A U.K. based asset management firm reduces its Fund Insurance IBR* to less than 10% (from over 75%) and implements operational risk controls to improve its risk management. Moreover, the firm expands its Fund Insurance to cover core operational risks such as trading errors and an underperforming NAV.
Challenge
Directors of a U.K. based asset management firm were interested in knowing how useful their Fund Insurance was in protecting their funds against certain operational loss scenarios mainly surrounding trading.
Discovery
We discovered that the firm’s Fund Insurance had an IBR* of over 75%. We devised a plan for the asset management firm to (a) implement controls around its trading practices; (b) increase the probability of payout on its existing insurance coverage; (c) expand its insurance coverage to include protection against trading errors; and (d) have the ability to trigger its insurance in the event of a lengthy underperforming NAV.
Impact
- The firm gained confidence in its ability to manage operational risk related to trading.
- The existing insurance was re-structured into an Operational Risk Swap.
- Insurance Basis Risk* was lowered to below 10% and maintained at that level at each renewal.
- The firm included its use of an Operational Risk Swap, which results in a ‘floor’ to its NAV, in its marketing material in order to attract new and retain existing investors.
*Insurance Basis Risk: probability of non-payment or delay in payment of Insurance.