The Titanic, Bruce Springsteen’s voice, NASA satellites and countless other odd and famous objects have been insured by Lloyds of London contracts over the years. Now, in an effort to protect customers from the Nick Leesons of the world, the venerable institution has begun offering insurance against rogue traders.
While other insurers offer policies to cover trading, they define fraudulent trading as breaking rules either to cause losses or for personal financial gain—in other words, stealing. In Leeson’s case, however, Barings was not protected by its fidelity trading insurance because Leeson exceeded position limits not to bolster his commissions but to cover his earlier losses. The new Lloyds policies also cover unauthorized trading undertaken merely to get out of trading holes.
The policies, written by SVB Syndicates, a Lloyds subsidiary dedicated to specialty coverage of financial institutions, provide up to $300 million to cover direct financial loss caused by unauthorized, concealed or falsely recorded trading by any person trading for the insured institution.
“What we found when we looked at the losses in unauthorized trading was that quite typically they did not include dishonesty,” says Steven Burnhope, director of SVB. “It was often an action taken [simply] to make a profit. Our customers said to us that, with the emergence of trading as a major component of their earnings these days, the traditional products didn’t address the risks that were emerging in those areas.”
While SVB’s new policies cover only proprietary trading activities, another Lloyds subsidiary, Stone Financial Risks, is now offering policies geared toward securities brokers as well, offering protection for losses caused by dealers’ clients.
The annual premiums for the rogue trading policies will range between $2 million and $10 million, with annual deductibles of between $10 million and $25 million, to be determined on a case-by-case basis. SBC and Stone will examine each firm’s internal risk management framework, making sure that solid trading controls are in place. Neither plans to issue policies to firms that fail to meet the basic requirements. In January, Chase purchased the first policy, and some 40 other financial institutions have asked for quotations thus far. Since Lloyds represents 60 of the world’s 100 largest banks, it hopes that the policies will take off.
“We didn’t know at the beginning if we would be able to provide cover in this area,” says Burnhope, “because it is one that insurers have found quite difficult to assimilate.” It is clear now, however, that with these policies another level of risk management tool has emerged. Is reinsurance of rogue trading policies far off?
Rogue Trading Insurance
While other insurers offer policies to cover trading, they define fraudulent trading as breaking rules either to cause losses or for personal financial gain—in other words, stealing. In Leeson’s case, however, Barings was not protected by its fidelity trading insurance because Leeson exceeded position limits not to bolster his commissions but to cover his earlier losses. The new Lloyds policies also cover unauthorized trading undertaken merely to get out of trading holes.
The policies, written by SVB Syndicates, a Lloyds subsidiary dedicated to specialty coverage of financial institutions, provide up to $300 million to cover direct financial loss caused by unauthorized, concealed or falsely recorded trading by any person trading for the insured institution.
“What we found when we looked at the losses in unauthorized trading was that quite typically they did not include dishonesty,” says Steven Burnhope, director of SVB. “It was often an action taken [simply] to make a profit. Our customers said to us that, with the emergence of trading as a major component of their earnings these days, the traditional products didn’t address the risks that were emerging in those areas.”
While SVB’s new policies cover only proprietary trading activities, another Lloyds subsidiary, Stone Financial Risks, is now offering policies geared toward securities brokers as well, offering protection for losses caused by dealers’ clients.
The annual premiums for the rogue trading policies will range between $2 million and $10 million, with annual deductibles of between $10 million and $25 million, to be determined on a case-by-case basis. SBC and Stone will examine each firm’s internal risk management framework, making sure that solid trading controls are in place. Neither plans to issue policies to firms that fail to meet the basic requirements. In January, Chase purchased the first policy, and some 40 other financial institutions have asked for quotations thus far. Since Lloyds represents 60 of the world’s 100 largest banks, it hopes that the policies will take off.
“We didn’t know at the beginning if we would be able to provide cover in this area,” says Burnhope, “because it is one that insurers have found quite difficult to assimilate.” It is clear now, however, that with these policies another level of risk management tool has emerged. Is reinsurance of rogue trading policies far off?
Rogue Trading Insurance
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