Financial institutions adapt after hard market

Capacity is back into the insurance market for financial institutions, after a hard market that has convinced many companies in the sector to change their insurance buying patterns.

The arrival of new players in the insurance market for financial institutions (FI) has helped it to turn a corner, and the placement of difficult risks like D&O, errors and ommissions (E&O) and professional indemnity (PI) has become a more realistic prospect in 2022, according to brokers and underwriters.

“The situation is definitely improving in the FI market. For a long time, it felt like capacity was being so stringent that insurers almost had to find reasons not to underwrite risks,” says Marie Voysey-Moss, associate director for financial institutions at MGB Insurance Brokers. “Now there are more 100% lines available, which is certainly better, because then you can have the main underwriters’ actual perspective of the risk instead of multiple capacity exclusions applied.”

But market observers stress that the softening of the market remains to a certain extent concentrated on rates. Terms and conditions, including high retention demands, continue to be tight, even though it seems that the process of hardening is coming to an end here as well.

This is the case for example in the US, the most important FI market for insurers, where the reversal of the hard market has been among the most remarkable so far. The latest report by WTW on US FI insurance shows a trend for D&O rates to increase by up to 10%, but tending to flat in most cases. D&O for private financial institutions faces the toughest market as increases can reach 15%.

Asset managers should expect flat to 10% spikes for D&O and E&O blended packages, and for banks, a maximum of 15%-20% increase on their professional liability covers. Insurers should have the worst time renewing their professional liability policies, with P&C carriers facing increases of up to 30%.

Peter Trochev, senior vice-president and head of financial institutions at Ascot Group, says that even in lines that have for a long time presented a challenge for underwriters, such as D&O and E&O, insurers have had to fight more fiercely than in previous years to maintain their clients or attract new ones.

“Rate increases are limited in the US market, and we are seeing healthy decreases for clients 12 months removed from public-offering prospectus liability,” he says. “Many of our insureds purchase blended D&O and E&O policies, and we are seeing competitive pressures among these products. We have not seen a total broadening of terms and conditions so far, however that appears to be the next logical sequence of events.”

The arrival of new capacity has been the main factor behind the new market trends. A number of MGAs, in particular, seem to have concluded that the correction has gone on long enough to start offering more robust lines to FIs.

Observers also point out that a benign claims environment prevalent since before the Covid-19 pandemic is also an important factor, although it may prove to be a test of insurers’ underwriting discipline in the future. Some expect that a backlog of litigation caused by the partial workings of US courts during the pandemic may be gradually disentangled, resulting in a flush of D&O, PI or other claims. Forthcoming US interest rate increases can also dam the tide of capital made available to underwriters.

“The added pressure on premium can be attributed to favourable loss trends in our space and increased alterative capacity stemming from relaxed monetary policy over the last decade,” Trochev says. “As the Fed reverses course, pricing discipline will be paramount.”

The potential impact of protracted court decisions coming mainly from the US, but also from other markets, is one of the reasons why PI is the line that deserves the closest scrutiny by the market at the moment, says Neale Stevenson, financial institutions focus group leader at Beazley.

“2022 is likely to be the plateau of the hard market, even though we are still seeing some rate increases,” he says. “D&O today is more competitive, while PI still has a higher barrier to entry, but it has historically been more volatile for FIs.”

Due to the potential for claims, Beazley at the moment does not write business domiciled in the US. But a worldwide focus by regulators to improve the lot of retail clients of financial institutions means that it is not the only place from which unwanted surprises can pop up for PI underwriters.

Australia has become a very challenging market after regulatory retail market reviews created a tougher environment for banks. The UK is also adopting a growing number of rules to protect retail investors, which is one of the reasons why some pension operators are struggling to place their programmes right now. Stockbrokers with a strong base of retail clients face similar problems, Voysey-Moss stresses.

“FI PI tends to be the toughest cover to provide for most assureds and there are no signs that this will change in the short, medium or long term,” says Jane Bennett, the head of the FI unit at Inigo. “Regulators will not ease up, the assured’s clients will be no less aware of their rights and they will remain keen on buying financial products.”

But risk managers who need to arrange PI programmes may have reasons for hope if they have done their homework. One of the recent developments in the FI space, in Bennett’s view, is that the loosening of the market is putting insureds and underwriters back in touch to actually talk about the risks involved in a placement.

“We are now at a stage where the market is loosening. It is an exciting time as conversations between insurers and clients will focus on a longer horizon,” she says. “Risk managers will be really able to come into their own. Underwriters need to understand the business of their clients, their products, geography, governance and reporting. Risk managers can articulate this and differentiate their companies.”

“Markets are less overwhelmed and have time to review submissions,” Voysey-Moss agrees. “During the Covid pandemic, everybody was so pressurised, they did not have much time to consider risks. But we are seeing more clients’ meetings and, even if it is by teleconference, underwriters are willing to spend time talking to clients.”

She adds: “Insureds can help this process by knowing their own businesses and devoting time to their submissions in order to give a good description of how they operate. We know when the passion of the client and their understanding of the business show in a submission or a call, it may result in preferential terms.”

In any case, many financial institutions have adapted themselves to new market conditions by changing their insurance buying practices, says Richard Allen, head of professional lines at Sompos International’s Syndicate 5151.

“There is a tendency for large banks to drop their PI covers, and that is something that has happened in the past five years, even ten years in some cases,” he notes.

Similarly, institutions that used to buy Side A, B and C D&O coverage are now focusing on the minimum required levels of Side A cover to keep a lid on costs. And some groups have embraced alternative transfer tools with gusto during the hard market.

“Banks are forming captives and taking higher retentions too. And higher retentions, from an insurance perspective, are a good thing,” Allen says.

Sompo exemplifies the return of capacity in the market as, in the past 18 months, it has started to look once again at providing cyber insurance to FIs. Ascot is also writing cyber on blended policies for asset managers or other institutions.

Limits on offer are also on the rise, although cautiously so. Beazley offers up to $25m limits for D&O, E&O and crime covers, according to Stevenson. “However, it is very rare that we offer that much. The downside risk of very large lines still outweighs the potential upside,” he says.

“Hopefully more carriers will go back into writing bigger 100% lines, which would be really helpful,” Voysey-Moss adds.

Values may trend up as new entrants feel more comfortable offering primary and excess capacity in the market. One of them is Inigo, and Bennett says the specialty insurer has significant ambitions for the FI insurance segment, with a focus on comprehensive crime, PI and D&O. Geographically, the company targets the UK, Europe, Australia, the US, Canada and South Africa.

“In the medium to long term we want to want to be a lead market in the FI space,” she says. “In this kind of business, you need to be engaged with the client from the outset of the insurance buying process and, critically, you want to be engaged, if and when there is a claim.”

While new players come into the market, FIs have to tackle new risks and situations that can trigger their covers. Stevenson notes that pledges made by financial groups that they are going to implement ESG policies or sell sustainable financial products to their clients constitute a significant risk factor, not least because regulators themselves have been pressed to stay on top of the matter. One example is the investigation launched in June by the US Securities and Exchange Commission against Goldman Sachs AM for suspicions of greenwashing.

“If a company offers investment funds that are labelled as ESG, they must make sure that they really are ESG,” Stevenson says.

Also, during the pandemic, new working relationships have been forged with employees that found out that they can do their jobs anywhere, including abroad. The need to retain talent while respecting a variety of regulatory regimes has led some banks to even create their own offshore locations for nomad workers, in a quest to maintain control over the potential legal issues raised by those new practices, says Nick Elwell-Sutton, a partner at Clyde & Co.

“This way, workers do not create risks by moving abroad without the company knowing it. It will not be surprising to see more companies doing that,” he points out.

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