Financial services firms and their directors are juggling a large number of major new and emerging risks that are coming from the financial fallout from Covid-19, as well as non-financial risks such as cyber, compliance and a new focus on environmental, social and governance (ESG) issues, according to Allianz Global Corporate & Specialty (AGCS).
In a new report on the risk trends facing the sector, AGCS says the financial services indusrty is going through “a period of heightened risks”, with the culture of companies called into question and potential reputational risks linked to diversity and inclusion, executive pay and sustainability.
Following Allianz’s Risk Barometer, which identified the top five risks for financial services as cyber, pandemic outbreak, business interruption, regulatory change and macroeconomic developments, AGCS says cyber is the top cause of loss in analysis of more than 7,600 claims worth €870m.
It adds in the report that this figure includes a rise in insurance losses from claims against directors following major privacy breaches, claims related to fraudulent payments, and liability claims where clients have not been able to execute trades during system failures.
While the immediate losses linked to the pandemic outbreak have passed, future claims are more likely in the form of litigation against directors, either linked to market corrections or where directors are accused of failing to manage or disclose Covid-19-related risks, AGCS says.
Increased cyber risks have also spiked in line with Covid-19 changes to work practices and the speedier adoption of new technologies. AGCS says financial services firms are an attractive target for cyberattacks, and although many have moved to protect themselves from outages by using clouds, this comes with its own risks. “Institutions face sizeable business interruption exposures, as well as third party liabilities, when things go wrong,” it says.
AGCS’s Thomas Kang, head of cyber, tech and media, North America, commented: “Third-party service providers can be the weak link in the cybersecurity chain.”
Many of the increased risks facing financial services today, from cyber to climate change, have also fallen under the gaze of regulators and legislators, which has raised the stakes if these risks are not managed. “Regulators are increasingly focusing on business continuity, operational resilience and the management of third-party risk… Companies need to operationalise their response to regulation and privacy rights, not just look at cybersecurity,” AGCS states in the report.
It adds that “regulation is setting the pace” for financial services in tackling climate change and sustainability. “There have been over 170 ESG regulatory measures introduced globally since 2018, with Europe leading the way,” AGCS notes.
Litigation and activist shareholders are also being used to drive behavioural changes at financial institutions, the report says.