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.
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.
Group Practice Leader Financial Institutions
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