Determining the right level of Fidelity Insurance for Retirement funds
By Greg Preston
FQ Financial Skills
The LI-MIT (Limit of Indemnity – Marsh Indication Tool) is currently the retirement industry’s most effective solution in assisting fund advisors and boards of trustees in setting their level of compulsory Fidelity Insurance. The tool also aims to identify training shortfalls, risk exposure, and other areas of concern for the board.
Fund advisors walk a legal tightrope in suggesting or advising on an appropriate limit of Fidelity cover for their clients. Without a systematic and empirical analysis of the risks faced by a fund, and without any updated guidelines by the FSB on the levels of insurance funds should carry, any such advice or suggestions are extremely risky.
Similarly, trustee boards and their sub-committees are increasingly exposed to member class actions and other litigation should insufficient insurance be secured to cover a claim. When considering the implications of loss to the fund, legal costs and other contingent costs that may be incurred following a claim, the board needs to be confident that the level of cover purchased is commensurate to the risk faced by the fund.
The LI-MIT system has been revised and upgraded on a regular basis in collaboration with specialists from Marsh Africa (risk actuaries and advisors), Camargue Underwriting Managers and FQ Financial Skills (industry knowledge and assessment expertise). The latest improvements include an update of risk considerations using the most recent claim statistics and expanding the system to cater for all types of retirement funds, including Stand Alone funds, Umbrella Funds, Retirement Annuity Funds, Preservation Funds, Beneficiary Funds and Unclaimed Benefit Preservation Funds
The LI-MIT tool is an actuarially based survey, weighting claims information, regulatory developments and PFA rulings, which when applied to each fund’s own risk profile, yield an empirical basis for deciding an appropriate level of cover. Input from the trustees and the principal officer is obtained with respect to the fund’s characteristics, with verification and extraction of data from the Fund’s audited Annual Financial Statements. In addition, data is obtained from the fund’s administrator.
The onerous principles and practices of the King reports on Corporate Governance, increased member awareness, possible class actions and heightened regulatory enforcement should leave no doubt in the minds of advisors and boards that the correct and appropriate insurance levels are no longer optional.
The most recent data emanating from those funds that have already used LI-MIT have provided valuable insight into the level of Fidelity Cover held by the funds. The results show that 37% of funds are under-insured, 33% are over-insured and only 30% are appropriately insured. Thus, 70% of funds have an inappropriate level of cover.
With LI-MIT having recently been updated and now suitable for all funds, there really is no reason not to utilise this very important tool.
Camargue Underwriting Managers (Pty) Ltd
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