Tough times for financial institutions

To compound the challenges financial firms face to set up their insurance programmes after two years of increasing premium prices, carriers are now turning their attention to terms and conditions, which are getting tighter by the day. As a result, the hard market should continue to affect the ability of banks, investment managers and other financial players to assemble the insurance programmes that they used to enjoy in the past. According to Gareth Abbot, a senior vice-president at Lockton, the situation is especially complicated in lines such as employment practices liability (EPL), which insurers are reluctant to underwrite for financial companies. “EPL is incredibly difficult for financial institutions to obtain. It is a very tough line of insurance to underwrite as the exposures now are so broad,” he tells GRM. “Capacity has suffered a huge reduction and there is only a handful of insurers who will contemplate the cover, at substantially reduced limits and higher premiums.” Although not as dramatically, the situation bears some similarities in other lines that are vital to the sector. A number of carriers, including Argo and Neon, have withdrawn their capacity for FIs in the past couple of years. In November 2020, the market suffered a big shock when one of its main players, AXA XL, took the same route. New entrants have been unable, or unwilling, to fill the void. “New capacity that has come in in 2020 and 2021 is very conservative in its approach,” Mr Abbot says. “There is capacity for the majority of transferable risks faced by financial institutions, but at a much lower level than they used to see. “Insurers that offered lines of $10m or $12m, now offer $1m or $2.5m,” Mr Abbot continues. “The average of the segment lies at around $5m. For buyers that are no longer able to find their usual limits, the simpler answer is to self-insure. It is a frustrating position to find themselves in.” The difficulties are generalised but some companies suffer more than others, depending on the sector and jurisdictions where they operate. Risks located in the US, Australia and Germany are the hardest to transfer at the moment, as class actions, social inflation and regulatory onslaughts have put financial institutions under pressure in those countries. “There is very little appetite in the London market for Australian business,” Mr Abbot says. “The vast majority of policies will place a harder deductible for claims brought out of the US, compared to the rest of the world.” In such markets, premium rates have gone up considerably, reaching up to 1,000% hikes for some kinds of companies and their toughest risks. Mr Abbot believes that rate increases are losing some of their momentum, though. “Although we saw substantial increases in 2020 and 2021, and we should start seeing some stabilisation of rates, we do not anticipate they will go down to the levels of 2018,” he remarks. Nonetheless, buyers in financial services should continue to sweat to set up their insurance towers, as insurers have given little if any signs of resumed appetite for their risks. “When you try to place any limits over $100m, it becomes incredibly challenging today. Four years ago, you could potentially place $100m with 12 or 15 carriers. Today, you are looking at 18, 20 carriers or more,” Mr Abbot says. Terms and conditions John Richards, head of London market financial institutions at Sompo International, says that insurers are focusing on terms and conditions, which were handed out freely to buyers during the dog-eats-dog days of the soft market. Now, they are striving to claw back in areas such as investigation and mitigation costs. Underwriters are unwilling to provide in-built discovery periods beyond one year, he says. Higher deductibles are another important item, with many buyers being urged to retain ever higher levels of risks in order to obtain better conditions at the higher layers of their towers. “Many clients are looking to increase their primary excesses in order to enable more insurers to come onto the placement,” Mr Abbot says. “They find that there may be appetite for some institutions for excesses of a certain limits of liability by attaching hard deductibles.” But oftentimes, their choice has been to limit their coverages to bare bones. “Side-C D&O insurance has become so expensive that a lot of clients are considering whether they should buy it,” Mr Richards says. “Many are reverting back to having only Side-A and Side-B coverage, and some are opting for Side-A only.” FIs are also reducing the amount of PI and crime covers that they purchase, sometimes drastically, particularly in locations like Australia, he adds. For some companies, even the option of limiting their programmes may be hard to achieve. This is the case, for instance, among investment managers with large exposures to the commercial real estate market, which insurers are extremely reluctant to work with today. That is because commercial real estate was badly affected by the Covid-19 pandemic and it is still not clear for underwriters the extent to which the sector will be able to recover as changes in working habits consolidate once the crisis is over. Mr Abbot adds that any financial institution that works in an unregulated sector finds it very hard to purchase insurance today. For his part, Mr Richards says that Sompo, for instance, is not too keen on companies in sectors such as foreign currency dealers and private equity, with exposures to businesses like commercial real estate or others that have been severely affected by the pandemic. New risks He also stresses that new FI risks are getting the attention of the insurance market. One of them is the exposures of a growing band of fund and asset managers that pledge to make investments that comply with the highest environmental, social and governance (ESG) criteria. “Many insureds in the fund management sector are saying that they are launching funds that are ESG compliant and there is a concern it might expose them to different kinds of claims,” he says. “For example, if you are an ESG investor, there is a potential risk that you could be seen as an activist investor which will only increase your exposure to claims.” Regulatory risk is also on the rise, especially in Australia, where the work of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has put pressure on financial institutions and increased their risk of being targeted by consumer class actions. Mr Richards warns that the full impact of Covid-19 on the financial sector is yet to be known, which could be reflected in the future ability of companies to purchase insurance. “For example, non-performing loans, both in credit cards and mortgages, are a key area of concern,” he says. “Everybody is holding their breath to see how these develop, given that government support schemes will have hidden a lot of issues. As those schemes are withdrawn, we will see what impact it has on unemployment, taxation, inflation and so on.” Cyber And that is all before we talk about cyber risks, which in both Mr Abbot’s and Mr Richards’ view, constitute one of the main threats for financial institutions these days. “Cybersecurity breaches are the greatest challenge the vast majority of our clients face today, and they can have a knock-on effect on other risks like regulatory risk,” Mr Abbot says. “Regulators can be a little overzealous when reacting to a security breach situation, leaning quite heavily on financial institutions.” In his view, the ability of FIs to transfer those exposures to the market is still progressing. In fact, the market is now working on the transference of some of those coverages from traditional covers purchased by financial companies to the specific segment of cyber insurance. “Traditionally, crime policies have provided cover for cyber extortion, however the financial institutions market has started to push back on this due to a worrying increase in ransomware claims,” Mr Richards says. “Instead, brokers have looked to the cyber market to pick up this exposure, given that it has deeper knowledge of the area and the required controls. “This is true across the financial lines product range, where some of the more traditional lines of business that may not have evolved as quickly as the exposures are narrowing cover and relying on the cyber market to address these threats,” he adds. Mr Richards considers that financial companies, especially those that are submitted to tight regulatory regimes like banks, have over the years developed strong controls against cyber risks. But criminals do not stop developing their capacity to perpetrate bad deeds, a fact well exemplified by the recent boom in ransomware attacks. “Given the sheer frequency and severity of these attacks, insurers are having to look at other solutions, for example higher retentions and co-insurance, otherwise there is a danger that ransomware may become uninsurable in the market,” he says.

Tough times for financial institutions

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