Financial Institutions Overview

snowpeaschocolateManagement

Nov 18, 2013 (3 years and 8 months ago)

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Financial Institutions Overview

Presented by:

Andrew Knight

DFI Marketing Manager / FPC Practice Leader


Trends, Updates, Exposures and Solutions

Agenda


Section I:

Sector Overview


Section II:

Key Focus Areas


Asset Management (NI 31
-
103 Registration)


AMP (Asset Management Protector)


Financial Institution Bonds


Private Equity


VCAP Gateway


Mortgage Lending


Mortgage Protection Insurance


Section III:

Why Chubb?






Section I:

Sector Overview


What is a Financial Institution?


An institution that is in the business of dealing or transacting third
-
party money.


Third
-
party money can be defined as cash, stock, bonds, promissory
notes, loans or many other types of negotiable or non
-
negotiable
securities.


Depository Institutions
: banks and credit unions which pay interest
on customer deposits and generate capital which can then be
loaned or invested to earn a rate of return from other third parties.


Non
-
Depository Institutions
: those firms which sell financial products
or earn a rate of return without taking deposits. Examples are
insurance companies, brokerage firms or mutual fund companies.


Many financial institutions provide both depository and
nondepository services.

What is a Financial Institution?

1. Depository Institutions

»
Banks, Finance Companies, Credit Unions, Trust
Companies, Mortgage Companies, Leasing
Companies

2. Financial Management Firms

»
Investment Advisors, Stockbrokers, REITs, Mutual
Funds, Wealth Managers, Venture Capital Firms,
Investment Bankers

3. Insurance Providers

»
Insurance Companies, Reinsurance Companies

4. Service Organizations

»
Exchanges, Financial Intermediaries, Funds Transfer
Organizations, SRO’s


The Regulators


Investment Industry Regulatory Organization of Canada
(IIROC)


Mutual Fund Dealers Association of Canada (MFDA)


Office of the Superintendent of Financial Institutions
(OSFI)


Canadian Securities Administrators (CSA)


Financial Services Commissions of Ontario (FSCO)


Securities and Exchange Commission (SEC)


Provincial Regulators



Products




Directors & Officers Liability


Fiduciary Liability


CANCAP (E&O)


Employment Practices Liability


Financial Institutions Bonds (A, B, C)


Electronic Computer Crime


CyberSecurity


Kidnap & Ransom


Mail & Transit


VCAP Gateway




AMP (Asset Management Protector)


Mortgage Protection


General Liability


Umbrella


Property


Group Personal Excess


Bankers’ Professional Liability


BrokerEdge


Automobile Liability


Multinational Capabilities







Section II:

Key Focus Areas


Asset Management




Directors & Officers are vulnerable


Rapidly evolving regulatory environment
-

increased scrutiny


Bill 198, Bill C
-
45


National Instrument 81
-
107
-

Independent Review Committee


National Instrument 31
-
103
-

New Registration Regime


Volatility of Returns


Merger & Acquisition Activity


Cases of Fraud, Ponzi Schemes, etc


Conflicts of Interest


Breach of Investment Guidelines


Failure to perform due diligence in selection and
oversight of sub
-
advisors or outside funds


Prospectus liability claims against mutual fund directors,
advisors, service providers





Asset Management Protector (AMP)




Launched in 2009


Designed for the asset management industry


Customizable to asset managers who want to structure
their insurance coverage


Able to address numerous combinations of asset
management structures and their foreign equivalents


Directors & Officers Liability (Public or Private)


Professional Liability


Investment Company


Private Fund


Employment Practices Liability


Fiduciary Liability



Asset Management Protector (AMP)




Who Is It For?


Investment advisers and consultants


Wealth management firms


Mutual funds, exchange traded funds, and closed
-
end funds


Hedge Funds


Funds of Funds


Real Estate Investment Trusts (REITs)


Private Real Estate Funds



Asset Management Protector (AMP)




Important Considerations:


Understanding the Organizational Chart and who is an Insured


What is the definition of Claim?


Definition of Investment Adviser Services


Investment Company vs Private Fund Coverage


Independent Directors
-

additional protection


Independent Review Committee (IRC)



Solutions


Broad base policy wording terms and conditions


AMPlifier Endorsements


Real Estate AMPlifier Endorsements


Cost of Corrections


Asset Management Loss Scenarios


Example 1:

Failure to follow investment guidelines


Example 2:

Inadequate disclosure of risks


Example 3:

Formal regulatory investigation of possible


trading violations


Example 4:

Failure to adhere to contract provisions


Bill C
-
45

(Amendment to the Criminal Code)

Bill C
-
45 (Section 217.1 in the Criminal Code):



Created rules for establishing criminal liability to
organizations for the acts of their representatives.



Establishes a legal duty for all persons "directing the
work of others" to take reasonable steps to ensure the
safety of workers and the public.



Sets out the factors that courts must consider when
sentencing an organization.



Provides optional conditions of probation that a court
may impose on an organization.

Financial Institutions Bonds 101


SAA Forms vs Chubb Forms


Bond 14 vs Bond B


National Instrument 31
-
103 (NI 31
-
103)


Bond 24 vs Bond A


Bond 25 vs Bond C

National Instrument 31
-
103


What does this mean?


Definition of ‘Custody’


Sections applicable to Insurance:


Section 4.21 Dealer (page 14)


Section 4.22 Adviser (page 14)


Section 4.23 Investment Fund Manager


IFM (page 15)


Section 4.24 Global Financial Institution Bonds (page 15)


Section 4.25 Notice of Change, Claim, or Cancellation (page 15)


Appendix A Bonding and
Insurance Clauses (page 54)

National Instrument 31
-
103


Section 4.21 Dealers:


Applies to Investment Dealers, Mutual Fund Dealers,
Scholarship Plan Dealers, Exempt Market Dealers, &
Restricted Dealers


Must maintain a Bond with a single
-
loss limit in the
highest of the following:


$50K per employee, agent, or dealing representative or $200K,
whichever is less


1% of the total client assets that the Dealer
handles, holds, or
has access to

or $25M, whichever is less


1% of the Dealer’s total assets or $25M, whichever is less


An amount as determined by the Dealer’s BOD


National Instrument 31
-
103


Section 4.21 Advisers:


Applies to Portfolio Managers (the old IC/PM category)


Must maintain a Bond with a single
-
loss limit in the
highest of the following:


1% of AUM that the Adviser
handles, holds, or has access to

or $25M, whichever is less


1% of the Adviser’s total assets or $25M, whichever is less


$200K


An amount as determined by the Adviser’s BOD

National Instrument 31
-
103


Section 4.21 Investment Fund Managers:


This is meant to refer to the Fund Manufacturer/Sponsor
& not the IC/PM firm/Adviser


Must maintain a Bond with a single
-
loss limit in the
highest of the following:


1% of AUM or $25M, whichever is less


1% of the IFM’s total assets or $25M, whichever is less


$200,000


An amount as determined by the IFM’s BOD

National Instrument 31
-
103

The key take
-
away is how you define

“handle, hold, or have access to”
, as that

is the trigger point for the higher insurance

requirements. In the absence of this trigger,

the required limit can be as low as $50K

(unchanged).

National Instrument 31
-
103


NI 31
-
103 Companion Policy (CP) has the following to
say about “Custody”:



Hold client securities or cash for any period of time


Accept funds from clients, for example, a cheque made
payable to the Registrant


Have the ability to gain access to client assets


Have, in any capacity, legal ownership of, or access to, client
funds or securities


Have the authority, such as under a POA, to withdraw funds or
securities from client accounts


Have authority to debit client accounts to pay bills, other than
investment management fees


Act as Trustee for clients


Act as Fund Manager or GP for investment funds

Venture Capital & Private Equity




What is Private Equity?


Private pooled investment fund, managed by a firm, to invest in
equity of private companies (portfolio companies), to generate
increased value out of these portfolio companies, and exit them
for a profit


Fund is typically created as a limited partnership, and the private
equity firm serves as a general partners. Most of the capital is
contributed by outside institutional investors who become the
limited partners of the fund


Value creation is generated in the portfolio companies typically
though either expansion, new produce development or
restructuring of the company’s operations, management or
ownership


Typical exit strategies for portfolio companies are: IPO; strategic
sale or merger; failure
-

bankruptcy or closure of portfolio
company



Types of Private Equity




Venture Capital


Acquire minority interest in seed/early stage companies, little or
no revenues


Equity investments only, rarely use leverage


Typically take one board seat


Make small investments in many companies


Exit typically 3
-
5 years


Buyout and Leveraged Buyout


Acquire and take a majority interest in mature, middle
-
market
companies with operating cash flows


Buyout vs LBO


Typically take multiple seats on the board of the portfolio
company


Make large investments in few companies


Exit typically 2
-
3 years


Venture Capital & Private Equity




Claims Trends


Mostly arise from portfolio company related transactions


Bankruptcies/Insolvencies


M&A Activities


IPOs


Claimants are typically interested third parties of portfolio
companies


Shareholders


Employees/Management


Creditors


Business partners


Typical Allegations


Breach of fiduciary duties


Fraud


Breach of Contract


Misrepresentation

VCAP Gateway



Chubb’s new Venture Capital Asset Protection (VCAP)
Gateway Policy is designed to respond to the evolving
needs of venture capital and private equity firms



State
-
of
-
the
-
art policy that:


Incorporates broadest coverages available


Streamlines coverage for the entire private equity model



Provides coverage for:


Everything that a Private Equity firm is;


Everything that a Private Equity firm does; and


Everyone that does those things



VCAP Gateway




Insuring Clause 1
-

Management Liability Coverage


Insuring Clause 2
-

Management Indemnification Coverage


Insuring Clause 3
-

Professional Liability Coverage


Insuring Clause 4
-

Outside Directorship Liability Coverage


Insuring Clause 5
-

Organization Liability Coverage

VCAP Gateway



The Firm’s People


Insured Person includes:


Advisory Board members;


More industry specific terms ie venture partner, EIR;


In
-
house counsel;


Shareholder Representative;


The foreign equivalent; and


Automatic coverage for any nature person (including independent
contractors) who has a written indemnification agreement with an
insured organization



VCAP Gateway



The Firm’s Activities


Private Equity Venture Investing includes:


The creation, management and dissolution of a Private Fund or
Investment Holding Company by an Insured;


Any act by an Insured for Portfolio Company related to a loan;


Advisor/other activities by an Insured for an Organization or
Portfolio Company;


An Insured’s sale or purchase of securities issued by a Portfolio
Company;


Investment/portfolio management or asset allocation services for
a Private Fund;


Selection/oversight by an Insured of outside service providers;


Activities by an Insured or others (for whom the Organization is
legally liable) as a Shareholder Representative;


Acts by an Insured as Controlling Shareholder



Mortgage Protection Insurance



Who Buys It?


Banks, Lenders, MICs,

Why Buy It?


Primary purpose of coverage is to protect the mortgagee in the event
that the collateral is damaged and there is no insurance to repair or
replace the building


In event of a significant uninsured loss, the borrower may be unlikely
to continue making mortgage payments


If the mortgage goes into default, the owner of the mortgage has the
right to recover their outstanding mortgage balance


If there is damage to the property, the value of the collateral may not
be adequate to pay off the mortgage balance




Mortgage Protection Insurance



Mortgage Holder’s Interest Insurance



Mortgage Impairment

borrower’s responsibility to

place insurance



Mortgage Errors & Omissions

lender’s

responsibility to place



Mortgage Holders’ Liability Insurance



ie. Seller/Servicer Liability



ie. Real Estate Tax Liability


Foreclosed Property Insurance



Forced Placed Property Insurance


Mortgage Protection Insurance



Foreclosure


Forced
Placed

Mortgage
Impairment
or E&O

Lender
believes

hazard insurance is in
force and that it
protects their interest.

But,
it’s not or it
doesn’t!

Valuation is
“Mortgage Holders’
Interest”.

Lender
knows that
hazard insurance
is not in force or it
does not cover
their interest.

Valuation
should
be

replacement
cost.

Lender has taken
action and
exercised their right
to take title or take
deed in lieu
possession.

Valuation
should be

replacement cost.

Mortgage Protection Insurance






Mortgage Protection Insurance



Mortgage Impairment Valuation


The most we will pay for loss or damage in any one
occurrence is the lesser of the following:


The amount of loss or damage (minus other
insurance proceeds);


The amount of your mortgage holder’s interest; or


The applicable Limit of Insurance shown in the
Declarations



NOTE: This goes for Mortgage Holder’s Interest
Insurance and Mortgagee Errors and Omissions
Insurance


Mortgage Protection Insurance



Forced Placed/Foreclosed Valuation


Subject to the Limit of Insurance for
Foreclosed Property

shown in
the Declarations, Foreclosed Property is valued at the lesser of:

a. the full cost to repair the Foreclosed Property at the time of the loss
or damage, at the same location and for the same use or occupancy,
without deduction for physical deterioration or depreciation; or

b. your Foreclosed Property Financial Interest (as defined
-

which also
takes into account an adjustment to appraised market value).


Subject to the Limit of Insurance for
Forced Placed Property

shown
in the Declarations, Foreclosed Property is valued at the lesser of:

a.


replacement cost; or

b. the unpaid principal balance on the mortgage or loan

Mortgage Protection Insurance




Fire damage to vacant residence


Homeowner Vandalism
-

mortgagor is in process of
defaulting/vacating residence and decides to damage the property
first ie arson, taps are left running or damage to walls, cabinets,
bathrooms, etc


Resultant mould subsequent to water damage that was not attended
to


Lack of Winterization


water damage and subsequent freezing due
to expansion and bursting of frozen pipes due to absence of heating
in winter months


Trespassers
-

Vandalism
-

attractive nuisance


Vagrants living in and vandalizing vacant homes


Grow Operations


*Note the above are examples of typical loss scenarios and
coverage may not necessarily apply in some cases





Section III: Why Chubb?

Why Chubb?


Dedicated Financial Institutions Underwriters


Financial Strength
-

A++ AM Best Rating


Best
-
in
-
class Product Offerings


Local and Global Claims expertise and
reputation


Market Knowledge


7
th

Consecutive year as #1 Crime/Fidelity
Underwriter (SAA) and one of the largest
writers of Financial Institutions locally and
Globally






aknight@chubb.com

416
-
359
-
3222 ext. 4507




Product Information and Applications:

www.chubbinsurance.com


Contacting Chubb

Legal Disclaimer


Chubb refers to the insurers of the Chubb Group of
insurance Companies. This literature is for informational
purposes only. Whether or to what extent a particular
loss is covered depends on the facts and circumstances
of the loss and the actual coverage of the policies as
issued.


Claims examples are based on actual cases, composites
of actual cases, or hypothetical situations.


The information provided herein should not be relied
upon as legal advice or a definitive statement of the law
in any jurisdiction. For such advice, an applicant,
insured, listener or reader should consult their own
independent legal counsel. No liability is assumed by
reason of the information contained herein.