Mutual Funds - An Updated

Underwriting Approach

Shelia January
Senior Vice President
Zurich North America Specialties
June 7, 2004
Presentation Agenda
• Historic Context & Risk Issues
• Current Market Conditions
• Risk Characteristics
• Policy Structure
• Underwriting Information
• Current Regulatory/Litigation Climate
• Pricing Considerations
• Insurance Marketplace
• Summary
Historic Context & Risk Issues
• Earliest Policies were written in response to insureds’ coverage
needs as presented to the insurance industry
• Prior to 1988, limited offerings from the commercial insurance
marketplace
• ICI Mutual began offering coverage in 1988
• 1988-1990 - more insurers began offering insurance products
• 1986-1990 saw enormous growth in mutual fund assets from
<$500mm to >$1,000mm; $6,900mm by y/e 2000
 Historic Context & Risk Issues, cont.

• Traditionally, broad coverage was provided on policies

written for limits of $10,000,000 to $100,000,000
(industry captive), with lower retentions than those
offered to most financial institution risks
• Low frequency of claims
• Policy language written to coincide with regulatory
definitions, functions, and requirements
Current Market Conditions

• Currently 10 markets regularly writing coverage for Mutual

Funds and Investment Advisers, with a few others occasionally
providing some excess limits
• Approximately $300mm in available capacity for a single
insured’s program utilizing all available sources, including
Lloyds marketplace
• Prices have generally doubled since 2000, with higher increases
since September, 2003
• Retentions have increased by a minimum of 50%, and generally
at least 100%
 Risk Characteristics
• Numerous entities to be covered under policies,
basically the funds and all entities involved in the
management and sales
• Heavy regulatory involvement and enforcement
without direct responsibility for ongoing oversight
• Dependence on oversight of independent directors
• Little direct influence of shareholders other than
“voting with their feet”
Policy Structure
• Single Limit of Liability, covering any or all of the
following:
– Mutual Fund Errors & Omissions
– Mutual Fund Fund Directors & Officers
– Investment Adviser E&O
– Service Provider E&O (service provided to mutual
funds)
– Investment Adviser D&O
– Operational Failure (also called Cost of Corrections)
Underwriting Information
• Application
• Fund Prospectus(es)
• Plan Financials
• Form ADV
• Adviser Financials
• Fund Statement(s) of Additional Information (SAI)
• Underwriting Visit with Fund &/or Adviser Officers -
depends on insurer
Current Regulatory/Litigation Climate
• Beginning in September, 2003, increasing regulations and
requirements
• SEC has increased the number and scope of audits
• Increased state investigations and enforcement actions
• Increased costs to comply with more extensive regulations
• Previously accepted industry practices under attack and
investigation
• Negative perception by investing public
Pricing Considerations
• Asset size
• Asset type
• Entities covered
• Coverages included
• Retention levels
• Corporate Governance
• Internal Control Structure
Insurance Marketplace
• Less support for Mutual Fund risks within some insurer
organizations
• Less support for Mutual Fund risks in the reinsurance community,
especially for the new capacity available
• Industry Captive is taking a hard line on pricing, terms &
conditions
• Not clear as to how much of the current losses will be covered by
insurance policies
• Pressure from Independent Directors to maintain high levels of
D&O/E&O Insurance
Summary
• Mutual Fund groups that have been insulated from the recent
extreme fluctuations of the marketplace are now experiencing
what other Financial Institutions have in the past

• Coverage and capacity are still available

• Insurers are developing tools to continue to refine their

underwriting appetites and the correct risk pricing