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How can brokers help financial institutions protect against insolvency and regulatory failures?


In depth: Rachel Gordon explores how specialist cover can protect financial institutions as the risks are exacerbated by the pandemic.

Financial institutions may appear as bastions of strength and security, and despite selling intangible and often complex products, they convince many to hand over their money for wealth creation and long-term protection.

But, as company failures and mis-selling debacles have proved, they are far from invincible. Beneath the surface, there are rapier-sharp risks swirling around and what is more, these are increasing. This is a place for the expert broker – although they must stay ahead of the game and be prepared to negotiate hard with insurers to ensure cover can be as encompassing as possible.

Clearly, the pandemic has changed the risk landscape, although the longer-term implications will remain unclear for some years to come. As Charlie Emkes, a directors’ and officers’ placement specialist and senior account manager with broker Protean Risk, comments: “The UK faces rising insolvencies following the lifting of the government’s moratorium on winding up petitions as well as other measures like the end of furlough. There is uncertainty about the economy and likely to be turbulence ahead. But, at a time when financial institutions need wide cover, there are policies out there with 30 plus exclusions. This is why specialist brokers to work with underwriters and ensure clients get the right amount of cover that will protect them against rising liabilities.”

Directors can face intrusive investigations where they may need to defend themselves, even if they avoid prosecution. There is also more shareholder activism and actions being brought and this has led to growth in the D&O sector – resulting in some insurers making losses and so withdrawing.

That said, the cover remains keenly sought after – the FCA’s Senior Managers Regime, for example, brings personal liability risks for those who are negligent or abuse their positions. “A broker can build cover around an individual and the risk they face – and of course, there are concerns about personal liability,” says Emkes.

James Wickes, partner with law firm RPC, believes directors within financial institutions face numerous threats. “A director can get caught up in a problem that would result in a claim being triggered. They may not be directly culpable, but have simply dropped the ball as far as oversight is concerned. So, has anything been covered up or have they done enough in their roles? The ‘failure to prevent’ issue is very current in terms of economic crime and this can be an easier way to bring an action over having to prove fraud.”

Meanwhile, looking at risks coming down the line, there may well be some investigations linked to the way banks handled the Covid-19 support loans during the pandemic. HMRC has been well funded to probe these and a growing number of prosecutions and director disqualifications are now happening. As Wickes says: “It remains early days, but D&O does cover investigations and so this will be a topic that’s on the radar for financial institutions’ underwriters.”

Risks ahoy – the fallout from the pandemic

The pandemic has also led to a rise in cyber crime and a swathe of fraud, but there are other risk factors at play.

Financial services is a competitive sector and challenger banks, fintechs and insurtechs are putting pressure on traditional providers. There is a regulatory spotlight on governance and a number of chief executives have been embroiled in scandals. What is more, claims management companies seek to capitalise on any product that could have led to consumer detriment. Anti money laundering too remains very much in regulatory sights in terms of bringing prosecutions, as does market abuse.

Meanwhile, financial institutions also transferred their workforces en masse to homeworking. Outwardly, it looks as though this was managed pretty well, although time will tell if there were security issues. Could phone apps have been wrongly used and was there sufficient monitoring? Time will tell.

Cover extends now to challenger banks, insurers and the growing number of MGAs, asset managers that can range from those running large mutual funds to boutique investment firms and hedge funds
Nadia Bagijn, Travelers

This is why financial lines cover can provide a much needed safety net and as Nadia Bagijn, head of financial institutions at Travelers, explains, there are a wide range of businesses where protection is needed – and it is certainly not just the biggest banks. “Cover extends now to challenger banks, insurers and the growing number of MGAs, asset managers that can range from those running large mutual funds to boutique investment firms and hedge funds.”

Badijn explains that the core products within financial lines are professional indemnity, which exists to protects against breaches of professional duty and from litigation from clients and third parties.

Secondly, directors’ and officers insurance exists to cover against personal liability and where an individual could be sued such as for corporate governance failing and thirdly, crime/fidelity, which provides insurance for loss of assets from employee fraud. Meanwhile, brokers may also recommend other complementary covers such as errors and omissions, employment liability, reputational risk insurance and cyber.

Recent years have seen considerable growth in cyber, although it remains separate to the main offerings. Liz Robinson, director – management risk for broker Tysers, comments: “Cyber isn’t often part of a blended FI program, and we would always advise our clients purchase standalone specialist coverage instead of potentially dilute their other core coverages with a cyber add on.

“Financial institutions are more reliant on technology in every aspect of their business and this creates more cyber exposure at every access point. The marketplace for cyber insurance is rapidly changing, and the increased claims environment is resulting in significantly more selective risk appetite, higher premiums, retentions, co-insurance and restrictive coverage.”

She adds there is some crossover with crime coverage. “We work closely with clients and insurers to dovetail coverage where there is potential overlap or gaps. This is especially true with social engineering risks.

“Financial institutions will also remain targets for cyber crime due to their assets and sensitive data.  Ransomware claims are the primary driver of losses in the sector, but cyber risks to our clients - and therefore claims - are diverse and evolving.”

Naomi Hall, associate at law firm Fladgate, says: “The ever increasing sophistication of cyber attackers, combined with a large proportion of the workforce carrying out their roles remotely, has created a perfect storm for an increase in ransomware attacks, which has brought the need for cyber cover into sharp focus.

“This, coupled with the market move to reduce the unintended exposure caused by non-affirmative (silent) cyber cover, following the PRA’s letter to all UK insurers in 2019, has moved cyber cover high up the agenda for financial institutions.”

The ever increasing sophistication of cyber attackers, combined with a large proportion of the workforce carrying out their roles remotely, has created a perfect storm
Naomi Hall, Fladgate

Financial lines remains steady in the hard market

Financial lines, along with many other business classes, are now often subject to higher premiums because of the hard market. However, there is no capacity crisis and as Graham Ludlam, partner with DAC Beachcroft, comments: “Despite the hard market, and narrowing of terms, adequate cover on suitable terms is largely still available.  The hardening market has been a steep learning curve for many dealing with insurance because it has been a relatively long time since the last hard market.

This has created a perception that cover is no longer offered on wide enough terms. This is part of the cycle and to be expected where the previous prolonged soft market led to increasingly broad terms. It’s important insurance buyers understand why this has happened and they are certainly looking for brokers to provide guidance on what terms are available, where narrowing of terms can be resisted and on pricing.”

Emkes points out that 2022 may also see an improving picture. “D&O losses did lead to insurers pulling out and there was also an impact from the Lloyd’s performance review. But, we have access to Lloyd’s, the company market, European and international insurers. Capacity is increasing and the hard market is now flattening.”

Despite this, cyber cover may be more problematic in terms of a growing number of insurer restrictions, and as Hall says: “With regard to cyber in particular, 2020/2021 saw significant rate increases and reduction in coverage. Insurers require stringent cyber security plans to be willing to underwrite any cyber risk including the use of multifactor authentication, which is essential to cover. Data privacy claims continue to occur but insurers should take some comfort from the recent Supreme Court decision in Lloyd v Google, which disallowed a data privacy group action.”

Looking forward

Bagijn agrees that there is an appetite to write financial lines for financial institutions and this means brokers do have access to strong markets. She points out the sector is in far more robust shape than others such as retail, hospitality and travel, for example. There is also gradual evolution in terms of product development. “In terms of the market developing, brokers tend to take the lead in this area, with insurers being more conservative when it comes to newer risks. But, we are listening and wordings remain pretty comprehensive.”

Tristan Sargeaunt, managing director at Protean Risk, says that there is scope for brokers to have “first-mover advantage” in a number of areas connected to financial lines. “Insurers are doing pretty well writing vanilla risks – and clearly they will tend to be risk averse. But, we’ve had a fintech team for the past five years which has grown massively and we’re also involved in the crypto sector. This is seeing a lot of growth, but there’s little capacity. However, there are new insurers coming out of Bermuda and they are seeing digital currencies as an opportunity.”

The financial institutions sector certainly brings opportunities for brokers, hence the rise of a number of niche and successful specialists. But, powerful and demanding clients have high expectations and the cover recommended must be ready to respond to a risk horizon that is at best cloudy.

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