MGA supplies E&O coverage and
education to financial planners
By Phil Zinkewicz
Bayard (Bud) Bigelow, III, is president and CEO of The Cambridge Alliance. His wife, Nancy, is executive vice president of the company.
When the Gramm-Leach-Bliley (GLB) Act was signed into law in December 1999, the barriers between insurance, banking and the securities industry came tumbling down just like the walls of Jericho. GLB meant that all the players in financial services industries could cross industry lines and broaden the scope of the products they offered to the public. Citicorp and Travelers anticipated GLB when they joined forces to form CitiGroup a few years earlier. But when financial services deregulation became a reality, insurance companies, banks and security interests began to form alliances at a rapid rate.
GLB also allowed for a new breed of financial planners and investment advisers--people to tell consumers what to do with their money and how. But that means new exposures in the field and that, in turn, portends potentially rapid growth in the sale of professional liability insurance for products such as errors and omissions (E&O) coverage for investment advisors.
One firm that intends to take advantage of this growth is The Cambridge Alliance, a Burlington, Vermont-based MGA that specializes in E&O insurance for registered investment advisors (RIAs), investment advisory representatives (IARs), asset managers and financial planners.
The history of Cambridge is interesting because it is yet another example of how the insurance industry often creates its own competition. In 1986, the Institute of Certified Financial Planners (ICFP) endorsed an errors and omissions insurance program offered through the Fireman's Fund. In 1988, Fireman's Fund surprised the industry by abruptly withdrawing from the market. In fact, Fireman's Fund was one of a series of several national carriers that had withdrawn from this line of business after having been endorsed by the ICFP.
As a consequence of Fireman's withdrawal from the market, the ICFP assisted in the formation of a mutual insurance company, hoping to avoid what had happened with each of the previously endorsed carriers. Financial Services Mutual Insurance Company, A Risk Retention Group (FSM) was formed in Vermont and began writing coverage for the Institute's members in 1988. In 1992, Bayard (Bud) Bigelow became the president of FSM after running similar E&O insurance programs for Orion Capital Corporation.
In 1995, both Bud and the FSM board of directors agreed to move the program from the mutual to a large national carrier, First Specialty Insurance Corporation (FSIC), one chosen based upon the objective needs of the market, the prospects and the policyholders. FSIC is owned by Employers Reinsurance Corp. (ERC), which in turn is owned by GE Capital Services. In 1996, the program was moved to its current carrier and has offered continuous, uninterrupted coverage to members of several financial associations as well as unaffiliated financial planners and other financial professionals.
Bud attributes Cambridge Alliance's substantial, sustainable and continuing high rate of annual growth to its "cast of characters." Bud, Cambridge's president, started out in the insurance business in 1986. His experience includes a successful restructuring and turnaround of a NYSE insurance company as its chief planning officer, the successful start-up of a professional liability insurance program for certified public accountants, and management of the currently offered E&O insurance program for investment management consultants and other financial professionals since 1992. Additionally, he has similar experience outside the insurance industry.
Bud's wife, Nancy, is vice president and chief underwriter for the E&O professional liability program for registered investment advisors, financial planners and investment management consultants. Her underwriting experience with the program dates from 1993, when she assumed responsibility for all underwriting activities for the program. Nancy's underwriting career began at Chubb, where her responsibilities included underwriting and branch administration. After leaving Chubb, she spent 10 years at Aetna Life and Casualty in underwriting and systems design and implementation.
Underwriter Milton (Milt) C. Beard brings years of investment banking experience to The Cambridge Alliance.
"Our knowledge of the investment community helps us to avoid claims ... Our areas of expertise are diverse."
--Milt Beard
Along with Bud and Nancy Bigelow, "the cast" includes C. Anthony (Tony) Bougere, senior vice president of marketing, and Milton (Milt) Beard, who is an underwriter for the program. Tony has both marketing and insurance experience, having worked for various marketing firms and Aetna. Milt's experience includes years of investment banking activities for Merrill Lynch in London and Tokyo.
"We decided to move the program from the mutual insurance company that had been set up because we felt it was important to find a more secure carrier," says Bud. "While carrier insolvencies are relatively rare events, when they do occur, insureds and claimants can look to the state's insurance guaranty funds to provide limited relief. But E&O professional liability insurance for financial planners and RIAs is sold by excess and surplus lines insurers and, except for the state of New Jersey, there are no guaranty funds for E&S insurance companies.
"In other words," continues Bud, "for most insurance products sold, the state guaranty fund stands behind the carrier as the 'insurer of last resort,' albeit one that will absorb only a pre-determined maximum amount of each unpaid claim. However, when buying insurance in the E&S market, the financial strength and stability of the carrier is significantly more important. That's why we selected ERC, writing the business through FSIC. This company has long years of experience in the professional lines area. The carrier has an A++, XV rating by A. M. Best, which is the highest rating offered by the rating agency. The 'XV' part means that the carrier has significant assets."
Bud says that Cambridge Alliance does all the underwriting for this program and uses concrete and detailed standards and practices to keep claims low in frequency and severity. "And neither I nor marketing has a vote in the formulation of underwriting policy--I have throughout my career structured all insurance operations so that underwriting can exercise and sustain independent judgment," says Bud. "Consequently, we are a very stable market. One of our primary goals is rate and form stability, so that policyholders will not be surprised by major changes at renewal time. Our competitors appear to be much more volatile," says Bud.
According to Nancy, standard limits range from $50,000 per claim and $100,000 annual aggregate to $5 million per claim and $5 million annual aggregate. Coverage includes financial plans, modular or comprehensive, including estate tax, investment and retirement planning; RIA and IAR activities, including investment advice, generic or specific, asset allocation plans, investment policy statements and investment consulting; and optional coverage for various levels of discretionary authority.
The Cambridge Alliance cast: (from left) Milt Beard; C. Anthony (Tony) Bougere, senior vice president, marketing; Bud Bigelow and Nancy Bigelow.
She says that as far as cost is concerned, policies are individually underwritten, with premium cost a function of coverage selected and the size and nature of practice. Nonstandard deductibles are available at reduced premium. There are discounts for fee-only financial advisors and financial planners as well as for multiple financial advisors in the same firm.
"E&O for financial planners is a highly technical line of business," Nancy explains. "It requires strong underwriting standards and an incredible level of service. Our target market is the small to medium-sized firm and our goal is to provide the same underwriting standards and level of service as we would to the large corporation. We require all applicants to provide full disclosure--resumes, marketing material, background materials, investment strategies they take, etc. Then we tailor each policy to meet the applicant's needs. We don't have templates. We recognize that this process is longer on the front end, but we feel it is important to structure the coverage properly. We look at their Web sites and place emphasis on regulatory compliance issues."
On the claims side, however, Bud points out that Cambridge's response is speedy, particularly because the firm is methodical going into the insurance contractual arrangement. "We respond to a claim, we manage that claim and respond to the insured, usually within 24 hours," says Bud. "We encourage early reporting of claims, so that we can handle them promptly. In addition, we encourage insureds to report 'incidents' before they become claims. Per the language of the policy, we can assign an attorney, at our expense, to undertake preventive measures before the claim escalates. We believe in early intervention and prompt response. When we have a large claim, we always do a post-mortem re-examination of both our underwriting and our claims practices to find out what we or our policyholder might have done differently to have avoided this costly claim."
Moreover, according to Bud and Nancy, the broker's role is an important part of the process. "When we established Cambridge Alliance as an MGA, we realized that there would be a potential conflict of interest if we acted as both agent to the carrier and broker to the client," says Bud. "So we decided that we would represent the carrier and our brokers would represent the insureds. Our clients can elect the broker they want to use, within the confines of surplus lines laws. We wanted our clients to have control over who would represent them."
However, if a client has a particular question or problem, Bud says that Cambridge is ready to assist the broker in any way necessary. "If the broker wants us to meet with the client to discuss problems, we will do so, ensuring brokers at all times that we will enhance the relationship between insured and broker and will improve their ability to attract and retain new and renewal business."
"We rely heavily on referrals from satisfied policyholders, associations and financial institutions with whom we have a long-standing relationship," says Tony. "We attend several trade shows each year and publish articles frequently. We find that from the one-on-one conversations with our policyholders and prospects, we learn as much as they do. This knowledge translates into an enhanced ability to meet the needs of our policyholders and the brokers representing them and provides us with a continuous window into what is going on in the profession."
Milt Beard says that what makes Cambridge stand out in the E&O market for financial planners is that the "team" knows not only the insurance marketplace, but also the investment market. "Our knowledge of the investment community helps us to avoid claims," he says. "Our areas of expertise are diverse. Our applications are two pages long because we know the important areas to consider when underwriting a risk. Our competitors have applications that run for pages. It makes you wonder what they're reading or paying attention to when questions are repeated so often."
Finally, the Cambridge team sees itself as a provider of much-needed education to the financial planning profession. Bud is the author of several articles on insurance coverage and loss prevention programs for financial planners. And Nancy is not reluctant to assist financial planners even if they are not clients.
"We don't take on all risks," says Nancy. "It's not that the ones we turn down are uninsurable. Sometimes they just don't fit into our program. In those instances, we'll spend time talking to them and give them guidance as to where they can go for assistance. The financial planning industry is a growing one. The more educated that financial planners are, the better for everyone," she says. *