Financial Services – Professional Liability Risks
The Problem:
Axon Wealth Management, a mid-sized U.S.-based financial advisory firm, faced rising costs and regulatory complexity in managing its professional liability (PL) risks. With operations across multiple states, Axon needed a cost-effective way to self-insure against potential client lawsuits while maintaining flexibility to scale as the firm grew.
Traditional insurance markets offered high premiums and rigid terms that didn’t align with Axon’s specific risk profile. Although Axon had sufficient financial strength to assume a significant portion of the risk, it could not cover the entirety of a large claim, such as a multimillion-dollar lawsuit stemming from alleged mismanagement of client portfolios.
The Solution:
Axon partnered with Nova to establish a Segregated Portfolio within an SPC structure in the Cayman Islands. Nova’s team worked closely with Axon’s compliance, legal, and risk management teams to design a tailored PL insurance program, focusing on:
- Defining Axon’s Risk Capacity: Nova analyzed Axon’s financial strength, liquidity, and equity value to determine its ability to retain risk, ensuring a balanced approach to self-insurance versus risk transfer.
- Determining Retention: Nova evaluated Axon’s risk appetite alongside available PL insurance rates in both U.S. and international markets, identifying an optimal retention level that maximized cost efficiency.
- Dedicated Portfolio Setup: The SPC structure allowed Axon to create a dedicated portfolio that provided coverage for its insurable PL risks.
- Risk Allocation:
- Low-severity risks, such as claims related to administrative errors (e.g., clerical mistakes in client reporting) or minor advisory disputes, were fully retained by the portfolio’s fund.
- Higher-severity risks, such as fiduciary breaches or portfolio mismanagement leading to losses over $1M per event and $2M in aggregate, were ceded to the international reinsurance market at rates 30–50% lower than traditional U.S. carriers, leveraging Nova’s expertise.
- Legal Separation: The portfolio fund was legally segregated under Cayman law, ensuring security, independence, and transparency. Nova also provided underwriting expertise to assess Axon’s exposures and optimize financial structures within the tax-neutral Cayman environment.
The Benefits:
- Cost Savings: 30% reduction in annual insurance costs.
- Enhanced Risk Awareness: Greater control over operational risk and monetization of overlooked exposures.
- Return on Assets: Improved group ROI by investing assets previously allocated to premiums.
- Flexibility and Control: Ability to adjust coverage and retentions as Axon’s business evolved.
- Tax Efficiency: Maximized financial returns through Cayman’s tax-neutral structure.
- Scalability and Expansion: Profits reinvested to fund Axon’s expansion into new markets.
The Impact:
Today, Axon operates with a customized, resilient insurance platform that strengthens its financial position, supports scalable growth, and transforms insurance into a strategic advantage fueling long-term success.