In times of volatility for financial institutions insurance can be a comfort blanket
Authored by Chris Muir is the Senior Development Underwriter on the Financial Institutions team for Travelers Europe.
Are we in the throes of another 2008-esque financial crisis?
The recent bankruptcies of Silicon Valley Bank (SVB), Signature Bank and Silvergate Capital in the US, alongside the hastily arranged buyout of Credit Suisse by UBS, might make us think so.
Though we haven’t experienced the kind of chain reaction we saw when Lehman Brothers went bankrupt and companies like RBS, AIG and HBOS required government bailouts, there is still a significant level of concern around the future of financial institutions in general. This may motivate company directors to fixate on their balance sheets to try to protect the future of their business.
But to insulate their business from the volatility of the times, it’s just as important for directors to make sure they have suitable and comprehensive insurance in place.
Directors’ and officers’ liability insurance can ease the burden
In the best of times, directors’ and officers’ (D&O) liability insurance is a key component of any insurance package. In more turbulent times, it can provide invaluable protection to people running a company.
In 2008, there was a claim against the directors of RBS for misleading investors who subscribed to a rights issue to fund the purchase of the Dutch bank ABN Amro. In an almost mirror image of these events, shareholder claims against SVB and their CEO and CFO allege they misled shareholders over the bank’s liquidity issues. A comprehensive D&O policy can mean the difference between a company’s claims being paid by an experienced insurer and its directors having to pay costs out of their own pockets.
Don’t forget about professional liability protections
It’s not just D&O policies that have been triggered by recent events. In the challenging commercial real estate market we’re experiencing, with higher interest rates increasing the cost of borrowing and changing post-pandemic work patterns causing depressed valuations for offices, the protection provided by a professional indemnity policy can provide a real estate investment manager with the headroom to survive.
As dissatisfaction grows with investment returns in this sector, investment managers may be accused of failing in their due diligence prior to purchase, or of over-leveraging properties amid low interest rates and neglecting to use appropriate hedging strategies to protect against rising interest rates. Such allegations can be expensive, time-consuming distractions from business for a director. But having an experienced claims professional on hand to help can take away a lot of the stress.
Challenging times call for crime cover
It’s difficult to overstate the value of crime cover for financial institutions during times of economic strain. In previous recessions, fraud cases have spiked. Although the UK economy had not dipped into recession at the time of this writing, there was still a 151% rise in fraud cases reaching UK courts last year. During times of prosperity, a fraud loss can be damaging to a business. But when income is down and margins are tight, the additional cost could devastate a business lacking the right insurance protection.
In times of economic hardship, not only are more frauds perpetrated, but more frauds are also discovered. Challenging economic environments invite business leaders to put their finances under a microscope – and doing so can reveal fictitious payments and fraudulent transfers that may have gone undetected for years.
Look beyond the usual pillars of protection
Some previously overlooked covers can also deliver significant benefits in current times. Recently, we have observed a number of investment banks looking to cut back on staff numbers due to record-low deal volumes. Undertaking a redundancy program means following strict rules. If employers don’t follow those rules correctly, unfairly sacked workers will take them to tribunal. An employment practices liability policy helps ensure that a redundancy program does not end up costing a company more money that it saved.
The now-infamous mini budget of September 2022, and the ensuing crisis around liability-driven investment strategies, has also brought pension trustee liability cover into the spotlight. This insurance can help protect trustees of a scheme against claims they have been negligent in running it.
It’s understandable that times of economic difficulty would motivate company directors to cut costs wherever possible. But rather than considering whether to cut back on insurance covers to save money, directors should take a minute to ensure their business has sufficient protection to see out this economic storm.
Choosing your insurance partner
Having the right insurance covers is important, but it’s just as vital to choose the right provider of cover. A cheap premium may be tempting, but a policy’s breadth of cover and the financial strength of the insurance provider are what matter most. Insurance companies are not immune from the market conditions – they were bailed out in 2008 alongside the banks. But if an insurance company were to fail or pull out of the market for certain lines of insurance, risk managers would be left scrambling to find a new long-term partner – and at the toughest time in the market cycle, when rates are increasing and capacity is shrinking. Making the right choice – on both insurance and insurers – can provide a lot of comfort.
The information provided in this document is for general information purposes only. It does not constitute legal or professional advice nor a recommendation to any individual or business of any product or service. Insurance coverage is governed by the actual terms and conditions of insurance as set out in the policy documentation and not by any of the information in this document.
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