The MFDA Investor Protection Corp. (IPC), the fund industry’s contingency fund, has acquired $20 million worth of insurance to cover claims, in case it ever faces a large loss.
The IPC announced Friday that it has secured $20 million in coverage from international insurers. In the event of a large loss, the IPC would cover the first $30 million of losses, and the insurance could be called on to provide another $20 million in coverage.
The coverage, which is renewable each year, is currently costing $280,000 plus tax, the IPC reports. But, it could lead to lower assessments for fund dealers. “Once IPC has established a relationship with the insurers, IPC will consider a modification of the assessments of MFDA members, likely around the time of the second renewal of the insurance policy,” it says.
Although, it also notes any change in assessments will be subject to the input from both the insurers, and the issuer of the IPC’s credit facility, “as they reference IPC’s cash position in their assessment of the risk of dealing with IPC.”
The move to use insurance as an additional source of funding for the contingency fund follows a recommendation from the IPC Issues Committee back in 2010.
Earlier that year, the fund indicated that it wanted to boost its total coverage capability to $50 million over the next five years. It said it needed to bolster its assets due to increased risk in the industry; increased coverage levels; comparison to other funds; and the history of failure of MFDA members; among other factors.