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Category: Financial Institutions

What Is in a Standard Commercial Crime Policy? Contractual Requirement For Insurance

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Do traditional Crime policies actually cover the risk that is understood under the contract? What are the risks for a client in buying off the shelf policies to meet the contractual requirements?

When speaking to our clients (contractors) who are working with organizations from countries such as USA, UK and Germany we are seeing more and more requests within the contract for Crime Insurance alongside the usual Professional Indemnity and General Third Party Liability insurances. Do traditional Crime policies actually cover the risk that is understood under the contract? What are the risks for a client in buying off the shelf policies to meet the contractual requirements?

What cover is implied by the contract?

Whilst the wording of the contract clauses is usually broad in its intent, we can infer that that the main purpose of the requirement is that if a member of staff of the contractor steals from the main organization then the organization will expect the contractor’s insurance to pay for the damage to the organization. It seems to be a pretty clear requirement and not particularly onerous, but how can it be covered?

What is in a Standard Commercial Crime Policy?

Traditionally a crime policy is for the protection of a client’s own assets, they are specifically set up to protect against a direct financial loss to the client due to the actions of both their employees and third parties. The cover can be broad in terms of protection of the client’s own assets (direct financial loss) but when it comes to actions against a third party then it becomes a more difficult proposition.
 
Typically Direct Financial Loss is not defined within the policy, but is an understood legal term for the loss of a clients own cash, securities and tangible property. So, in the case of an employee stealing from a client then we are in an area which is not covered under the main clauses of the policy.

What options are available?

In older crime policies there is no cover as required under the contract so they are not really useful, unless the client has large assets or holds large amounts of cash. In this case we need to ensure the cover is fit for purpose and not just a box ticking exercise as crime is a very expensive insurance in comparison to the other covers typically requested.
 
In more modern Crime polices there will usually be an optional extension for liability to a client. This will provide the cover needed under the contract but must be requested and checked to ensure it has no exclusionary language for territory or actions of the client. This extension will also typically exclude any actions which are in collusion with the organization’s staff which could lead to insurers trying to pass on the liability to the organization which could cause embarrassment for the client.
 
A neat way of creating the cover is to add the liability to the Professional Liability through a Dishonesty of Employees Extension. This is a clause designed to bridge the gap between the PI and Crime policies for the acts described above due to the Crime being designed to cover Direct Financial Loss (being akin to a property policy really) and not for legal liability. The clause gives cover to –
 
‘indemnify the Assured against all sums which the Assured shall become legally liable to pay as a result of any Claim or Claims made against the Assured during the Period of Insurance brought about or contributed to by any dishonest, fraudulent, criminal or malicious act or omission of any employee of the Assured.’
 
This would fit the presumption of the contract, albeit not providing the cover for the client’s own assets.
 

What difference does it make as to which is chosen?

Generally the main difference is that the cover given in the Professional Indemnity is a better fit for the client as it covers the implied contractual requirement most closely. The Crime work around does give good cover but does leave it more open to disputes where there is collusion.
 
The costs associated with the two options mean that where the crime can be incorporated into the Professional Indemnity these will be reduced significantly. Crime cover is typically the most expensive per million out of the standard contractual insurances, sometimes adding half the cost in total. Professional indemnity insurers will seek to charge for the extension, but not to the same level as a full crime policy. It is also usual for the crime deductible (franchise) to be higher than the Professional Indemnity as well.

Are there any other reasons for Crime Insurance being requested?

Sometimes the Crime cover is requested as a fall back in case a large fraud at the contractor causes them to cease trading. Contractors in the main are smaller than the organizations that they are working with and so have more exposure to shocks such as large internal frauds. In the case of a loss of $ 1.000.000 a lot of contractors would find it difficult to continue to pay wages, costs and taxes which could lead to a failure of the contract as people leave and / or the company is forced into receivership. The clause is thus to protect the organization from shocks to the contractor in this case.
 
It is therefore important to understand what the contract is seeking as there can be major reasons for a full Crime policy, but in the main the organization is seeking to protect itself from theft by staff of the contractor having access to their systems / premises.

Conclusion

The main takeaway is that we need to understand what is being sought by the organization in the contract. If it is merely to ensure they are protected from theft when giving access or through products bought (software for example) then we can look to provide cover which does this through a Professional Indemnity policy. If it is more for a catastrophic loss and inability to trade then we probably still need the Crime insurance as well.
 
It has been more and more standard in Professional Indemnity for Tech firms to include the Dishonesty Extension due to these requirements so a strong Tech Professional Indemnity policy tends to be sufficient for Tech contracts. For other professions it is more optional, but still usually available on the market.
 
I would note that the most common claims we see from Central and Eastern Europe are crime claims so it is always important to cover this area when a company gains critical mass, but for small entities needing insurance for contractual purposes then these work arounds can save money.

Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17

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Financial Institutions Are by Their Nature Big Beasts: Interview With Brian Alexander

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Brian Alexander, GrECo Group Practice Leader, shared his insights into struggles that Financial Institutions face regarding crime, the unique value clients get from Directors and Officers insurance and the specific insurance situation in Serbia. This interview was originally published in Svet bankarstva, a publication dedicated to banking sector developments in Serbia.

What are the main benefits of insurance solutions for financial institutions? 

Аlexander: Financial Institutions are by their nature big beasts. They have many interconnecting parts which raise the risk profile more than in traditional business. Each country has its particular quirks and so the experience of insurers and brokers from a risk perspective can be particularly telling as they get to see most of the institutions’ peers on a geographical basis so sometimes they can see issues arising faster than risk departments.
 
The main bank focused insurance of Bankers Blanket Bond (Crime), Professional Indemnity, Directors and Officers Liability and Cyber Liability have been in existence for many years, with a crime, in particular, having a history of 120 years, and in this time they have been tailored to the needs of banks and other Financial Institutions such as Investment Management (which has its specific product) so the cover is as broad as possible for the institutions. 

What are the largest risks and liabilities that financial institutions face? Do you think there are any specific risks especially relevant for financial institutions in Serbia? 

Аlexander: When we look at risk we look into the profile of the client and their inherent internal risks. 
 
Banks are perceived as rich in all societies and as such can be one of the first to be tested in legal cases. People are more likely to sue a bank than any other company as both they and their lawyers see them as lucrative targets. This coupled with the public perception of banks as being against the consumer means there is little sympathy in these cases. Professional Indemnity is the insurance which sees the highest losses for banks regularly due to these factors on a worldwide basis. 
 
With the perception of ready funds and financial data, a bank is one of the number one targets for hacking. We have seen the recognition of this by banks worldwide with high levels of security in this area. However, the security is only as strong as the weakest link and as discussed below this is the staff. Cyber Liability is a strong insurance product which helps in the case of lost data and liability carried under the law for this (GDPR etc.) but also in the clearing up after a hack. 
 
When we look at Serbia the focus is more on the crime element as the legal system is not yet at the level of the US or Western Europe in terms of recognising consumer rights (although it is moving more in this direction). Over the past 20 years, the main insurance risk in Serbia for banks has been from crime and in particular Internal Crime (Employee Infidelity as it is termed in the policies). 
 
Internal crime is one of the more difficult losses for an institution as it is both a breach of trust and also shows that controls were not as robust as was perhaps perceived. The second point is not always the case as trust is one of the key weak links in any system. When we look at typical fraud there is almost always an element where the person involved has managed to gain the trust to complete transactions on their own without oversight. The usual fraudster will have been in the organisation for at least 3 years but more typically 5-10 years and likely in the same role. They will be seen as reliable and good at what they do, likely working long hours and not taking many holidays. This leads to them not being monitored quite so much, because they have been so proficient over the years. 
 
In Serbia, we have seen fraud in the banks with losses over €1.000.000 several times and also a good deal of sub €1.000.000 losses as well. Internal crime has an almost limitless ceiling within a bank or Financial institution as most assets are dematerialised these days so movements of funds electronically are only really hindered by how to cover it up.
 
The days of the robber with a gun entering the branch being the main crime risk are long over and when we consider the sentence for robbing using a computer is around 2 years, robbing with a gun is 8-10 years, we can see it is better to use electronic means to rob. In terms of robbery by electronic means, it is almost always facilitated by a member of staff when practised in a bank.
 
When we discuss insurance with banks in Serbia and the greater region, the emphasis is always on crime insurance first and foremost as this is where we have seen the most claims. Insurers have the right to subrogation in the policies, but in my experience, very little ever gets recovered, so uninsured losses tend to be absolute. 



What is the unique value clients get from Directors and Officers insurance? 

Аlexander: Directors and Officers Insurance is a unique product in that it is protecting the decision-makers themselves and their assets. 
 
The insurance was created to ensure that the decision-makers in organisations could make bold choices in how to run the business without having to worry should it not work out as they had hoped. Of course, if they are reckless or criminal this will not be covered, but good faith decision-making will be. This allows an organisation to take calculated risks without the potential personal downsides that failure could bring personally.
 
The policy operates on two levels. The first is as essentially a legal expenses policy where accusations of wrongful conduct against an individual will be defended using the policy to pay legal fees, expert fees and the like. The second part is to pay any damages which are awarded against the director(s) as a result of the case. We can cover fines and penalties as long as the legal system in the country allows this.
 


Regarding underwriting risks, could you bring some insights into what the whole underwriting process for financial institutions looks like and what are the relevant limits here?

Аlexander: Firstly the limits are particular to each country and organisation based on their risk profile and willingness to bear risk. We have many peer examples that mean we can benchmark the organisation, but it is not a one size fits all process. This is where experience comes into play and setting the right levels of both limits and deductibles based on the above is one of the key roles of the broker in the process. 
 
When we get to the underwriting of the risk, the key here is information. The more the insurers have the more closely the premium will reflect the actual risk. Clients who give the bare minimum asked will have the biggest fluctuations in pricing. 
 
The main information the insurers are looking for is the number of staff (crime), fees and revenues (PI), assets (D&O) and unique data points (Cyber). All will look into the security and decision-making process of the bank and the latest financial information will be important too. The financials are an interesting point as for D&O their use is clear – a profit-making bank will be less likely to have their decision-making process examined leading to lawsuits – but for crime, it is important too as a failing bank can lead to staff feeling insecure and historically this leads to some committing fraud as they fear that there will be no money left to pay them in the event of redundancy. 
 
The process begins with the filling in of the proposal forms and the discussion of relevant limits with the broker. The broker will then approach insurers that they know are interested in Serbia and acquire quotes on behalf of the client. These will then be analysed based on the cover offered and the price, after which they will be presented to the client with a recommendation on which is felt is best. 


What are the steps in the process of claim settlements, especially crime claims, for financial institutions? What are the main obstacles in this process? 

Аlexander: Claims handling is a relatively painless process for clients as most of the process is managed between the broker and the insurer. 
 
In terms of crime claims once the potential loss is discovered then it is time to tell your broker. They will then inform the client of the issue and the insurer will open a file. The full information is not required at this moment, just the potential of a loss. If there is suspicion of a loss then you should always notify it, there are time conditions on notification of a claim and these are strict because something left can develop into a larger loss. The insurers are experienced in handling claims like this as they see them from all over the world, so are best placed to know what to do. It is in the client’s interest to get them involved as soon as possible, even if it is just a suspicion.
 
Once it is established that something in all probability has happened then a loss adjuster will be appointed. They will speak to the client and establish the likely cause of the loss. They will conduct interviews and ask for relevant documents for the case. The faster they receive these the sooner the loss will be established and payment made. They are highly experienced companies and will likely have seen the scenario before so they tend to know what is needed to prove the claim. 
 
After their report is passed on to the insurers the insurer will then decide on what will be paid. In the main most claims are paid in full within 6 months for a crime claim. Very complex claims can take longer, but in the main, these are rare in Serbia. 
 
In the past, we have seen a reluctance to give information to the adjuster. This is due to perceptions of issues around confidentiality from the client. It should be known that it is not in the interests of the insurer or the adjuster to leak any information, indeed the adjuster must work based on complete confidentiality, and they will not do so as a breach of trust like this will have serious reputational issues and likely see them lose business as a result.

What are the main misconceptions that clients in Financial Institutions might have when it comes to crime insurance? 

Аlexander: The major misconception is that the claim will not be paid until there is a court case proving the loss has happened with the individual being found guilty. This is not the case. The insurance does not mention this within the contract and indeed it would make it a poor product if it did. The claims are paid based on probability, so there does not need to be 100% certainty that the loss happened as suspected. In cases where it is closer to 50:50, there will be a need for more information, but most are more like 80:20. The wording used is tried and tested and most scenarios have been seen before, so fast decisions and knowing where to look are the norm. Another misconception is that improper financial gain (theft of money for the perpetrators’ use) must be fully proven. Again there are many ways that this can be shown without the smoking gun of a bank account.
 
We also see that deductibles can be off-putting for clients. Crime insurance is one of the most ’used’ insurances and therefore reporting every claim has a much higher cost than say D&O. The deductible is there to keep it more affordable because in a scenario where every theft is covered from €0 then the insurer may need a member of staff just for this one client to handle the claims. Looking at it from this perspective the cost would be enormous before the risk is taken into account. For this reason, we always discuss crime in terms of catastrophe risk, i.e. one which is above the pain threshold for the bank. This is where the discussion with the broker is important as deductibles can have a serious impact on price.


What is the added value that an insurance broker brings to the clients in the finance industry?

Аlexander: Whilst the risk department of any bank will know its specific risk better than anyone else, the broker brings the breadth of experience of many clients to the table. Benchmarking your risk and having access to the worldwide market are two key drivers for getting the best deal. 
 
The idea of a broker being just an individual to take your risk to the market and provide a price is an old one and the modern broker will work with you as a risk consultant to ensure that you are getting the best coverage for the best price. Experience is key here as the more we have seen, the more we can bring to the conversation. In my time as both an underwriter and a broker, I have probably seen most claims and insurance policies for banks in South Eastern Europe and also worked with the insurers who are keen to do business here. I also paid most of the claims.
 
With a broker such as GrECo, we are a Central and Eastern Europe-based broker (this is all we do, Serbia is not just a number on a balance sheet it is core to our business), but with experienced individuals who have worked in the major insurance markets around the world. I was the leading underwriter of CEE Financial Institutions risks for over 15 years at Lloyd’s of London for example. This experience and breadth of knowledge allow us to be truly specialist brokers and risk consultants rather than a salesforce. 
 

Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17

Continue reading “Financial Institutions Are by Their Nature Big Beasts: Interview With Brian Alexander”

Crime Insurance: Insure Your Food & Agriculture Company

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Secrets about Crime Insurance

Crime Insurance provides coverage for events not covered by most property or liability insurance policies.

Different Crime Insurance Clauses

There are several ways that businesses could be exposed to crime, both from within the organisation as a result of employee infidelity and from third parties. Crime Insurance provides coverage for events not covered by most property or liability insurance policies:

  • Clause 1 – Employee Infidelity: This clause protects the company from dishonest and fraudulent acts of the employees. This is the major source of all crimes committed against companies worldwide. The clause is very broad and covers almost any crime committed by an employee, whether alone or in collusion with others (both other employees and third parties such as crime gangs) which causes a loss to the company.
  •  Clauses 2 & 3 – Premises and Transit: This is the physical and stock cover for the company and will cover burglary and armed robbery by third parties. It can cover everything from machinery to stock to cash on-premises and has the benefit of covering valuables when in transit as well. Whilst not as effective as a cargo policy, this can provide contingent cover where a third party has a loss, and their insurance does not act.
  • Clauses 4-6 – Forgery and Counterfeiting: These clauses cover the forgery of documents holding a real value and are relied upon by the client for processing cash settlements or disbursement of cash.
  • Clause 7 – Damage due to any of the above clauses: If there is damage to any property as a result of a theft or robbery, then this can be added to the claim. A typical loss here is the destruction of a safe.
  • Additional extension on Computer Crime and Telephonic Crime: This covers the loss to the company by use of a computer or telephone and can have a very broad scope. It is in effect the cover for robbery or theft using a computer rather than a weapon or forced entry. These types of loss are rising due to the less severe penalties for being caught and the fact that they can be carried out remotely, thus lessening the chance of being caught. 

Nature of the Product to be Stolen

As with most businesses, there is a specific risk from the behaviour of employees and some of the causes are listed below. With Agribusiness there is the added threat that they deal in the most stolen goods worldwide accepting cash. There is a simple way of calculating the desirability of products and food that tends to meet all of the definitions to a high degree.

When looking at the product we must consider three themes and if the answer is yes to all three then it is an at-risk product:

  • Desirability – Do people want/need the product?
  • Portability – Is it easy to steal, especially in large volumes?
  • Saleability – Is it easy to sell, would it attract attention to the seller doing s

For example, in Poultry business we can see the following:

  • Desirability – Chicken is the most widely bought meat worldwide and so we can see that there is a demand for chicken products. 
  • Portability – Due to the nature and volume of sales it is surprisingly easy to steal poultry. A faked invoice or paying off the warehousemen or guards on the gates of the processing plant will allow a thief to drive right up to the plant and collect their haul.  
  • Saleability – People want poultry products, and whilst cheap poultry will raise a few eyebrows, it is unlikely that people will turn down the opportunity for cheap food. Selling on a market stall at a food market or arranging with a retailer to buy the products will make this easier, and the police are less likely to question the sale of chicken in this environment. 

So we can see that the products are at real risk, employees working hand in hand with outside groups can cause large losses very quickly here. In the agriculture sector, we have seen numerous large losses worldwide, and usually in basic food such as milk, meat, bread and cereals rather than finished products.

Typical Crime Losses for Food & Agriculture

There are multiple different potential crime losses for Food & Agriculture companies.

  • Addiction Issues  – These individuals start not wanting to be frauds but rapidly turn into a problem for the employee. Typically, they will have a drug, alcohol or gambling issue and will ‘borrow’ money to rectify an immediate situation, always to pay the money back. Usually, the problem spirals out of control and they start taking more and more to fix the problem until they finally realise that they cannot do it and flee. Whilst not the largest losses they can reach some big figures and 1 Mio. EUR is not uncommon, although figures in the hundreds of thousands are more likely.
  • Blackmail   – A member of staff is found in a compromising situation and criminals find out. They use this to force the employee to carry out some tasks to either enable them to access the employer (electronically or physically) or to simply force them to steal themselves. It can be anyone in a company, and losses can be from around 50,000 EUR for a straightforward taking of cash from the safe to millions of Euros from granting access to the computer systems. We see simple ideas such as leaving a door open to targeted blackmail on employees who hold passcodes for payments etc. in this example.
  • Invoice Fraud  – A member of staff who has control of tendering or contracts will conspire with a supplier to inflate invoices. Usually, they will split the difference between the ‘real’ price and the stated price. This will mean that either poor quality services are supplied or overcharged services with reasonable quality are given. This can very quickly add up, and if the staff member is allowed a level of autonomy in this area it can be hard to detect as they will often receive fake quotes to cover the fraud.
  • Delivery Fraud – This often works for hand in hand with either blackmail or general corruption. A gang will find a suitable member of staff who has access to warehouses or other storage facilities and find a way to get them to aid them in their plans. This can be through a simple cut of the profits (Improper Financial Gain) or blackmail. Either way, the staff member will grant them access to the facility through either forged paperwork or being there themselves to open the door. Whole lorry loads of goods can be taken, and losses can mount up quickly. Only when the goods are not paid for, the loss is discovered, which can be some time down the line. Achieving security against this can be difficult as the papers to release the goods will be official and unlikely to be queried at the gate.
  • Bookkeeping Fraud – A simple fraud that involves transfers of money, payments and general accounts of the client. No real sophistication to it – just plain theft. 
  • Social Engineering / Fake Presidents – These are two differing frauds but have the same method at their heart. Both rely on a level of trust either built up over time or gained by electronic means. 

    Social Engineering can take the form of regular phone calls building up a rapport, targeted emails (finding out the hobbies of a member of staff and then sending them links – Spear Phishing), or even working on an out-of-work friendship which then turns into a request for help. All of these come under the Social Engineering banner. Once the trust is established, there will be a request to transfer funds, either for a legitimate-looking reason or for help to the person conducting the fraud. Once the money is transferred, the contact usually ceases immediately.
     Fake Presidents is where a call is made seemingly from the CEO or CFO, usually on a Friday afternoon, requesting an urgent fund transfer. Usually, the reason is that if the transfer does not go ahead, a deal will fall through harming the company. The call will seem to come from the senior staff members but will be the criminals. They can hack phone systems to present the phone number of the person they are impersonating, use email addresses which are one letter different to the person etc. A less sophisticated version is hijacking emails and changing bank details at the last minute, in a deal to the fraudster’s account. 

Conclusion about Crime Insurance in Food & Agriculture

As we can see from the described above cases, “non-tangible damage” (financial) losses, caused by infidelity of employees or third-party criminals, can bring quite a significant gap in the balance sheet of any Food & Agriculture enterprise. On the other hand, such losses are not covered by a standard property damage/business interruption insurance contract. Additional commercial crime insurance policies are recommended. The indemnity limit of 1 million EUR costs starts from 50,000 EUR, as a rule, with the same amount of deductible.

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Brian Alexander, GrECo Group Practice Leader Financial Institutions

Brian Alexander

Group Practice Leader Financial Institutions

T +43 5 04 04 342

Shylov Maksym, GrECo Practice Leader Food & Agriculture

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Continue reading “Crime Insurance: Insure Your Food & Agriculture Company”

Neobanks – Potential for Embedded Insurance

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Neobanks are trying to bridge the gap between the offerings of traditional banks and the expectations of customers in this digital era.

What does traditional banking bring to customers? Complex processes, problems with ATMs and load of papers for account opening and loan approval. On the other side, neobanks with their business model are trying to fight these stereotypes by offering digital banking platforms with end-2-end services, no or low fees and excellent customer experience.

Neobanks are trying to bridge the gap between the offerings of traditional banks and the expectations of customers in this digital era.

What is a Neobank?

Neobanks, which are sometimes referred to as “challenger banks” are financial institutions that have positioned themselves as the cheaper alternative in comparison to traditional ones. They are fintech companies offering different technological solutions (like apps or software) to modernise mobile and online banking. In most cases they are focused on specific financial products (e.g. loans, accounts, savings) leveraging technology and artificial intelligence to offer tailor made services to the customer while, at the same time, minimising operating costs.

Neobanks vs Traditional Banks

Neobanks are still on the rise, but it would be hard to expect them to have many advantages over the traditional banks. Traditional banks have two very crucial advantages – money sources and the trust of their customers. Still, their complex legacy systems are the major burden they are carrying and for them it will be difficult to adapt to the digital needs of the technologically oriented generation.

On the other hand, neobanks might not be “equipped” with money sources like traditional banks, but they can fight in other areas – field of innovation – allowing them to act faster to the demanding needs of the customer by introducing innovative products fast and easy and offering excellent customer service.

Popular Neobanks

CHIME
With more than 12 million users, Chime is the most recognised brand in the neobank space in the U.S. The platform eliminates many of the common fees typically associated with traditional banks and provides credit-building opportunities, early access to direct deposit payments and automatic savings features with a competitive annual percentage yield.

VARO BANK
Initially founded as neobank in 2020, Varo Bank was changed to a bank. It offers services like Chime, including no monthly or overdraft fees and no minimum balance requirement. Users don’t need to undergo a credit check to open an account.

CURRENT
Current has also attracted hundreds of thousands of customers in the U.S. It offers benefits such as early access to direct deposit, fee-free overdrafts and cash back on debit card purchases.

Embedded Insurance for Neobanks

Working in the environment that is very competitive, like FinTech is, makes offering embedded insurance the best way to catch the interest of the customer. Insurance not only helps bringing trust in the mobile banking app by protecting customers purchases but increases the expenses of the customer and, ultimately the revenue for the neobank.

Embedding insurance plays a crucial role in the customer acquisition process by creating additional value for the customer in terms of new and innovative product solutions and for the neobank in terms of enhanced and value-loaded banking products they can offer.

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Alma Ribanovic

Group Practice Leader Affinity

T +43 664 962 40 17

Continue reading “Neobanks – Potential for Embedded Insurance”

Embedded Insurance – The Name of the Game

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Person buying embeded insurance

Embedded insurance is the future. It creates win-win-win situation for all parties involved.

What is one of the biggest issues we face in the insurance industry nowadays? It is the fact that selling insurance, which is not purchased together with a product or service, becomes quite ineffective and inefficient. The consequence of this “separate sales” is that the insurance product is very often rejected by the customer as unappealing hassle what, at the end, results in a huge protection gap. And due to market changes in terms of digitalisation, climate changes and lack of innovation, this gap is just getting bigger.

Buying insurance online represents significant issue for majority of customers. Why? Simply because the customer journey is inadequate and complex. Most of the insurances are still sold offline. True, they are researched online, but purchase cannot be done.

How can we solve this gap?

It is about embedding the insurance into the digital service offering. It is important that insurance is offered on the spot when the need is there and the risk to the buyer is paramount. Embedded insurance bundles the insurance coverage or protection with the purchase of a core product or service. It means that the insurance is not sold separately to the customer, but it is provided as a normal feature of the core product or service. That is, the customer gets more affordable, relevant and personalised insurance when they need it most.

Various tech players present on the market are very well equipped to embed insurance into their e-platforms mostly because they are the ones who control important insurance topics like:

  • Customer Journey: As life is moving rapidly into the online sphere, tech players are the ones who can best influence and control the customer journey. They are able to meet the customer where they are, offer insurance product when they need it and, by that, increase the penetration rates of insurance sales in comparison to separate insurance purchases.
  • Data: One of the biggest assets of tech players is that they have the data about the customers browsing history, transaction history etc. Data are up to date and can be used by insurers for better underwriting, risk selection and risk monitoring.
  • Trust: Digital services enjoy high levels of customer trust due to superior customer experience they offer. This is the perfect opportunity for insurance companies, as embedded insurance can help close the trust gap between insurers and digital services.
  • Communication: Tech players are in constant contact with their customers via diverse digital channels in comparison to insurers who contact their customers mostly only on renewals. By offering embedded insurance, insurers can use these communication channels to increase the connection to their customer base.

How is the market doing it?

Ant Group manages a digital financial services platform in China with an enormous user base due to the ubiquity of Alipay and the superapp they’ve created around it. In terms of insurance they spotted a large underserved market in low-income rural areas that traditional insurers were ignoring. Rather than trying to resell existing insurance products from one or two partners, they created their own insurtech platform to connect demand with supply in a new way. Ant Group focuses on understanding the needs of its consumers, educating them about the value of insurance and then designing compelling solutions for them with its suppliers.

Its insurance partners take on most of the underwriting and regulatory risk and deliver products to Ant’s specification. The company now offers 2000 customised, affordable and flexible life and non-life products from 90 different insurance suppliers.

Uber is another big online platform with a close relationship with its users including its 3 million drivers worldwide. At any time, depending on local regulations, competitive threats and new market opportunities, Uber requires the flexibility to provide its drivers with different types of insurance, benefits and incentives, related to vehicle and personal injury cover, sickness, paternity pay or other income loss.

Some of its insurance solutions are provided to drivers for free, some are invisible, some are optional add-ons. Some are related to when the driver is ‘in service’, some not. Given the size of its driver base, it has the potential to offer more complex products like pensions, life and health insurance in the future, in addition to other financial services like the bank accounts and loans it already offers.

In all cases Uber prides itself on the simplicity of its user experience and requires insurance solutions which are easy to adopt, good value and quick to claim against.

Embedded insurance is the future. It creates win-win-win situation for all parties involved – tech players, insurers and customers enabling better protection of consumers, creating added value and strengthening the value proposition.

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Alma Ribanovic

Group Practice Leader Affinity

T +43 664 962 40 17

Continue reading “Embedded Insurance – The Name of the Game”

Investing in the Future

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With new insurers having entered the market in the past few months, we should see a dampening of the price increases we experienced in the previous two years.

The market has continued on its hard path with increases in the range of 10% to 20% for clean accounts and much higher for those considered distressed risks. Additionally, the market has been weakened by the absence of face-to-face broking due to the Covid-19 crisis.

Looking back on the past 12 months

As a result, underwriters had no need to take on additional risks and thus continued to wield the power in transactions. After 2020, premium increases of 25% were the order of the day. However, the correction on financial institutions (FI) was nowhere near as severe as in the D&O insurance sector, given the more disciplined approach in the FI market compared to other liabilities.
 
There is a glimmer of hope in the strong competition we encounter in the fund management market. There were hardly any corrections in Central and Eastern Europe. With London markets taking a keen interest in this region, an even greater opportunity exists to bring specialist forms to the CEE region.
 
While claims have been lower than usual, conversations with loss adjustors suggest that this is not a long-term trend. It is rather people’s absence from their office that has shifted the focus onto other issues. Adjustors believe that we are heading for a wave of claims coming from employee fraud and Corona- related loan issues once office work is resumed and checks are carried out more rigorously. Fraud is expected to be a major issue for FI in the coming months, especially in Central and Eastern Europe.

Emerging risks

The impact of Covid-19 will become an issue for all types of FI in the coming year. Government support has kept many businesses solvent, but inevitably this will be scaled back over the next 12 months and the losses that are in the pipeline will crystalise. This will put a great strain on banks with large lending portfolios to businesses in the more distressed industries such as aviation, tourism and leisure.

In CEE, several countries heavily rely on these industries, so there is concern as to what will come from
the insurance market. More detailed Corona-specific questionnaires will become standard for the foreseeable future along with some inevitable rate increases where exposure is felt.
 
A second and perhaps more long-term issue arising for FI is the recent and potential legislation around investment and lending to companies that are considered detrimental to the environment. We have seen some central banks (France, UK) conducting regular audits of these companies’ exposure within their loan books and invest- ments, seeking to quantify the exposure which could turn out to be a systemic risk. The European Banking Authority is currently also working on a common standard for comparing banks’ green assets. This may be perceived as a move towards penalising those who hold too many assets in companies that are “sensitive to transition risks”. Some believe that charging capital for these risks (due to their “systemic risk” potential) could be a way forward. It remains to be seen how this would play out, but there is a lot of noise about it.
 
Accompanying the investigation of assets is the EU Directive published in December 2019 which came into force this year and which deals with the disclosure obligations for financial products linked to the sustainability of the investments they contain. This points to an alarming increase of risks for FI as it involves consumer protection laws and perhaps levels of disclosure that are not immediately apparent. Could a company, which (from an outside-in perspective) does not appear to pose a risk, suddenly become risky after such an investigation due to one small subsidiary’s non-compliance? The due diligence required alone would take hours to ensure compliance with the EU Directive.

Boards under pressure

In CEE we are used to the main risks for banks in insurable terms being either credit or crime. These present most of the claims. With increasingly stringent legislation concerning environmental issues and the potential of Covid-19 fallouts, we may soon be moving towards a liability phase. The risks of falling foul of EU legislation are all too real. We therefore expect more corporate boards to be held accountable and thus increasing activity in the D&O sector. For example, can banks really avoid the risk in a region that still relies heavily on coal and aging nuclear plants for power generation? Now more than ever will D&O become a more valuable risk transfer tool to enable FI to continue acting in good faith.
 
Furthermore, with consumer protection regulation tightening up the disclosure of product exposure concerning ‘dirty’ investments, we will see more activists trying to dig up such dirt on investment products and attack FI. Among lobbyists, it is a known fact that banks are seen as the enemy. Therefore, a strong professional indemnity cover is a must for banks. In CEE, there have only been a few consumer actions over the past years. This may, however, increase and bring highly motivated lawyers into play.
 
In short, boards will come under more pressure from all angles. Lending practices will be put under the microscope after the pandemic, particularly where loan books are highly exposed to industries that have fared badly in these times. D&O will be a strong risk management tool and, like all liability insurances, the earlier it is bought, the more cover it will provide.

Looking forward – 2022

As the world returns to some sort of normal life next year, the level of scrutiny will likely reveal issues that have lain dormant for the past 18 months. On top of this, FI will face new layers of legislation. In insurance terms we expect a weakening of the hard market with rates returning to flat or low single digit increases (about 5%). Notwithstanding that, if the aftermath of the Corona crisis produces significant losses across FI (and all lines), then rates will rise above this level.
 
With new insurers having entered the market in the past few months, we should see a dampening of the price increases we experienced in the previous two years. Insurers will be keen to diversify their books by seeking risks in our markets. Whilst not enough to lower prices or extend the terms, it should at least provide a more stable market place.

Brian Alexander

Group Practice Leader Financial Institutions

T +43 664 962 39 17

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The Consequences of Opening Up

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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 +43 664 962 39 17

Continue reading “The Consequences of Opening Up”

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

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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.

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Brian Alexander

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Safe through troublesome times

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Investment policy of the insurance industry

After banks, the insurance sector is the second largest asset manager in Europe. The assets consist to a large extent of the funds paid in by the insured in the life insurance, on the other hand they serve to secure the obligations arising from the insurance contracts for the payment of claims. The asset strategy is checked by the supervisory authorities in each country and its principles must correspond to the provisions of EU law Solvency II. A management report from the supervisory authority provides information on the status and development of the investments (see: EIOPA Data and Figures Financial Stability Report: Investment split).

Traditional and new investment forms

The most important instrument for long-term security of the invested assets and regular income are bonds, which make up around 60% of all investments. These are divided into government bonds, corporate bonds and bond funds. The distribution between these forms differs from country to country and depends on the bid of the respective state or the private bond issues. As with all other investments, the decline in interest rates is noticeable, but insurers are reacting to this by taking out bonds with ever longer terms. In life insurance in particular, remaining terms of around 10 years can be found in the existing portfolios in Germany and Austria, while terms in other countries are still 5 to 6 years. In the next few years, however, there will be a major shift in this part of the assets when bonds expire and can only be replaced by those with a lower yield. So that the level of interest rates does not fall too sharply, there is a tendency towards bonds from issuers with lower credit ratings, but these still make up a very small part of the portfolio. In terms of issuers, insurers concentrate on European countries and companies in addition to their home countries, with a focus on the large industrialized nations of France, Germany, the Netherlands and Belgium.

Investing in shares, apart from strategic investments and the establishment of own corporations, has lost a lot of importance after the crises at the beginning of the new millennium. The possible volatility is difficult to reconcile with the insurance business model and with the new regulations. In Austria, the share of equity investments fell to 1.2% in 2018, in other countries it is slightly higher, but without reaching the former proportions (e.g. 20 to 30% in Switzerland).

In search of an interesting total return, real estate investment has received a new boost. This form of investment is historically important for insurers because it also makes a reliable contribution to stable values and regular income. The construction boom of recent years, both in residential construction and in the construction of commercial properties with the corresponding financing requirements, has also given the insurance sector new impetus. In Austria, the total investment in real estate on the market has grown to over 10%; with individual companies, real estate is already the second major pillar of all investments with a share of around 40%. This development is similar across Europe, with local differences that result from the economic development of the respective country.

The construction sector is also an opportunity for other investments by insurers: there is an increasing willingness to invest in infrastructure projects and to participate in private-public partnerships in order to make an interesting contribution to total returns (search-for-yield policy). In recent years, the share of this type of investment has tripled due to the great demand. The investment of the insurer is rounded off by individual loans, mortgages and cash deposits at banks, which make up a maximum of 10% of the total portfolio.

Which influencing factors can be expected that can determine the success of the investment policy?

In recent years, the positive factors (very good international economic situation with steady growth, increase in the volume of insurance premiums, investments in large infrastructure projects) have been countered by the pronounced low interest rate phase as the most important negative parameter. Uncertainty factors in both directions included climate change, Brexit, demographic changes, increasing digitization and the beginning of a trade dispute between the great powers.

Then the global economy was surprised by Covid-19. The economic consequences of the pandemic and the countermeasures that have a direct negative impact on the economy cannot yet be assessed today. The insurance business model will have to accept certain losses both in the core area (receipt of premiums to finance claims and pensions) and in the investment field. The long-term nature of the business in both areas and the investment in countries and companies with very good credit ratings (75% of all bonds relate to the three best credit ratings) suggest that the insurance industry will also master this crisis very well.

The article is written by Andreas Krebs.

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Paul Spittau

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Sustainable Finance – a new basis for private pension schemes

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EU climate policy with huge impact on insurance based investment products

With the target of making Europe climate-neutral by 2050 the European Union is publishing some regulations with direct impact on the products of the financial market.

Keyword Sustainable Finance

The basis is the “Regulation to facilitate sustainable investment” 2020/852 EU that was published on June 18th, 2020. It is also called briefly Regulation on “Taxonomy” or “Sustainable Finance”. It makes a classification which investments are in compliance with the six environmental objectives:

  • climate change mitigation,
  • climate change adaptation,
  • sustainable use and protection of water and marine resources,
  • transition to a circular economy, waste prevention and recycling,
  • pollution prevention and control and
  • protection of healthy ecosystems

and will therefore be considered as sustainable investments. The first two objectives will apply from January 1st, 2022, the four remaining from January 1st, 2023. The classification of concrete investments (for instance decarbonisation) and benchmarks (e.g. the 2° C limitation of global warming) is being prepared.

In most cases, investments mean the use of foreign capital as bonds, credits, share capital, which can be offered to investors also as packaged products, for instance for saving money for future pensions. Therefore the Regulation on “Taxonomy” is accompanied by Regulation 2019/2088 “on sustainability‐related disclosures in the financial services sector”. This one has already been published and will apply from March 10th, 2021. There is a deadline for implementing the technical standards of details to be disclosed until January 1st, 2022. The Regulation stipulates full information and transparency on sustainable investments and activities including risks and adverse impacts resulting therefrom and will focus in the first instance on the field of “energy efficiency”. This is valid for the activities of the companies working in the financial sector as well as for the promotion of financial products and advice given in connection with them.

Effects on life insurance

Part of the financial products are Insurance based investment products (IBIP), i.e. life insurance products the value of which is exposed to market fluctuations. Among them we find unit linked or index linked insurances but also traditional life insurances and pension schemes. There is a dispute in some countries whether classical life insurances without explicit connection to an investment product belong to these, but the matter stands without clarification so far. All these products will have to offer in future information on the sustainability of the underlying investment or on the distribution of the investment portfolio according to the criteria of the Regulation, in addition to the existing information on capital security, interest rates, portfolio distribution to branches and countries and similar data. It may be expected that there will be numerous new products with sustainability as their main feature.

This leads to an extension of the advice offered by the insurance intermediary. Besides questioning the client in respect of his economical demands and needs he has to find out also the client’s ideas and preferences in respect of sustainable investments and must offer him adequate products. Of course, the “Best Advice” principle applies, the important aspect is to find the best financial solution for the client. Sustainable products that are more expensive than traditional products or have a higher capital and revenue risk can be placed only upon clear order of the client. This shall be stipulated by a third EU regulation in connection with the Insurance Distribution Directive (IDD), the details of which are currently under discussion.

We shall continuously report on further changes and developments regarding financial products.

The article is written by Andreas Krebs.

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