
Investment not a loan, therefore there is the need for
client fund segregation
Failure to act on instructions
• Failure to buy, sell, hold or
transfer
• Volatile markets increases
severity
Mismanagement of an
investment portfolio
• Failure to diversify
• Allocation of risk across funds –
Madoff
• Negligent due diligence
Reducing the risk of negligence
Lastly, Raj discussed what organisations can do to enhance
good practice and reduce the risk of negligence. This is
summarised by the following:
• Know what your professional duties and legal
responsibilities are of the parties you represent at any
given time;
• Know whether you are making an advised or non-
advised transaction;
• Ensure there is a proactive (not a reactive) audit and
compliance function;
• Know how to create a complete and accurate record of
all your advice, recommendations and communication.
This will provide essential defensive evidence;
• Reconciliation of all trades on a daily basis;
• Ensure that the risk management manual picks up errors
in trading or any transaction limit-exposed risks;
• Use the services of a third-party internal risk management
consultant to assist with the operational risk management
framework;
• Ensure that the legal department goes through large
and complex deals thoroughly to avoid forward-looking
statements and/ or contracts with third parties; and
• Ensure that the organisation has a robust complaints
handling procedure – generally a first trigger of litigation/
claim.
Even if PI and D&O insurance can be primarily driven
by regulatory requirements, the understanding of PI & D&O
exposures is a proactive way to manage an organisation’s
business, financial and operational risks. A specialist
class of business like FI needs a specialist reinsurer who
understands these exposures and building a long-term
relationship with a broker and reinsurer is important in
this class of business.
Please contact Mr Raj Gohil on rajul.gohil@talbotuw.com if you have
any queries regarding this article or FI insurance.
Disclaimer: This article is intended for general information purposes only and references to
companies have been made on research done which is available in the public domain. Whilst all
care has been taken to ensure the accuracy of the information Talbot Underwriting (MENA)
Ltd (TUMENA) does not accept any responsibly for any errors or omissions. TUMENA does
not accept any responsibility or liability for any loss to any person acting or refraining from
action as a result of, but not limited to, any statement, fact, figure, expression of opinion
or belief obtained in this document. TUMENA is regulated by the Dubai Financial Services
Authority. This material is intended for Professional Clients only.
62 November 2014 www.meinsurancereview.com
Market Update – Financial lines
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