Financial institutions - more exposed to risks in 2023!

Financial institutions operate in a highly scrutinised and competitive market governed by stringent rules imposed by UK regulators. Banks, venture capitalists, investment managers, and corporate service providers all have increased risk exposures that must be mitigated through insurance.

What essential coverage do financial institutions need?

Professional Indemnity (Civil Liability)

Professional Indemnity protects financial institutions from negligence, errors & omissions, and breaches of duty. It also includes defense costs as well as damages and awards.

Directors & Officers (D&O)

Similarly to Professional Indemnity, D&O will cover negligence, errors & omissions, and breach of duty, but not concerning professional services. It covers other aspects of the business, including regulatory issues, shareholder actions, reporting errors, and inadequate disclosures. The target of the claim is against the individual directors and officers rather than the entity itself.

Crime Insurance

Employee theft, forgery, and falsification of documentation are all covered under crime insurance. In some cases, crime insurance can provide protection against fraud committed by third parties.

Employment Practices Liability (EPL)

Employment Practices Liability (EPL) provides coverage for employment claims and specific issues such as discrimination or unfair dismissal (racial, sexual, gender, age). With the recent importance of equality in the UK, this cover has been very solicited.

Cyber Insurance

Did you know that it takes 181 days to detect a data breach and 75 days to contain it? Obtaining cyber insurance is critical in today's society. Cyber insurance protects firms against modern 1st party and 3rd party cyber exposures such as data breaches, ransomware, malware, and transfer frauds. The remedial work and claims are also covered.

Public Liability

Public Liability insurance assists the insured by providing cover in the event of third-party property damage or injury to third-party persons. This cover is essential for all businesses operating in the UK.

Employers Liability

Employer's Liability is a mandatory coverage that protects the insured in the event of an employee's injury or illness. The minimum level of cover required by law is £5m, but you will see a minimum of £10m limits available in the market.

Here are some case studies to help you visualise the benefits of having appropriate financial institutions insurance:

Case Study 1: A retail bank experienced unauthorised access to its computer systems leading to a leak of sensitive data on the dark web, including names, email addresses, and phone numbers. By having cyber insurance in place, the bank did not need to pay the mandatory notification costs of the breach. Additional costs would include £100k in computer forensics, £25k in PR, and unknown future defense and awards.

Case Study 2: Working on behalf of one of their institutional investors, a trader at a leading UK-based fund made an error in the placement of a trade in which they were looking to reduce the fund's equity exposure. Instead of selling the ETF, the trader increased his holdings. Realising this too late, the trader attempted to reverse the trade upon market opening the next day, but the price dropped dramatically, resulting in a loss of £500k for the fund. As the client has an FI PI policy in place, claims against the fund manager were covered under the negligence section of the policy.

Case Study 3: A claim was filed against an investment manager for gender discrimination on two counts: female employees were paid less than male employees in the same role and not promoted. The claimants won the case, but the insured had EPL coverage, which allowed them to cover the claimant's costs and awards.

Summary

While the key insurance policies a financial institution must have as part of its portfolio have been highlighted, the list is not exhaustive. A firm should examine various exposures such as property, pension trustee liability, business interruption, and credit risk insurance. The aforementioned would give a good foundation for any financial institution looking to guarantee they possess a robust insurance programme.

At Servca we spend time reviewing each business under its merit, working with our partners to understand the exposure and underwrite each risk as fair as possible. If you require any assistance please give us a call. Our team is here for any of your needs!

Written by George Grimshaw

Insurance Specialist - UK & International