The Consequences of Opening Up

What does this mean for crime and D&O insurance?

As the light at the end of the Covid-19 tunnel comes into view, what can we expect when we return to the office? Unfortunately, times of uncertainty tend to also be the times of higher fraud and also times of blame.

To look to the closest analogy, we have in recent times, the 2008 financial crisis is the nearest we have to an unprecedented event such as the Covid-19 crisis. When times were good mistakes and irregularities tended to be overlooked especially in the banking sector. As the liquidity crisis started to hit home it required everyone to open their books and see what their real position was. What they saw was often a mess of poor control and lax lending / borrowing. In the good times, controls had dropped – we need only look to USA where the practice of NINJA (No Income, No Job or Assets) or Self Certified loans was running rampant leading to systematic fraud and the collapse of several famous banks in the country. In UK there was a thriving industry in defrauding banks on Buy to Let loans which also brought down some venerable old names. Generally loan fraud was running rampant in the Western banking system.

The rise of crime and D&O policies for banks in CEE

In my own experience of dealing with banks in Central and Eastern Europe this was a time of increased claims on the Crime polices of the banks, a lot of things that would be overlooked in the past were now being looked at more closely and the number of fraud claims tripled in just one year. The amounts were relatively large and showed that there had been lip service paid to lending controls and controls around accounts of wealthy clients.

There was also the first real increase in litigation against banks and commercial entities as lenders and shareholders looked for somebody to blame. When money is lost there is always someone whose fault it is, particularly when investment companies are involved. This led to the start of the interest in Directors and Officers insurance on a large scale in CEE.

So what can we expect in the coming year as the economies open up?

Given past events we would expect to see the discovery of more frauds. The average timeline of a major fraud in a bank is around 18 months, so if we look at July as being a realistic time for most controls to be released then this will mean that the whole of the Crisis from the first lockdown onwards will almost exactly match this timeline. The lack of supervision whilst working from home will have tempted some to try to defraud their employer (statistically around 0.2-0.5% of employees are committing fraud at any given time, mostly petty), combine this with the uncertainty around whether there will be jobs to return to and you have a potent mix for crime to flourish. We can also add to this the fact that desperate businesses may have been susceptible to paying ‘gratuities’ to helpful loan officers – a very common form of employee infidelity.

As businesses survey the wreckage of the past 18 months they will also have a battle for survival. Investors will try to minimize their losses and are likely to resort to litigation when there is no other option. This will likely take the form of looking into decisions made by the boards in the run up to and during the lockdowns (Did they close too early? Were they too cautious? Did they not move quickly enough to take advantage of the new normal?). It should also be remembered that Liquidators see a Directors and Officers policy as an asset of the company.

More frauds to be discovered after the Covid-19 crisis

In conclusion, if we see a similar trend as in 2008, then we will expect an increase in events which can be covered by Crime and D&O insurance. There is no reason to doubt that this will be the case as the underlying issues are similar in that a strong worldwide economy was moving towards recession and a devastating event pushed it over the edge. The liquidity crisis of 2007 onwards came from a lack of trust forming as recession started to appear on the horizon, Covid-19 struck just as the fundamentals were turning as well. Policies in boom times by their nature are more lax than desirable as we move for growth.

As Warren Buffett said: “Only when the tide goes out do you discover who’s been swimming naked.”

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Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

“We are the friendly face who is there to ensure that the process runs smoothly.”

Brian Alexander, Group Practice Leader Financial Institutions, talks with Robert Lloyd, Director at ASL about trends in Crime & Cyber claims, the effects of Covid-19 on claims and the neutral and objective position of the loss adjuster.

Alexander: Can you tell us a little bit about how you got into adjusting?

Lloyd: I qualified as a chartered accountant in 2009 specialising in audit. Whilst this was great experience, I wanted more variation in my day to day work and the opportunity to travel internationally.

If I’m being completely honest, I came across ASL by chance. The role sounded extremely interesting – so I went for it. I met the Senior Directors at the time and they talked about trips to Latin America, cash being stolen from armoured cars and bank robberies. It was fascinating and I’m still captivated 11 years later!

Alexander: How does the adjusting process work?

Lloyd: We’re appointed by Insurers to investigate the facts of a claim and the amount of the loss. To do this, we provide the Insured with one or more written lists of information and documentation required.

If it’s a small loss, we may just correspond with the Insured through the Brokers. Alternatively, if it’s a large and/or complex loss, we will typically travel to the Insured, wherever they are in the world, and go through our questions with them face to face. Video meetings are increasingly playing a part too.

Once we have all the information, we prepare a report to the Insurers setting out our findings. Based on our report, the Insurers decide whether or not the claim is payable and, if so, how much.

It’s important to note that, whilst we are appointed by the Insurers, we provide a neutral and objective assessment of the claim.

Alexander: What are the benefits of the adjusting process to an insured (client)?

Lloyd: The loss adjuster facilitates the entire claims process. At the outset, we can help guide the Insured as to what they should and shouldn’t do – we can help them try to mitigate their loss and prevent a recurrence.

Then, by asking targeted questions, and requesting only relevant documentation, the adjuster is able to efficiently extract the information required by the Insurers to determine policy response. The adjuster also ensures that the Insured’s representations are properly and clearly communicated to the Insurers.

Additionally, the loss adjuster is someone that the Insured can speak with, along with their Broker, to discuss the status of the claim or simply to explain how the process works – we deal with crime and cyber claims every day and are therefore very comfortable with the process and the issues that arise. The adjuster should be a friendly face who is there to ensure that the process runs smoothly and that the correct outcome is achieved for all parties.

In those instances where coverage issues arise, and in order to manage expectations, the adjuster is also able to work with the Broker to explain these to the Insured.

Alexander: What are the current trends you see in Crime and Cyber claims?

Lloyd:

  • An ever-increasing number of social engineering frauds where an Insured is tricked, usually over email, into paying away money by fraudsters pretending to be a colleague, client or supplier. This affects both Banks and commercial entities with cover potentially available under crime and cyber policies.
  • More ransomware attacks. This is where criminals insert malware into an Insured’s computer system and encrypt data. It typically takes a week or more to get the systems back online resulting in a loss of income, which can be claimed under the business interruption section of a cyber policy.
  • Frauds involving transactions made via mobile telephone / cellphone – exacerbated by the growth of mobile banking in developing countries.
  • We continue to see numerous loan frauds across the world – and particularly in Eastern Europe. These often involve dishonest employees within Banks colluding to issue loans in return for kickbacks.
  • We’re seeing fewer claims involving the forcible theft of cash from Banks’ premises, ATMs and in transit. Perhaps that’s because running into a branch with an automatic weapon gives a much higher risk of being caught than trying a social engineering fraud or hacking into a Bank’s system. The amount that can be stolen by forcible theft is typically is much lower too!

Alexander: Has Covid-19 seen an increase in claims from what you see?

Lloyd:

  • We’ve seen a marked increase in ransomware attacks and social engineering frauds because remote working has presented the ideal conditions for these types of fraud.
  • There’s been a temporary drop off in more conventional fraud being notified – such as individuals stealing money from their employers. However, this is likely because Insureds have only recently returned to their offices, or are yet to do so, and so have not yet uncovered these schemes. The pandemic has created the ideal environment for fraud and we’re expecting to see significantly increased volumes of crime claims later this year and into 2021.
  • There have also been more loan frauds notified by the large Trade Finance Banks. This is because the pandemic has caused a number of their corporate clients to default – and the Banks’ subsequent enquires have led them to believe that some of those loans may have been obtained under false pretences. The Banks therefore notify the matter to their crime policies.

About ASL
ASL are market leading loss adjusters and forensic accountants. We specialise in dealing with crime claims made by Banks and commercial entities. We also handle cyber claims.

ASL’s professional staff includes chartered accountants and lawyers. This gives us the necessary expertise when it comes to quantifying complex losses and providing coverage analysis for the crime and cyber Insurers.

We have offices in London and Dubai and, since 1988, have handled assignments in over 100 countries.

Related Insights

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342