Citi predicts increase in APAC managers purchasing insurance

Operational Risk
15 Jan, 2013

Asia-Pacific (APAC) hedge fund managers are likely to purchase more insurance protection as the industry increasingly targets global institutional investors, according to Citi Prime Finance.

A Citi Prime Finance survey in December 2012 revealed APAC managers lagged behind their US and European counterparts in terms of insurance protection with 36% acknowledging they operated without insurance.

Fifty-seven percent of managers told Citi Prime Finance they held D&O insurance while 47% had PI insurance compared with a Baronsmead survey of European hedge funds which revealed 93%  and 82% held D&O and PI insurance respectively.

However, Citi predicts APAC managers will become more proactive in buying insurance. “We believe the trend towards earlier adoption of management liability insurance will continue in the region. The main driver of this will be the ongoing institutionalisation of the APAC hedge fund industry and the concurrent ambition to increasingly tap the large institutional investor base in North America and Europe,” said David Stanbridge, vice president of Citi Prime Finance business advisory services for APAC.

Cost and impact on fund performance was cited by 47% of APAC managers as the biggest reason for not buying insurance, while 37% said their investor base did not require it.  Stanbridge said this was attributable to APAC managers being smaller and having a less-than-institutional clientele.

“Many smaller managers are managing portfolios in which their own personal wealth represents the bulk of the assets and this significantly reduces the probability of litigation, thus mitigating the potential risks. Typically it is during this time that managers are concentrating on establishing a credible track record over a sufficient period of time in order to facilitate a marketing effort into the more developed markets,” he said.

The Citi survey said regional regulators such as the  Monetary Authority of Singapore might require some managers to purchase a minimum level of PI insurance in order to obtain a license. Despite this, Stanbridge said any increased uptake of insurance by managers would predominantly be an investor-driven affair. “It is more likely that institutional corporate governance considerations motivated by a desire to tap the institutional investor base outside of the region will be the primary driver of management liability insurance acquisition. A further driver of insurance adoption will be the increased professionalisation of regional hedge fund boards of directors with independent, professional directors requiring the funds to buy insurance as a pre-condition of them joining the board,” he added.

Citi Prime FinanceinsuranceAPACBaronsmeadMonetary Authority of Singapore