As brokers with clients in the financial sector continue to navigate a hard insurance market in the UK, what does the future hold? In a recent webinar, Travelers Europe leaders assessed the current market and provided insight into some economic indicators that may help predict the challenges and opportunities financial institutions could face in the remainder of the year. They also reviewed the types of cover and risk management practices that could help financial institutions best navigate uncertainty in the coming months.
A smoother landscape – but with four key obstacles
After a year of economic decline and uncertainty due to the pandemic, short-term financial forecasts are looking positive in the UK as restrictions are lifted and consumers play catch-up with spending that slowed during lockdowns. For financial institutions, this could mean growth in the mortgage book and increased credit card purchases. Insurers could see potentially fewer claims and better return on investment as more money begins to circulate in the economy. For asset managers, greater optimism could lead to improved equity markets and better returns for investors.
Just how positively the economy responds in the months ahead hinges on four factors:
Inflation, for one, is expected to climb in 2021, with no interest rate increase expected until 2023. Global demand has outstripped supply on a wide range of goods ranging from timber to microchips, while housing prices – and demand – have continued to grow thanks to the stamp duty holiday. For financial institutions, this means higher profit margins but also the potential for more defaults in the mortgage book due to individuals struggling to pay back their mortgages. Insurers could see better returns on investment but rising claim inflation. Equity markets will be impacted by any increase in interest rates.
Insolvencies will also play a role in the coming months – they are expected to climb 56 percent in the UK by the end of the year. Many businesses that were shielded from closure during the pandemic will reach a point where they must pay debts or close permanently. From 1 July onwards, company directors will lose protection from liability for wrongful trading, so legal actions are likely to increase against directors brought by creditors. This has the potential to lead to more Directors & Officers claims for insurers, loan defaults and declining profits for banks, and portfolio impacts for private equity firms as businesses close their doors.
House price rises could finally slow down this year after a period of relentless demand and dwindling supply. The UK House Price Index reported 9 percent growth in April and 10 percent growth in June, but demand is expected to slow after the stamp duty thresholds start to return to normal levels and the furlough scheme ends. This could mean a continued growth in mortgage books for banks, with potential for increased defaults and subprime lending. Insurers could find themselves more exposed to miss-selling claims and surveyor claims. Asset managers could see their property investment funds grow in value, albeit with greater exposure to collateralised debt obligations.
Finally, in the fourth quarter we will start to see clearer impacts from unemployment, which is expected to climb by 5.5 percent after the furlough scheme ends. This is especially true for the hospitality sector, which accounts for nearly half of the furlough scheme uptake through the pandemic. Even hospitality employers looking to fill vacancies in order to reopen are struggling to do that in the wake of Brexit. The potential impacts for financial institutions are a reduction in spending and lending, with increased defaults on loan repayment. Insurers could potentially see a reduction in insurance purchases, as well as more employment practices liability claims due to redundancies. Spending reductions will impact private equity firms as their portfolio companies face declining share prices and lower returns on investment.
What does this mean for brokers and their clients?
In the current market, brokers can expect insurers to have restrictions in their appetite, early renewal submissions, and tighter wordings, with specific emphasis on sublimits, mitigation cover and investigation cover. Amid insurers’ increased selectivity, brokers can help their clients find ideal cover by expecting to have to answer more questions up front and also scrutinising an insurer’s financial strength and claim handling capabilities.
Several types of cover can help financial institutions navigate the risks of the current environment:
Directors & Officers (D&O) insurance is designed to protect the directors of a business against any ‘wrongful acts’ committed whilst acting in their working capacity. A representative claim might involve a whistleblower who accuses a fund manager of non-compliance and improper recordkeeping, for example. D&O cover can help financial institutions navigate the complex regulatory environment, protect against potential insolvency claims, and mitigate risks related to merger and acquisition activity and Environmental, Social and Governance practices. It can also provide some protection against cyber exposure, though more insurers are moving away from this to encourage standalone cyber cover.
Professional Indemnity (PI) insurance is designed to protect the company and employees from claims related to professional services provided to third parties. A representative claim might involve a fund manager who is tasked with buying and selling in different currencies and makes in error in executing a trade, for example. For financial institutions, having PI insurance is sometimes a contractual requirement. More importantly, it provides balance sheet protection, cover against mis-selling claims, and can help mitigate the outcome of complex claims.
Crime insurance is designed to protect the company from crime losses perpetrated by employees, third parties or both. A representative claim could involve a large payment made from their bank to a third party in response to a fraudulent request, for example. Crime insurance helps companies contain the potential impacts of crime, which can be significant: Theft by employees is often undetected for a significant period of time, which means once the loss is discovered, it can be substantial. Small companies often lack proper internal procedures, and a large loss to a small client can lead to financial difficulties or insolvency. Computer fraud/social engineering has become increasingly common and any client can be exposed.
“Brokers can expect insurers to be more selective in the current environment but open to insuring the right risks,” said Nadia Bagijn, Head of Financial Institutions for Travelers Europe. “As brokers look to secure the best cover for their clients, they can be good advocates by anticipating insurers’ concerns and providing complete answers to questions. Supportive partnerships and good communication among insurers, brokers and insureds will continue to be important.”
Find out more about Travelers Financial Institutions insurance here.
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