BOSTON, MA – Insurance carriers are dramatically intensifying underwriting scrutiny of registered investment advisors (RIAs), private equity funds, hedge funds, and digital asset managers in response to heightened SEC regulatory focus and emerging risks in alternative investments. According to insurance industry experts, firms with significant private fund or digital asset exposure now face extensive questionnaires, 25-100% premium surcharges, coverage limitations, or outright declinations from carriers uncomfortable with these risks.
The shift reflects a fundamental change in how insurers assess financial services risk. Rather than applying broad coverage restrictions or blanket rate increases across entire sectors—as occurred during the 2008 financial crisis—today's underwriters are conducting surgical, firm-specific assessments that differentiate based on investment strategies, compliance infrastructure, client disclosures, and regulatory history. This granular approach rewards firms with robust governance and transparent operations while penalizing those with compliance gaps or elevated risk profiles.
"There haven't been any blanket changes to the actual policy forms. If anything, they just keep broadening," said Jessica Thayer, Senior Vice President and Financial Services Practice Leader at Starkweather & Shepley Insurance. "What we're seeing is more underwriting to each specific risk."
For private fund managers and digital asset firms, understanding what triggers insurance scrutiny and implementing strategies to demonstrate insurability determines whether they secure coverage at reasonable rates or face deteriorating terms that threaten business viability.
Private Funds: Why Insurers Are Concerned
SEC Enforcement Intensification
The SEC has dramatically increased enforcement actions against private fund managers:
Fee and expense practices: Hidden fees, accelerated monitoring fees, inadequate fee disclosures, allocation of expenses between funds and portfolio companies
Conflicts of interest: Side letters granting preferential terms, allocation of investment opportunities, related-party transactions
Valuation practices: Inadequate valuation policies, conflicts in valuation processes, overstatement of fund performance
Custody and client assets: Failure to adopt required custody rules, inadequate safeguards for client assets
Marketing and performance: Misleading performance advertising, cherry-picked results, omission of relevant risks
Recent high-profile actions:
- Private equity firms fined $50M-$100M+ for fee disclosure violations
- Hedge funds sanctioned for misleading performance marketing
- Venture capital managers charged with conflicts of interest in portfolio company transactions
Impact on insurance: Each enforcement action creates precedent that expands liability exposure for all private fund managers, forcing insurers to price elevated regulatory risk.
Fee Transparency Under Microscope
Private fund fee structures are complex and often opaque, creating regulatory and liability risks:
Common fee issues triggering scrutiny:
Management fees: Calculated on committed capital vs. invested capital, inclusion/exclusion of leverage, timing of fee calculations
Performance fees/carried interest: Hurdle rates, clawback provisions, crystallization timing, allocation among fund investors
Monitoring fees: Charged to portfolio companies, potentially duplicative of management fees, disclosure adequacy
Transaction fees: Broken deal fees, success fees, arrangement fees—who pays and how disclosed
Expense allocations: Allocation between fund and manager, allocation among multiple funds, adequacy of disclosure
Insurance implications:
Carriers now require detailed fee disclosures:
- Sample fund documents showing all fee provisions
- Explanation of fee calculation methodologies
- Disclosure of monitoring and transaction fees charged to portfolio companies
- Documentation of fee disclosure to investors
- SEC exam reports and responses (if examinations occurred)
Premium impact: Funds with questionable fee practices or SEC exam findings on fees face 30-50% premium surcharges or coverage exclusions for fee disputes.
Side Letters and Preferential Terms
Side letters granting certain investors preferential terms create conflicts of interest and disclosure issues:
Common side letter provisions:
- Preferential liquidity: Early redemption rights not available to other investors
- Fee discounts: Reduced management or performance fees
- Information rights: Enhanced reporting or access not provided to other investors
- Governance rights: Advisory committee seats, veto rights, consent rights
- MFN clauses: Right to receive any more favorable terms granted to other investors
Why insurers care: Side letters create:
- Disclosure risks: Inadequate disclosure to investors who don't receive preferential terms
- Conflicts of interest: Manager favoring certain investors over others
- Regulatory exposure: SEC has brought enforcement actions for improper side letters
- Investor disputes: Investors who discover preferential terms they didn't receive may bring claims
Insurance implications:
Underwriters ask:
- Do you grant side letters? If yes, describe types of provisions
- How are side letters disclosed to investors?
- Do MFN clauses create circular disclosure obligations?
- Have you received regulatory inquiries about side letter practices?
Premium impact: Funds with extensive side letters lacking clear disclosure protocols face 20-40% surcharges.
Valuation Controversies
Private fund investments in illiquid securities, private companies, and complex instruments create valuation challenges and dispute risks:
Valuation risks:
- Subjectivity: Limited market prices for private assets, requiring subjective assumptions
- Conflicts: Manager compensation tied to valuations (performance fees based on appreciated values)
- Regulatory scrutiny: SEC focused on valuation practices, particularly during fundraising
- Investor disputes: Investors claiming inflated valuations to justify higher performance fees or mask losses
Insurance implications:
Underwriters evaluate:
- Valuation policies and procedures documentation
- Independence of valuation process (third-party valuations, valuation committee)
- Frequency of valuations and triggers for interim revaluations
- Disclosure of valuation methodologies to investors
- Regulatory exam findings on valuations
Premium impact: Funds with weak valuation governance or exam findings on valuations face 25-50% surcharges or exclusions for valuation-related claims.
Digital Assets: The Frontier of Insurance Uncertainty
Regulatory Ambiguity
The regulatory framework for digital assets remains unsettled, creating significant uncertainty for insurers:
Jurisdictional confusion:
- SEC vs. CFTC: Unclear which regulator has jurisdiction over various crypto assets
- Securities classification: Debate over which digital assets are securities vs. commodities
- State vs. federal: State money transmitter laws, state securities laws, federal framework all potentially applicable
- International variation: Different regulatory approaches across jurisdictions
Evolving enforcement:
- SEC bringing enforcement actions against crypto exchanges, lending platforms, and staking services
- CFTC pursuing fraud cases in digital asset markets
- State regulators investigating unregistered securities offerings
- International actions (UK, EU, Asia) creating conflicting precedents
Insurance impact: Regulatory uncertainty means insurers can't accurately price liability exposure. Many exclude digital asset activities entirely; those providing coverage charge substantial premiums to account for unknown risks.
Custody and Operational Risks
Digital asset custody presents unique operational and security challenges:
Custody options and risks:
Self-custody (private keys held by firm):
- Advantages: Direct control, no counterparty risk
- Risks: Key loss/theft, internal fraud, hacking, operational errors
- Insurer view: Highest risk, often results in coverage declinations or 100%+ premium surcharges
Qualified custodians (Coinbase Custody, Fidelity Digital Assets, etc.):
- Advantages: Professional custody, insurance coverage by custodian, regulatory compliance
- Risks: Counterparty risk (custodian failure), limited insurance coverage, potential regulatory changes
- Insurer view: Moderate risk, 25-50% premium surcharges typical
Exchange custody (assets held on crypto exchanges):
- Advantages: Liquidity, trading convenience
- Risks: Exchange hacks, fraud, insolvency (FTX, Mt. Gox precedents), regulatory shutdown
- Insurer view: High risk, often results in coverage exclusions or declinations
Insurance implications:
Underwriters require detailed custody information:
- Percentage of AUM in digital assets
- Types of digital assets (Bitcoin/Ethereum vs. altcoins/stablecoins/NFTs)
- Custody arrangements for each asset type
- Cybersecurity controls protecting private keys
- Insurance coverage provided by qualified custodians
- Disaster recovery and business continuity for custody operations
Premium impact: Firms with self-custody or exchange custody face 75-100% premium surcharges or coverage exclusions. Even qualified custodian arrangements result in 25-50% surcharges.
Market Volatility and Valuation
Extreme crypto market volatility creates valuation, disclosure, and suitability risks:
2024-2025 examples:
- Bitcoin ranging from $38,000 to $73,000 (+92% intra-year swing)
- Ethereum ranging from $2,200 to $4,800 (+118% swing)
- Numerous altcoins experiencing 50-90% declines or 200-500% gains
Why insurers care:
Valuation disputes: Clients claiming advisory firms provided misleading performance information or failed to disclose downside risks
Suitability claims: Clients arguing crypto investments were unsuitable given their risk tolerance, investment objectives, or financial situation
Disclosure failures: Claims that firms inadequately disclosed crypto volatility, liquidity risks, regulatory risks, or custody risks
Insurance implications:
Underwriters assess:
- Client base sophistication (accredited investors, qualified purchasers, institutions vs. retail)
- Suitability procedures for crypto investments
- Disclosure documents provided to clients regarding crypto risks
- Performance reporting practices
- Percentage of client portfolios in digital assets (firm-wide and individual client basis)
Premium impact: Firms with >5% AUM in digital assets face 30-50% surcharges; >10% face 50-100% surcharges or declinations.
Fraud and Hacking Precedents
The digital asset space has experienced numerous high-profile frauds and hacks:
Recent examples:
- FTX collapse ($8B+ customer funds lost)
- Terra/Luna implosion ($40B+ value destroyed)
- Celsius bankruptcy ($4.7B customer assets frozen)
- Numerous exchange hacks (Mt. Gox, Coincheck, KuCoin, Poly Network)
Why insurers care: Each incident demonstrates:
- Custody vulnerabilities
- Fraud risks (misappropriation, Ponzi schemes)
- Counterparty risks (exchange/platform failures)
- Regulatory risks (enforcement actions, criminal charges)
Result: Insurers view digital asset exposure through lens of these worst-case scenarios, assuming similar risks exist for any firm with digital asset activities.
What Investment Managers Must Do to Secure Coverage
Strategy 1: Provide Comprehensive Documentation
For private fund managers:
Governance and compliance:
- Compliance manual addressing fee practices, conflicts of interest, valuation, custody
- CCO qualifications and resources
- Evidence of annual compliance reviews and testing
- Board or advisory committee governance documentation
Fee transparency:
- Sample fund documents showing all fee provisions
- Fee calculation methodologies and examples
- Monitoring and transaction fee disclosures
- Investor communications explaining fees
Regulatory history:
- SEC exam reports (redacted as appropriate) and remediation evidence
- Any enforcement actions, deficiency letters, or regulatory inquiries
- Documentation of corrective actions taken
Strategic partnerships: For firms lacking robust in-house compliance, document relationships with:
- Third-party compliance consultants
- Fund administrators providing independent oversight
- Legal counsel advising on regulatory matters
Strategy 2: Quantify and Contextualize Digital Asset Exposure
For firms with any digital asset involvement:
Be specific about exposure:
- Percentage of AUM: 2% vs. 15% creates vastly different underwriting responses
- Types of digital assets: Bitcoin/Ethereum viewed differently than obscure altcoins or NFTs
- Investment approach: Passive allocation vs. active trading creates different risk profiles
- Client base: Institutional/accredited investors vs. retail changes risk perception
Demonstrate operational controls:
- Use qualified custodians (Coinbase Custody, Fidelity Digital Assets, BitGo)
- Implement cybersecurity controls (MFA, cold storage, multi-signature requirements)
- Maintain comprehensive disclosure documentation
- Document suitability procedures and client risk acknowledgments
Consider structural segregation:
- Some firms establish separate legal entities for digital asset activities
- Segregates insurance risk and allows specialized coverage for digital asset entity
- Parent entity insurance excludes digital assets, avoiding premium surcharges
Strategy 3: Demonstrate Regulatory Proactivity
What insurers reward:
Proactive regulatory engagement:
- Registered with appropriate regulators (SEC, CFTC, state regulators)
- Sought guidance or no-action relief where appropriate
- Participated in industry working groups on best practices
- Retained experienced securities counsel
Remediation capability:
- If SEC exam identified deficiencies, demonstrate:
- Prompt acknowledgment of issues
- Comprehensive remediation plan
- Implementation of enhanced controls
- Ongoing monitoring to prevent recurrence
Industry leadership:
- Participation in industry associations (ILPA, AIMA, NVCA)
- Adoption of industry best practice guidelines
- Transparency with regulators and investors
Example: A private equity firm received SEC exam findings on monitoring fee disclosures. Rather than defending practices, they:
- Immediately retained outside counsel to review all fee arrangements
- Enhanced fund disclosures regarding monitoring fees
- Implemented quarterly fee reporting to investors
- Provided detailed remediation documentation to insurer
- Result: Secured coverage at only 15% premium surcharge vs. 40-50% surcharges for firms with similar exam findings who failed to demonstrate remediation
Strategy 4: Work with Specialized Brokers and Insurers
Not all brokers and insurers understand private funds and digital assets:
Seek brokers who:
- Specialize in financial services insurance
- Have relationships with carriers comfortable underwriting alternative investments
- Understand regulatory landscape and can present your firm effectively
- Have placed coverage for similar firms
Target insurers with appetite:
- Traditional carriers: Chubb, AIG, Beazley have dedicated financial services teams
- Lloyd's syndicates: Many Lloyd's syndicates specialize in complex financial services risks
- Specialty insurers: Certain specialty carriers focus on alternative investment managers
- Insurtech: Some insurtech companies (Coalition, At-Bay for cyber; others for E&O) may have more flexible underwriting
Avoid commodity approach: Don't treat insurance as commodity purchase. Specialized brokers and carriers who understand your business provide better outcomes than generalist brokers using standardized applications.
Strategy 5: Consider Coverage Enhancements and Separate Policies
Regulatory coverage endorsements: Some carriers offer enhanced regulatory coverage for:
- SEC investigations and inquiries
- Defense costs and fines/penalties
- Whistleblower claims and retaliation allegations
Separate crime/fidelity coverage: For digital asset custody risks, consider separate crime coverage with:
- Digital asset theft coverage
- Social engineering fraud coverage
- Cybercrime coverage
Cyber insurance: Mandatory for any firm with digital assets due to custody and hacking risks
Parametric insurance: For specific risks (regulatory action, key person departure), parametric policies pay predetermined amounts automatically, supplementing traditional coverage
The Future: What to Expect in 2026-2027
Trend 1: Continued Regulatory Scrutiny
Private funds: SEC enforcement will continue focusing on fees, conflicts, and valuation. Expect additional guidance clarifying requirements and creating new compliance obligations.
Digital assets: Regulatory framework will evolve but remain unsettled through 2026-2027. Enforcement actions will continue, creating litigation exposure for advisors.
Trend 2: Insurance Capacity Specialization
Generalist insurers will likely exit or restrict coverage for alternative investments, while specialists increase capacity:
Expect bifurcated market:
- Most traditional carriers limiting exposure to vanilla RIAs (stocks, bonds, mutual funds)
- Specialists (Lloyd's, certain carriers) increasing capacity for alternatives but at 25-50% premium surcharges
Trend 3: Technology and Data Requirements
Insurers will increasingly require:
- Third-party cybersecurity ratings (BitSight, SecurityScorecard) for digital asset firms
- Automated compliance monitoring data
- Real-time AUM and exposure reporting
- Portfolio composition transparency
Trend 4: ESG Integration
Environmental, Social, Governance (ESG) factors will enter underwriting:
- Insurers asking how ESG factors integrated into investment decisions
- Climate risk disclosures and scenario analysis
- DEI policies and practices
- Controversial investments (fossil fuels, weapons, tobacco)
Key Takeaways
Private fund managers face heightened insurance scrutiny due to SEC enforcement targeting fees, conflicts, and valuation practices, resulting in 25-50% premium surcharges for firms with regulatory findings or weak compliance.
Digital asset exposure results in 25-100% premium surcharges or coverage declinations from most insurers uncomfortable with regulatory uncertainty, custody risks, and fraud precedents.
Granular underwriting rewards transparency and governance—firms demonstrating robust compliance infrastructure, qualified custodian usage, and proactive regulatory engagement secure better terms.
Comprehensive documentation is essential—detailed submissions explaining governance, fee practices, custody arrangements, and regulatory history significantly improve underwriting outcomes.
Specialized brokers and insurers are critical—working with financial services specialists who understand alternative investments ensures access to appropriate markets and optimal coverage.
Structural segregation may be necessary—firms with significant digital asset exposure should consider separate legal entities for digital asset activities to isolate insurance risk.
The landscape will evolve rapidly in 2026-2027—expect continued regulatory developments, insurance market specialization, and technology requirements reshaping coverage availability and pricing.
Private fund managers and digital asset firms must recognize that insurance is increasingly a differentiator reflecting governance quality and regulatory compliance sophistication. Firms investing in robust compliance infrastructure, transparent disclosures, and proactive risk management will secure coverage at reasonable rates, while those cutting corners or ignoring regulatory evolution will face deteriorating insurance markets that ultimately threaten business viability. The time to address these issues is now, before insurance becomes unavailable or prohibitively expensive.
Need help securing insurance for private funds or digital asset activities? Heightened regulatory scrutiny and insurer concerns require specialized expertise to navigate. Working with brokers who understand alternative investments and have relationships with appropriate carriers ensures optimal coverage outcomes.
Sources: Insurance Business Magazine, Starkweather & Shepley Insurance, Financial Services Insurance Market Reports, SEC Enforcement Data