Financial R&R: The Most Important Risk and Insurance Topics for Financial Institutions Going into 2023
Ron Borys and Ryan Farnsworth, Alliant Financial Institutions, discuss the most important risk and insurance considerations for financial institutions and what clients need to know going into 2023.
Welcome to Financial R&R, a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.
Ron Borys (00:14):
Welcome, everyone. This is Ron Borys and Ryan Farnsworth with the latest episode of the Financial R&R podcast. We're really excited to talk about a variety of topics, certainly an interesting world we live in when it comes to insurance. You know, we're going to cover it in a variety of different ways. Ryan, I'm looking forward to this discussion.
Ryan Farnsworth (00:34):
Yeah, I'm just thrilled that you've emerged from your2023 budget cocoon that you've been in for the last couple of weeks because it's hard to believe that the year is already coming to a close. And I mean, who would've thought that we would be here where we are this time last year with respect to the market and a few of those other items that you mentioned? So really looking forward to debate and discussion about each of those topics today. And it's good to have you back though, buddy.
Ron Borys (01:02):
Yeah, I appreciate that. Listen, budget gets harder and harder every year, largely because of the growth that our team has experienced. So, I guess that's a good problem to have, right?
Ryan Farnsworth (01:11):
And I think going through what we think are some of the most important topics of today, or at least in the coming months for financial institutions and other stakeholders in the insurance market, is really what we want to try to cover. And most of our clients in the financial institution space are not full-time risk managers. They have a day job, you name it, and it seems as though with the risks that financial institutions are facing, almost everyone has the role of Chief Compliance Officer or Social Governance Director, just given everything that's being heaped upon financial institutions. So, let's first talk about the bounds of the insurance market itself. Ron, when you talk with clients, what are some of the top things that you look at and mention to clients in terms of what the market is today?
Ron Borys (01:56):
So, listen, clearly, the story of 2022 was capacity. We just came off of two years, 2020 and 2021, where there was tons of uncertainty around what the world was going to look like during covid. And obviously in the early time post-Covid, certainly, plenty of folks felt it was a good opportunity to either leave their existing sort of position and partner with some type of startup. What did that do? Right? It put a lot of these incumbents in a position where despite what they think from an underwriting perspective and what a risk perspective they needed to do, what they needed to do to retain their portfolio, right? To put them on their heels, certainly on the defensive. So, it'll be interesting to see how it all plays out. Certainly, plenty of folks have expressed to me their theories. Interestingly enough, and this comes up pretty often, I would say the behaviors influence more than anything are the folks that have been doing this for a while. I haven't necessarily seen the recklessness that people like to describe when it comes to these newer markets. I think they're definitely trying to pick and choose their battles and do it in a smart way. But I don't know, Ryan, what are your thoughts on that?
Ryan Farnsworth (03:01):
Well, I think the dynamics of newer capacity, and there's the B-word again, newer budgets for insurance companies have put the whole market into a blender and it's very difficult to know what you're going to get with any one particular submission or renewal placement in some cases. And I think that the thing that financial institutions can and should be focused on is doing their best to differentiate their risks and their approach at their firm. It partners well with us as we help our clients find a more rewarding way to manage risk. It really does drive differences in the outcome for this market. Right now, there are insurers who have predominantly been in excess capacity in the past, who are now dipping their tone to primary. As you mentioned, there are new markets that are freshly minted with the capacity and budgets to drive premium growth in this year and into next year.
Ryan Farnsworth (03:52):
It's critical for our financial institution's clients to be responsibly aggressive with your insurance renewals. Of course, we all want to save money. We all want to drive the best value for our bottom line, especially when it comes to insurance. And if your firm hasn't had a claim or significant litigation, maybe it's not something you can entirely relate to, but it's so critical as you go through carrier selection and coverage analysis in the midst of what can be a pretty crazy pricing cycle that you stay focused on ensuring that you have that contract certainty within your policy regardless of the coverage, whether it's directors and officers liability, cyber liability, property, and casualty. What drives frustration in the insurance market and has been the insurance companies not being willing to pay when a claim is made. And it's not always entirely on them, but what it is entirely on is the overall placement process and coverage analysis and negotiation to ensure that you have as much contract certainty as possible at the best price.
Ron Borys (04:53):
Yeah, no, listen, you know, I think one of the things that we've continued to observe is that while people are so focused on pricing over the last two years, I think a lot of folks in our industry took their eye a little bit off the ball when it comes to coverage. And I know we've certainly made that a big focal point and priority of our brokers.
Ryan Farnsworth (05:10):
And I think our partnership with our claims and legal team is a big factor in that. And that's probably another takeaway that the financial institution should be thinking about is that it's important to educate yourself in the market of what's going on in terms of litigation and claims and how are actual claims-paying out if you don't have the fortune of having your own claims and your own litigation to evaluate having resources like Steve Shappell and his team to help identify what the latest trends are in terms of case law. And I love the monthly Executive Liability Insights that his team comes out with. It truly identifies what the takeaways are for us and the coverage that we should be negotiating. I think you and I both agree we don't anticipate this market hardening or firming anytime soon.
Ron Borys (05:55):
No, and listen, I think it's a great segue whenever you're talking about coverage and you're talking about claims, you can't help but sort of start focusing on where the regulator's heads at, right? I mean, we have midterm elections coming up in two weeks. We know that regulatory scrutiny, regulatory oversight, regulatory priorities, right, wrong, or indifferent tend to coincide with changes, whether it's in Congress or certainly, down in the White House. You know, we've certainly continued to see a very active regulatory environment, particularly for financial institutions. The big trend I guess we've seen recently is inquiries or subpoenas being issued in connection with the use of media channels whether it's WhatsApp or other means by which employees communicate during the day. Covid was a blessing in some ways, but a curse in many others, right? It taught people how to work remotely and it proved to employers and proved that people can work remotely successfully. But we also learned that there are a lot of ways for our employees to communicate and you know, we need to be mindful of that, right? In many cases, a lot of those communications may be social in nature, but some may be more than that. So, what have you, kind of, been hearing, Ryan, on that front?
Ryan Farnsworth (07:07):
Yeah, I mean, we have seen a downturn in public securities class action filings over the past couple of years. So that's one thing that people have focused on saying, “oh, that must be why the market's softened.” There's no doubt that the regulatory corner if you will, is just as active as ever. I mean, just the other day received one of those emails from a law firm that talks about, you know, the regulatory priorities and they were talking about administrative actions, everything from proxy voting to failure to retain text messages, the same thing you just talked about, service provider fees, the custody rule. There are the marketing rules that are going into effect for a lot of financial institutions. Cyber security rules go down the list and you can see that the SCC and other regulators are extremely active and it's becoming costly for financial institutions to comply with those regulations, with those administrative actions.
Ryan Farnsworth (07:59):
And we don't see that slowing down anytime soon. So, if you think about it from an insurance perspective, it is absolutely time to review your claim and your notice provisions to ensure that your policies as prepared as possible to address that contract certainty element that we just discussed. Which with the definition of claim, how is your policy triggered? Is it going to be triggered if you receive a subpoena about a WhatsApp probe or whatever the case may be? And how would you expect your insurance to respond? And if you do have that broad insurance coverage from early triggers from early, you know, whether it's informal investigations or otherwise, how are you complying with any notice provisions that you may have as you come up upon your renewals? These are claims-made policies and ensuring that you don't have any late notice issues down the road for failing to advise of what may have been a routine letter or routine exam, you need to make sure that your policy speaks to what's actually happening in terms of your activity with the SEC.
Ron Borys (08:58):
Right? It's like, what does Steve say all the time? Early and often? I literally feel like I have him sitting on my shoulder saying early and often, early, and often. And I'll tell you, I've been thrilled with how we've been engaging with our clients when it comes to these types of topics, right? We know that our model tends to be more assertive and proactive than reactive, right? We're always encouraging our brokers and our claims advocates and attorneys to be assertive in reaching out to clients when it comes to following up on status of claims. But we've also told our clients,
Hey, listen, we're part of your team.” Talk us through these things, right? Because we've done such a great job over the years of making these policies relatively broad when it comes to how they might be triggered. And it's just really cool to see that we're able to develop those types of partnerships, right?
I mean, listen, we're certainly looking to be hired to place and effectively negotiate great pricing, great coverage terms, and we certainly want to provide great service. But that relationship that, that evolution into sort of insurance advice, insurance consulting, that's really where meaningful relationships are built long term. And I think as regulators continue to come up with new things that they're focused on that area of coverage for regulatory inquiries, investigations, subpoenas, it's just such an important thing that I think is really going to be highlighted and focused on again as we look into the new year.
Ryan Farnsworth (10:21):
Yeah, absolutely. And it sounds like, you know, you and I have been working together for almost 20 years and we're talking about the same types of things over and over, but if you want to win a football game, you can't turn the ball over, right?
Ron Borys (10:35):
The game hasn't changed that much.
Ryan Farnsworth (10:37):
There are simple basic things that you have to repeat in order to come out victorious when you have a claim. And it's easy to take your eye off the ball, as you said if you're focused on a lot of other things. So, look, the other thing that's really hit the boardroom is cyber risk. And it continues to be an item that, you know, we pay attention to, not only from an insurance perspective but just world and current events with all the activity in Russia and Ukraine really over this last year. Our focus is seemingly never-ending when it comes to the types of cyber risks that companies need to be thinking about, both in the boardroom and elsewhere. I mean everything from MFA to network security monitoring, backups, EDR products, vulnerability management, network segmentation. That's just a few of the things that our cyber risk consulting team have educated us on and things that underwriters are focused on from a cyber risk perspective and that our clients need to think about from a cyber insurance perspective. So, where do we even start with cyber risk, Ron, to put this in a three to five-minute segment?
Ron Borys (11:44):
I mean listen, obviously there's a lot of terrible things going on in the world right now, and in some cases in our own country, you know, in the last few years, cyber your network, right? People have developed a weapon against businesses, and you know, not even private businesses, it could be public entity sector type businesses where they're able to infiltrate a network, they're able to, for lack of a better term, right, hold that network hostage or shut it down or threaten to do something damaging to that network in exchange for something in return. And it could be cash, it could be cryptocurrency, it could be public humiliation of that organization. Because everybody knows even the most sophisticated companies, when you're involved in that type of situation, it's not positive, right? You have to notify people that may have been affected. You have to potentially follow certain state regulatory or transparency or disclosure requirements.
Ron Borys (12:36):
And certainly, the folks that are responsible for working with clients on the consulting side of this, that service has become almost hard to find, right? I mean these folks are working 24/7, weekends, holidays. And I'm really excited to share that we're going in that direction as well. Understanding, again, Ryan, clients at Alliant are looking for the more rewarding way to manage risk. That's not necessarily just placing an insurance policy, it's being a risk advisor and a risk consultant, but is really in the area of cyber trying to focus just as much on the cyber consulting piece as we are focused on the cyber brokerage piece, and we've made investments year to date in guys like Scott Takaoka and Adam Rauf. You know, I think that area of preparedness in the insurance application process, but also when it comes to the potential threat or responding to that threat action, I just think that's something Alliant is going to be even better at in the weeks and months to come.
Ryan Farnsworth (13:35):
Yeah, look, the application process now for any insurance really is nothing more than a risk evaluation of where you stand. And when it comes to cyber risk, it's always evolving. We always need to be improving our security, our technical ability to protect our data, and to hold ourselves accountable. I mean, we get requests from clients all the time regarding reports that our firm has with respect to our own cyber security. And so, what we as a firm are focused on it, and we're going to continue to highlight that with underwriters across all areas of risk from D&O to the actual cyber policies themselves, to Fidelity bond coverage for social engineering and other related fraud risks. And I think one of the things that we haven't touched upon yet that's, that's critical across all lines of coverage is the ability to quantify risk and help use analytics to make decisions and to go through that decision-making process, not just, you know, with what feels good in terms of limits or coverage or pricing, but what can actually be identified to the quantification of risk from certain modeling exercises to understand what the best way is to transfer that risk to an insurance policy.
Ryan Farnsworth (14:47):
And you said it, our specialty analytics group is heavily invested in cyber risk quantification in D&O and E&O risk quantification and modeling so that clients can compare the various risks with what's the best insurance trade. And it's not just looking at benchmarking anymore, it's now taking that analysis to the next level.
Ron Borys (15:06):
Yeah. Listen, as an industry, I think it goes without saying, one of the things that the cyber insurance carriers have done really well over the last couple of years is annoying and confusing senior folks. We continue to take these calls from folks that are just incredibly frustrated with questions like, do these underwriters, do they understand my business? Why are they asking me these questions? Half of these questions don't even apply. And I think that's where making the cyber renewal less about the exchange of information and more about embedding ourselves into the framework of our clients, getting out in front of helping them understand what the important points are to the underwriters managing the underwriter's expectations and advance of these meetings. And don't get me wrong, it takes a while, right? We're starting our cyber renewals at a minimum of 90 days out, in some of the large, complicated times, we're doing it 120 to 150 days out. Why? Because we need that time to get Adam and to get Scott and engage with these clients to help them be less frustrated in the process and develop a better understanding as to what these underwriters are looking for. And by responding in a certain way, how is that going to drive the most successful outcome at renewal?
Ryan Farnsworth (16:19):
Yeah, at this point it doesn't stop. It seems like, you know, as soon as you finish the placement of a policy, it's how can we now better prepare ourselves for the next renewal process, right?
Ron Borys (16:27):
So, without a doubt realize it's been probably longer than we would've liked to record and get back in the swing of things. You know, we obviously were really busy sort of doing a bunch of different things. For those who have listened here and are interested in hearing more about Alliant and the work that we're doing in the financial institution's industry sector, please feel free to visit our website at www.alliant.com. As I say, Ryan, you know, you and I agree, we're thrilled to have and, and really lucky to have the team of folks that we have. We're, we're really excited about the people that we've been talking to are interested in joining this firm and, you know, really excited about what the future brings through the rest of this year and certainly looking to 2023.
Thanks for your message.
We’ll be in touch shortly.
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