Advances in technology promise to change the way financial institutions operate in hundreds of ways in the next decade. Many of these changes will require a reexamination of the way insurance mitigates the risk associated with the business.
Richard Magrann-Wells, Senior Vice President and Willis Towers Watson’s Financial Services Practice Leader,looks at five risks that will need to be monitored closely as technology and finance continue to coalesce.
Regulators are already having difficulty keeping pace with the rapid advancements in financial technology (FinTech). Three areas where we anticipate this struggle to increase include:
- know-your-customer (KYC) guidelines
- antitrust concerns
Pear-to-peer (P2P) lenders are already feeling the heat as the recent terrorist event in San Bernardino, CA, appears to have been funded by a P2P loan. Politicians are already suggesting that P2P lenders be required to meet traditional know-your-customer rules similar to traditional banks.
Using algorithms to make credit decisions may produce excellent results in default ratios, but many critics are concerned that it may also lead lenders afoul of anti-discriminatory regulation like the U.S. Community Reinvestment Act.
The blockchain employs distributed ledgers to facilitate transfer of unique identifiable financial assets. A number of larger banks are already discussing creation of a private network of ledgers for trading amongst the largest institutions. Many smaller financial institutions are voicing concern that they will be excluded, and such networks could create monopolies in certain areas of trading.
While public policy concerns will not allow insurance to expand to cover regulatory fines we expect that regulatory investigatory cover will expand. Financial institutions have faced substantial costs in recent years related to investigations prior to actual enforcement actions.
2. Privacy / Network Security – Big Data
Obviously the use of more technology and the storage of more data radically increase the amount of risk an institution faces in keeping that data protected. Less obvious is that the use of big data itself may become controversial and result in litigation based on privacy concerns.
The amount of data accessed by financial institutions is exploding. Certain lenders are already making credit decisions based on the use of social media and broad internet presence analytics.
We expect that controversies will arise surrounding the range of nontraditional data considered and the results of those analytics.
We envision that cyber policy limits will continue to grow exponentially to deal with the scope of data that is being accessed by financial institutions. It is difficult to predict how carriers will respond to new exposures that may result from the broader nature of the data.
There is nothing new about the people risk that accompanies the new developments in finance – it is the types of people that are new.
The young creative types who are seemingly vital to develop a technological edge also create a unique set of risks. Startups, and firms that hire young creative workforces, often face issues with harassment, discrimination and wrongful termination in higher numbers than more traditional staffed firms, they also demand a very different set of benefits similar to that being offered by non-financial technology companies.
While new policies are not necessarily required to deal with the changing composition of bank employees, it will require adjustment in the nature and limits required. It is also to be expected that additional training and other mitigation methods will be instituted.
The integration of technology into financial institutions is happening at such a frenetic pace that it is impossible for firms to develop the technology without the use of outside help.
Traditionally financial institutions could rely on large well-capitalized service providers to meet these needs. In the current environment, financial institutions are looking to smaller firms that are developing incredibly imaginative technology—but integration of those tools may require new types and limits of insurance to manage that risk.
Insurers have made some strides in offering policies that provide additional coverage in excess of a vendor’s own policies. However, we anticipate that these coverages will need to grow significantly to deal with the disparity that exists between a small, but vital, technology vendor’s financial resources and the needs for assurance of a major financial institution.
5. Unlimited Liability Clauses / Increased Surety
Over the past 3 years unlimited liability clauses have become commonplace with firms guaranteeing their timely delivery, or uptime, and connectivity of their products and services. Financial institutions should also expect new surety requirements in Latin America to financially guarantee delivery and connectivity.
Surety is one of the oldest forms of insurance and also one of the slowest changing. However, we are seeing signs that advances are being made and innovations will develop that will streamline the process. Availability of sufficient limits will be the constraint when dealing with such unlimited liability clauses for large firms.