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1997 RISK MANAGER OF THE YEAR: CONCENTRIC RISK PROGRAMS MEAN BIG SAVINGS

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FMR Corp. will bank millions of dollars and its risk management staff will save considerable time under two multiyear integrated risk programs that Judy Lindenmayer has fashioned for the company.

And, if FMR, better known as Fidelity Investments, exhausts either of the programs' limits, it can opt for either full or much cheaper partial reinstatements of limits, according to Ms. Lindenmayer, vp-Fidelity insurance and risk management.

The integrated, or concentric, risk program may be the first of its kind for a mutual-fund complex, according to Thomas F. McKenna, a J&H Marsh & McLennan managing director who helped Ms. Lindenmayer put together the programs.

The broker's Fin Pro division placed both of the three-year integrated programs, which combine coverage for multiple bond and professional liability exposures.

The programs went into effect in July 1996.

One concentric risk program covers Fidelity's mutual fund complex. Fidelity's FMR Co. subsidiary provides investment advisory, management and shareholder services to the nation's largest pool of mutual funds, which Fidelity does not own.

The other program, known as the corporate concentric risk program, covers all of Fidelity's other business operations. Fidelity runs a multitude of businesses, ranging from computer software development to stockbrokerage to credit card operations to an executive livery service, to name a few.

By combining about 30 employee dishonesty, crime and professional coverages into two concentric risk programs, Fidelity will trim its total risk-financing costs by more than $1 million, or about 30%, annually, said Donna M. Manzo, corporate risk manager and a member of Ms. Lindenmayer's staff.

The programs also free a huge block of time for Ms. Manzo and Finance Manager Tom Wronski, another member of Ms. Lindenmayer's staff.

Previously, they spent a lot of their time from March through July every year pulling together information the underwriters required before covering those risks.

"That's time saved over the next few years," Ms. Lindenmayer said.

Fidelity did not combine all of the coverages in both programs into a single concentric risk program because the company takes "a painfully conservative approach" in terms of protecting the funds and shareholders separately from corporate risks, Mr. McKenna said. "They are on the cutting edge on a lot of things. When it comes to the funds, they're very conservative."

The mutual funds program combines two coverages, which share the available limits:

Government-mandated fidelity bonds, which would protect mutual funds' customers from losses resulting from employee dishonesty at Fidelity Investments, the loss of securities on Fidelity's premises or in transit, losses due to forgery or alteration, and losses due to counterfeit currency.

Errors and omissions liability insurance, which protects Fidelity against third-party suits that allege a failure in professional services performed by any Fidelity or fund officer, director, trustee or employee in connection with the fund.

The corporate program combines several coverages. All share the $100 million of available limits.

The covered risks are:

Consolidated financial institutions bond. The coverage protects Fidelity, including its employee benefit plans, and Fidelity's customers' assets from losses due to dishonest acts by Fidelity employees.

Part B of Fidelity's directors and officers liability exposure. It covers Fidelity for the company's indemnification of its directors and officers. The insurance also covers all Fidelity employees against numerous employee liability claims.

Fidelity purchases Part A D&O coverage, which provides personal coverage to directors and officers when corporate indemnification is not permitted, from American International Group Inc.

Stockbrokers E&O.

Corporate E&O.

E&O liability for its Charitable Gift Fund.

Electronic and computer crime. The coverage protects Fidelity and its customers' assets from losses due to fraud committed through computer or electronic transmission activity, including computer viruses and fraudulent customer voice instructions.

On a shared-limits basis, Fidelity's Bermuda-based captive, Fidvest Ltd., retains the first $10 million of bond and stockbroker E&O losses.

The corporate concentric program provides first-dollar coverage for the other risks.

By using the captive, managed by Marsh & McLennan Management Services (Bermuda) Ltd. in Hamilton, Fidelity could afford enhanced coverage.

Most notably, the captive's participation allowed Fidelity to eliminate several exclusions in its stockbroker E&O coverage. For example, E&O claims arising from options or futures trading are not excluded under Fidelity's coverage, Ms. Manzo noted.

But, Fidvest does not play any role in the mutual funds' concentric risk program.

"We have always kept the funds' program separate from anything else we do on the corporate side," Ms. Lindenmayer explained. If it used the captive in the funds' program as well as in the corporate program, Fidelity might risk the amount of coverage that would be available to its mutual funds' customers, she said.

The main underwriters of both concentric risk programs are AIG, Chubb Corp., Reliance Insurance Group and underwriters at Lloyd's of London, which participate on a quota-share basis.

Fidelity's new financial insurance product provides excess coverage over the corporate concentric risk program.

If losses exhaust the concentric risk programs' limits, Fidelity can reinstate the limits twice on the mutual funds' program and once on the corporate program. Notably, though, Fidelity in all cases has the option of obtaining only partial reinstatements.

The reinstatements are an important financial concession by Fidelity's underwriters, Ms. Lindenmayer and Ms. Manzo said.

Partial reinstatements mean Fidelity does not have to incur the full cost of replacing its limits but still can protect itself if its earlier limits are exhausted a short time before the end of the policy period, Ms. Lindenmayer said.

The dual reinstatements on the funds' program were "extremely difficult to get," Ms. Manzo said.

"That was a big hurdle," Ms. Lindenmayer said. But, it was a "very important" one to clear.

Though this program's limits are shared by the bond and E&O risks, the program in combination with the reinstatements provide Fidelity the full bond protection it must maintain under Securities and Exchange Commission regulations, Ms. Lindenmayer explained.

"We didn't want the funds not to have the same limits they would have had if we didn't do this combined program," she said.

She would not say, though, how much E&O coverage that leaves the funds.

Another attractive feature with the reinstatements is that Fidelity can call on all of them within one year if necessary.

Ms. Lindenmayer and her staff spent about 18 months pulling the program together.

That period included several months that she spent going through several corporate levels and various counsel to obtain approval.

Corporate counsel persuaded her to present the plan to the funds' trustees and treasurer as well as to corporate senior management in stages to give them time to think about it and raise questions.

Ms. Lindenmayer said it was relatively easy for her to show them that the new programs would cover their risks as well as the previous programs had and do it more cost efficiently.

She already had some experience and success in structuring a blended-risk program that folded in some of the coverages included in the corporate concentric risk program.

In 1990, Ms. Lindenmayer and Ms. Manzo were looking for ways to trim the cost of Fidelity's various bond coverages. "You could look at them and know you were paying too much," Ms. Lindenmayer said.

A study conducted by Fidelity's risk management department and M&M concluded that combining the bonds into a single program would help Fidelity cut its costs.

Fidelity's chief financial officer at that time then told Ms. Lindenmayer how Chairman Edward C. Johnson III became intrigued with the concept of captive insurers during a trip to Bermuda in the late 1960s.

He had his Bermuda-based company, Fidelity International Ltd., a mutual fund complex that is independent from Fidelity Investments, capitalize a captive for use sometime in the future.

Ms. Lindenmayer, who serves as a risk management consultant to FIL, had thought of using the captive to retain some bond risks for FIL.

But retaining FIL's risks in a captive that was more than 25% owned by Mr. Johnson would have created unfavorable foreign-source income for him.

For FIL, the solution was renting a captive.

For Fidelity corporate, Mr. Johnson still liked the idea of retaining the risks in a captive. Fidelity then purchased the captive from FIL.

"Our chairman is an absolute visionary," according to Ms. Lindenmayer.