This article was produced in partnership with Travelers
Mia Wallace of Insurance Business sat down with Nadia Bagijn, head of financial institutions at Travelers, to discuss the challenges facing financial institutions
Financial institutions are finding themselves at the heart of a perfect storm of regulatory challenges, external risks and internal pressures.
The regulatory environment is ever-evolving, highlighted Nadia Bagijn (pictured), head of financial institutions at Travelers. As a result, brokers and insureds alike are looking to their insurer partners to provide up-to-date information and insights into the changes that will impact their operations. Financial institutions, in particular, are subject to a significant amount of regulation, she noted, which means there are more ways for these firms to unintentionally breach these rules.
“The Financial Conduct Authority (FCA) has long been active in this space, and keeping abreast of regulatory changes is especially pertinent to firms that deal with retail customers,” she said. “And, life insurers and banks are seeing heightened pressure due to their dealings with vulnerable customers.” This is running in the foreground of the added complication that is the FCA’s increased involvement with ESG reporting.
Given the complexity of navigating this fast paced and undulating environment, it’s natural that insureds and their brokers look to their insurers to keep them up to date with the latest market machinations. And as Bagjin noted, there are four key areas of coverage that financial institutions need to focus on at this time.
Directors & Officers (D&O) insurance
“A lot of clients have never been through a regulatory investigation unless they are part of a really large financial institution,” Bagijn said. “For smaller clients, asset managers and small building societies, they aren’t always aware of the impact that this may have on their business and how it affects individuals. So, this is something we try to convey to our clients – we see these types of claims often, and we have the experience to handle them. That’s where our D&O insurance really steps in.
“When a director is investigated by a regulator, it’s incredibly stressful and expensive. When there is a D&O insurance policy in place, the insurer is there to help them build up a defence and support them through the process. It’s very important for the directors to know that they’re protected - the D&O policy is essentially an end-to-end support system for individuals when it comes to regulatory investigations.”
Professional Indemnity (PI) insurance
Professional indemnity is another area where financial institutions need cover, Bagijn said, as historically this is the insurance cover that receives the most claim notifications. The last few years have seen consumers become increasingly aware of consumer rights, and this has resulted in more consumer class actions. Travelers has also seen significantly more redress exercises being performed due to the FCA’s intervention.
A PI policy covers claims against insureds related to professional services being provided by them, which includes the misselling of products. Products sold to retail clients are often not as straightforward as they initially appear to be, she said. Travelers has seen that sometimes when an investment starts to underperform, investors realise that they didn’t truly understand the risks involved with the products and then take action against financial institutions.
The FCA are looking more at compensation exercises, wherein an insured is required to put their client back to where they should have been (even if there has not been a claim or demand), Bagijn said. The sums involved may seem limited but can add up very quickly when hundreds or thousands of customers are involved.
Crime insurance might sound like a standard cover for financial institutions, Bagjin said, but it’s a standard for a reason – crime is always happening and the vast majority of this, as seen by Travelers, is of the employee fidelity type. Where there is money there will always be criminal interest, and when employees steal money they tend to be very good at covering their tracks. Often a client will not notice any money is missing until several months or years down the line, and once the theft is discovered, the sums involved can end up being significant and severely detrimental to the operations of a smaller company. A crime insurance policy serves to protect clients, she said, and brings in a third party to investigate what happened.
Travelers is also currently seeing a lot of cyber-related social engineering - when somebody pretends to be a senior manager or employee of the company and sends an email asking for the urgent transfer of funds, usually on a Friday afternoon when there’s nobody else around. By the time the staff member realises their mistake, the criminal has already transferred the funds to another bank account and changed it to a digital currency such as Bitcoin, which makes it almost impossible to get back.
“Crime insurance is there to protect the client,” Bagijn said. “We’re here to help. And it happens more often than people think. It doesn’t take much to be able to steal money and we’ve seen it across asset managers, banks and insurance companies; no-one is immune to it. We’ve seen it across all industries and that’s why it’s so important to have crime insurance in place.”
With cyberattacks being ever-present, cyber insurance is increasingly important to companies, and Bagijn noted that within financial lines it remains a critical topic for discussion. Every day new hacking attempts occur, and she highlighted that the level of notifications has gone through the roof in the last two years.
“As you can imagine, banks and insurance companies have private and sensitive information with usually very good procedures and protections in place,” she said. “But what we’ve started seeing more of is that the attackers are no longer looking for personal identifiable information (PII), they are now looking just to lock the insured’s system and demand a ransom in return for that system being unlocked.”
“Suddenly, a lot of asset managers that thought they didn’t need insurance for cyber, because they don’t carry personal information, are now potentially facing this new threat. This exposure is no longer all about stealing information, it’s about locking your system as well. So as an asset manager, if you suffer an attack, it is possible that you won’t be able to trade for a week or two until your system is back up and running. This can be significantly detrimental to their performance and operation – they could lose clients, they could lose money.”
Travelers is seeing a lot more interest in cyber insurance, Bagijn said, and always encourages clients to buy a standalone product rather than just leaning on the coverage available through their D&O, PI or crime coverage.
Having operated in the financial institutions’ insurance space for some 18 years now, Bagijn has seen for herself the shifting attitudes towards the products available to firms. There’s a lot more knowledge of what’s going on, she said, particularly as brokers are now so good at capturing data information from clients’ profiles and their claims, and using that to advise their clients on what’s happening in the wider market.
“We’re able to do the same thing, and to discuss with them what we’re seeing,” she said. “Often, the view previously was ‘it will never happen to me’. But the UK has moved into a more litigious environment. We’re definitely seeing clients, investors and customers becoming more aware of their rights. There’s now a lot more awareness in the market – awareness that you can sue or be sued - something that financial institutions need to consider more.”
You can discover more about Travelers’ cover for financial institutions here.
Nadia Bagijn has supported the insurance needs of financial institutions for around 18 years and has a unique perspective on the key challenges that they face. She took on the role of Head of Financial Institutions for Travelers Europe in September 2018.