Brokerages Losing Extra Client-Asset Insurance
Merrill Lynch & Co., Charles Schwab Corp. and dozens of other U.S. brokers that buy extra insurance to protect client assets from bankruptcy are losing the coverage because insurers say it’s too risky.
Travelers Property Casualty Corp., American International Group Inc. and Radian Group Inc., the only U.S. insurers that protect brokerage assets, stopped renewing policies three months ago, said Stephen Harbeck, general counsel of the Securities Investor Protection Corp. The policies, which resemble surety bonds, supplement federal coverage of $500,000 per account.
Brokerages are exploring insuring themselves or buying protection from Lloyds of London.
Underwriters are backing away from the policies, even though they have never paid a claim, in the wake of Enron Corp.’s collapse. That default cost insurers $654 million in surety transactions, which guarantee the performance of an obligation.
“On paper, their liability is huge with these policies,” said Steve Leggett, a New York-based vice president at insurance broker Willis Group Holdings. Insurers “got duped with Enron and they don’t want to get duped again.”
Insurers have restricted surety products since settling this year with J.P. Morgan Chase & Co. over $1.1 billion of Enron-related policies. Insurers said they were tricked into backing Enron loans disguised as commodity transactions with an offshore entity sponsored by J.P. Morgan.
The private policies typically cover all assets in clients’ accounts and cost $600,000 to $1.5 million a year at the largest companies. Though the firms buy the insurance to attract wealthy clients, 99.7% of investors at the 306 U.S. brokerages that failed in the last three decades have recouped their losses with SIPC coverage.
About 120 of the Securities Industry Assn.’s 150 biggest members buy the supplemental insurance. Many smaller brokerages are covered indirectly through their clearing firms.
“To the extent that ‘excess SIPC’ provides high-net-worth clients with greater peace of mind, it’s extremely important,” Charles Schwab spokesman Glen Mathison said.
To replace the lost coverage, about 20 of the largest brokerages have discussed forming their own insurance companies, and similar efforts are underway at smaller firms. Most insurers are extending policies through the end of the year.
