Despite Increased Regulatory Scrutiny, Insurance Market Generally Favorable for Financial Institutions
Regulatory oversight and enforcement, a continued focus on cybersecurity, and increased pressures on financial performance will dominate risk and insurance headlines in 2016 for financial institutions.
In 2015, financial institutions generally saw property and casualty insurance rates soften, a trend expected to continue, barring unforeseen circumstances. Financial and professional liability insurers typically sought modest rate increases in 2015, largely due to increased regulatory scrutiny, a challenging economic environment, and rising concerns about cyber-attacks. Despite those challenges, healthy competition among insurers and ample capacity mitigated pricing.
Barring unforeseen events, rates are generally expected to remain close to flat in 2016 for directors and officers liability insurance (D&O), employment practices liability insurance (EPL), and fidelity bonds for financial institutions. Exceptions could be seen in errors and omissions (E&O) and cyber liability markets, which remain volatile.
Other highlights for financial institutions:
- Limited catastrophe losses, plentiful capacity, new capital entrants, and lower treaty costs contributed to softening property rates. Underwriters in 2016 will continue to focus on comprehensive business continuity planning.
- Casualty rates generally decreased in 2015 for organizations with good loss profiles, a trend expected to continue this year, barring unforeseen changes.
- Some insurers in 2015 excluded cyber coverage from commercial general liability policies, causing many organizations to consider standalone cyber insurance. Bodily injury and property damage losses stemming from a cyber event are exposures typically not covered under cyber policies and may require additional coverage.
- In the financial and professional liability space, asset management firms and insurers may see rate decreases in excess insurance pricing due to the highly competitive environment.
Key risk exposure areas in 2016 include:
- Cybersecurity. Financial institutions remain one of the highest-risk industries for a cyber-attack. Notification and investigation costs of a breach are a looming concern. Banks especially face additional challenges relating to cyber, including potential risk of a credit rating downgrade due to lack of preparation for cyber incidents.
- Regulatory compliance. The constantly evolving regulatory landscape presents ongoing challenges for financial institutions. For example, virtually all prudential regulators are becoming increasingly focused on cyber risk assessments. In a 2015 report, the Office of the Comptroller of the Currency (OCC) cited a need to raise awareness at banks about cybersecurity and an increased focus on cybersecurity at third-party technology service providers. Also in 2015, the Federal Financial Institutions Examination Council (FFIEC) released on behalf of its members (including the OCC) the Cybersecurity Assessment Tool, aimed at helping financial institutions identify their risks and assess their preparedness. In material related to the assessment, the FFIEC lays out guidance for CEOs and board members regarding their roles in cybersecurity.
For more information about financial risk and insurance trends for financial institutions, read Marsh’s United States Insurance Market Report 2016.