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HUB International 2021 Outlook

Financial Institutions

 

Transforming Uncertainty into Opportunity

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New Service Offerings Bring New Risk

Doubling down on risk management in 2021 is the only way to manage the liabilities associated with launching new products and services. To avoid the increasing chance of lawsuits and cyberattacks, financial institutions will need to get their house in order.

Improvise, adapt and overcome will be the name of the game for the financial sector in 2021.

As digital tools give consumers self-serve access to financial services, investment firms and other financial institutions (FIs) are challenged to create new and more specialized products to remain relevant. Investment firms, banks and other FIs are looking to invest in and merge portfolios. M&A activity will continue at an aggressive pace in 2021.

“Having the right policies in place in advance of launching a new venture or changing an existing business model will be increasingly important.”

These forces of change continue to raise the risk threshold. Having the right policies in place in advance of launching a new venture or changing an existing business model will be increasingly important. The right coverage limits on Directors & Officers (D&O), Errors & Omissions (E&O) policies and Employment Practices Liability (EPL) will be increasingly critical. And, in 2021, many policies will face increases of 30% or more due to the recent rise in insurance claims, high-priced settlements and drop in insurance capacity across industries in all coverage areas.

The first order of business for financial services firms caught in the throes of change will be to get their house in order. This will require appropriately mitigating risk with a formal risk management strategy and securing assets and real estate investments.

Financial institutions that can successfully pivot to either a broader product or service offering or focus on a niche will lead the industry into 2021.

Here’s a look at the top areas of interest for financial institutions in the coming year:

“A growing number of consumers want their money to support businesses that share their values.”

“In a niche market, there may be gaps in insurance coverage or an exclusion in an existing policy.”

1. Niche products and service offerings realign the FI market.

The financial services sector is changing rapidly. Investment management firms have been consolidating for years as margins drop due to an increase in exchange traded fund “ETF” assets and movement away from traditional mutual funds. Many have no choice but to cannibalize their revenue by moving to an exchange-traded fund to meet customer demand. Others are reinventing themselves in a small, niche market. For example, an investment management firm may now exclusively specialize in sustainably-minded or environmentally-focused investments.

A growing number of consumers want their money to support businesses that share their values. At the same time, investment managers with the necessary capital are buying up their struggling peers and trying to create new, larger, entities with additional capabilities in hopes of expanding their reach and gaining operational efficiencies.

As products and service offerings change, new risks emerge. In a niche market, there may be gaps in insurance coverage or an exclusion in an existing policy that precludes coverage of the new niche, or technology-based service.

If your financial institution is considering or has already pivoted to include additional products or service offerings, work with your broker to review your insurance policies and close potential gaps.

Financial institutions that can successfully pivot to either a broader product or service offering or focus on a niche will lead the industry into 2021.

“As forbearance plans run out, consumer and commercial mortgages that were spared a few months of reprieve, are forced to relaunch their payment plans. Even with additional governmental stimulus, we will likely see increasing portfolio delinquencies and associated foreclosure.”

2. Traditional risks continue to increase.

Data breaches will remain the largest risk factor for financial institutions in 2021. In fact, cyberattacks affect financial services firms 300 times more than other sectors. Having the right cyber coverage will be critical to avoiding significant business interruption and handing notification of breached parties appropriately.

While higher-risk FI entities will see a 10 to 20% increase in coverage costs in 2021, cyber coverage remains relatively low cost and competitive. In the last few years, an increasing number of FI data breaches have led to allegations that the firm’s Directors and Officers didn’t implement enough safeguards to protect the data. It’s not uncommon for shareholders and investors to enter a lawsuit against business leadership, arguing that their lack of safeguards affected the stock price and balance sheet. For this reason, D&O coverage could cost up to 30% more in the coming year.

Mortgage delinquencies and foreclosures will be another major risk for mortgage servicing financial institutions in 2021. As forbearance plans run out, consumer and commercial mortgages that were spared a few months of reprieve, are forced to relaunch their payment plans. Even with additional governmental stimulus, we will likely see increasing portfolio delinquencies and associated foreclosures. It will become increasingly important for institutions to have a comprehensive portfolio risk plan in place, which should be inclusive of lender-placed insurance, mortgage impairment insurance, active loan level risk management and property monitoring for seriously delinquent mortgages.

Banks and other essential FI businesses may experience new Workers’ Compensation and Employers Liability allegations well into 2021. Essential workers may claim to be in unsafe conditions, as some businesses fall short when enforcing personal protective equipment (PPE) and social distancing requirements. As a result, banks and other essential FIs face Workers’ Compensation (WC) claims when employees contract the coronavirus, or families of deceased employees claim lost earnings and lifetime medical expenses due to COVID-19 deaths attributed to their place of business.

Essential FI businesses will need to create rules and regulations around CDC COVID-19 guidelines if they haven’t already, specifying enforcement for both employees and workers. Avoid general liability (GL), WC and EPL claims by following best practices and defined company practices, such as sanitizing and PPE requirements. This will help the organization be as defensible as possible.

The fact that many FIs are working remotely doesn’t seem to totally derail risks of racial and sexual discrimination. FI employers will continue to face employment practices liability (EPL) claims and potentially high-profile claims and lawsuits.

FI businesses will want to work with their broker to ensure their Cyber, WC, D&O and EPL policies are robust and lacking major gaps, as they move into 2021.

“When merging with another entity, investing in a company or simply partnering with a third party vendor or supplier, look for any and all potential holes before entering into the relationship.”

3. Double down on due diligence.

When it comes to an M&A or IPO, turn over every rock in assessing potential risk. Then, work with your insurance broker to procure broad Representation and Warranties coverage for the impending risk. This includes understanding any impact COVID-19 has had on the business, and what future impacts could potentially be.

D&O insurance costs are also on the rise when it comes to initial public offerings (IPOs). Because more shareholder claims are being brought at both the state and federal level during and after an IPO, the minimum self-insured IPO retention is $10M. FI boards should remain acutely aware of the real costs of going public, and plan for increased deductibles and retentions before increasing premiums.

When merging with another entity, investing in a company or simply partnering with a third party vendor or supplier, look for any and all potential holes before entering into the relationship. Have you done everything possible to mitigate their cyber risk? Consider the business’ corporate governance and leadership. What risks exist? Look for any obvious red flags.

If your business, upcoming M&A or IPO faces unusual or significant risk, your broker will want to conduct a thorough assessment in order to highlight your risk management, loss control and other efforts to rein in coverage costs.

As significant IPO and M&A activity endures and new niche business structures emerge, the necessity for risk management will intensify.

2021 Growth and Beyond

Unprecedented change ushered in by the COVID-19 pandemic will continue to accelerate FI trends into 2021. As significant IPO and M&A activity endures and new niche business structures emerge, the necessity for risk management will intensify.

FI businesses will increase and enhance their risk mitigation in 2021 in an effort to both stabilize coverage rates and increase their capacity to survive and thrive in the new marketplace.

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