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Financial R&R: Financial Institutions 2023 Insurance Recap & 2024 Predictions

By Alliant Specialty

Ron Borys, Ryan Farnsworth & Steve Shappell look back at the driving market forces and claims trends for financial institutions in 2023. They also reveal their expected trends and challenges for 2024, including regulatory risks, contract certainty and the importance of effective carrier and broker partnerships.

Intro (00:01):
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. I'm Ron Borys. I'm here with Ryan Farnsworth, and this is the Financial R&R. We're pleased to have a repeat guest with us today, Steve Shappell. We haven't done this market update, - trends, priorities - podcast in a while, so we thought it'd be a great opportunity to inform all of our listeners and anyone out there interested in hearing our perspectives. Looking back over the year, what drove the market, what were priorities, types of claims that we saw, certainly talk a lot about the market. It's an interesting term that we use in our industry to discuss or describe how underwriters are pricing risk and reacting to new business opportunities. So, we're going to spend the next 10 minutes or so covering that and then ask Steve to provide some insight into what he's seeing from a legal and claims perspective.

Ryan Farnsworth (01:02):
That's exactly right, Ron. And as you think about all the activity in the market, the activity on the claims front has been just as busy, it seems as though every one of our clients has an active renewal process because we have competitive quotes coming in from all kinds of options, but we also have claims activity with those very same clients. So Steve, welcome. It's great to have you here and we look forward to discussing more about the dynamics between the market and claims activity together today. How would you sum up 2023 when it comes to the claims activity that we've seen, particularly in the financial institution space?

Steve Shappell (01:42):
I think you're spot on, Ryan. Where the SEC, which really is such an integral part of our claim exposures and volume, boasts a record year, that's pretty indicative of the kind of year we are having. You and I look at the enforcement results for 2023, the SEC claims to have record recoveries, record frequency volume of enforcement actions; I count 231 enforcement actions, 270 standalone APs. It's been an interesting year from the SEC, and I think there's a lot of emphasis and the priorities we've seen come out from the SEC, there are priorities that highlight their results from 2023 and promise continued strenuous enforcement.

Ron Borys (02:32):
And that was expected. We all knew that with the change in administration, there were some different goals and initiatives and priorities established. We knew it was a well-funded SEC, we knew that they weren't looking to just passively go across and about their day, that they were determined to make an impact. And when you look at some of the events that transpired over the course of 2023, and even looking back at 2022, you had crypto, certainly a big vulnerable market, although some crypto followers will say that the market's turned, and I think Bitcoin is now back in the low to mid-thirties. So, certainly that has recovered a little bit. But, regulatory risk is real. And I think sometimes because it's not as public in many cases until the end of the matter or in some cases, not at all as civil litigation is, Steve, I think sometimes people really undervalue and underestimate the impact that regulatory investigations have on the insurance industry, especially considering the scope of covers that's currently available.

Steve Shappell (03:33):
Completely agree, Ron. I think if I did a multiple choice in how many enforcement actions you think the SEC filed, and I put an answer up there of 784, no one would click on that as an answer. The frequency is, to your point, real, it was promised. And the SEC's delivered and has promised, robust continuation of that.

Ryan Farnsworth (03:55):
And if you ask our public company clients, if you ask our private fund clients what types of trends and themes they're seeing in those examinations, or in some cases enforcement actions, you're going to receive different types of answers all across the board. Between fees and expenses, conflicts of interests, the compliance rule, marketing rule, use of crypto; you talked about cryptocurrency risk, and now the SEC is starting to apply the custody rule towards those types of examinations. And in some cases, enforcement actions for how the custody rule plays into effect for cryptocurrency. It's almost as if SEC registrants don't even know where to start. So, as we think about the end of 2023 and looking back, part of any companies or any boards’ New Year's resolution should be thinking about 2024. How do we put some sort of procedures or process in place to put together a mock audit or to go through a consulting process with an external firm, whether it's a law firm or another consulting firm, to go through that process and start asking yourself the tough questions, perhaps even tougher than how the SEC might ask them, so that you can be ready and you can demonstrate that resilience, that risk management resilience with your shareholders, with your investors, and then eventually with the SEC when they show up.

Ron Borys (05:18):
Maybe it'd be a good opportunity to just talk a little bit about what we saw in the market past nine, 10 months of the year. While we talk about regulatory risk, while we talk about civil litigation, we talk about cyber breaches, there's a variety of things that can result in market movement. I think the biggest factor continues to be the fighting for market share. People see good opportunities out there. We had some underwriters in a meeting with our colleagues last week. They'll be the first ones to say that if they see a good deal come across their desk, even if it's already competitively priced, they're going to try to go at it even more aggressively to win that business based on kind of the market premium dynamic. When we look at customers and when we advise clients on how to make those types of decisions, it's challenging. Because these are good markets, strong financial strength ratings in many cases, people who came from large, sophisticated insurance companies who've been writing this type of risk for a really long time. So, Ryan, how have you seen that play out from your perspective?

Ryan Farnsworth (06:16):
That's exactly what we're seeing in terms of the underwriting talent that's out there in the market. It's not just like we have underwriters who have never done this before, looking to put business on their books. I think we all as experienced professionals within the management professional liability space, especially for financial institutions, understand that there is inherent risk associated with that market. There will be claims, there will be losses, but I strongly feel that underwriters have gotten to a point where they know how to underwrite a book and they recognize that losses will be paid. Some insurers are willing to acknowledge that losses will be paid more than others. That's where Steve's team comes into play, so helpful as we look to place business because we want to partner our clients with the insurers who are going to make that process as painless as possible and at least acknowledge the contract certainty within the policies.

But having the experience of going through a few financial services market cycles over the past 20 years, underwriters by and large understand that they are going to pay claims, but they've come to a point where they strongly feel like there are certain risk characteristics of a company or of a board or of a senior management team that will help mitigate the losses that they are inevitably going to pay eventually through their portfolio. And that's part of our job as brokers and as we work with our clients to help them find that more rewarding way to manage risk. It really is a process where as we go through the underwriting process every year, more effort should be put into preparing for the underwriting meetings and the market submission than we've ever done it in our careers. Because underwriters will recognize the positive risk management characteristics that are being conducted by our clients and reward them for that as part of the competitive marketplace that we see ourselves in.

Steve Shappell (08:16):
The one point you made, Ryan, is something we keep our finger on the pulse of a lot. And the three of us talk about this a lot, the willingness to pay versus the ability to pay. There's some paper out there that's really solid paper, really solid financials, but in the face of a challenging claim, we've been talking about the SEC and SEC claim. And these claims are challenging, and they allege very serious conduct, almost by definition often. We're spending more and more time on this issue of drilling down on a carrier's performance and their willingness to pay and their willingness to work with our clients as opposed to getting adversarial with our clients, partnering with our clients and collaborating with our clients for an outcome, not treating our clients like they're trying to steal just because they got an SEC claim or a shareholder class action claim or some other E&O type of litigation. So, it's something that we're spending more and more time on, and I think 2024 will be a year that will push this concept even more as we see more and more carriers struggle and more and more carriers using outside counsel at an excessive rate, which creates an adversarial relationship.

Ron Borys (09:25):
And I would say even more so than just the adversarial relationship, we have to be mindful and careful as an industry of reputational risk around the product and the ability to use the product. I've heard a lot of comments made by clients over the last month or two of, “yeah, we know they'll pay, but by the time they pay and after all the pain associated with that, is it really worth it?” And I think we need to continue to challenge ourselves. I think we need to continue to get the right people in the room on the carrier side, particularly when you have an audience on the client side of sophisticated C-suite level executives. When you sit in that room and you talk to each other and you talk about your firm and all the great value it brings, at the end of the day, what our clients really want is someone who's going to make the process easier for them.

We'll be the first ones to say that insurance claims recovery work is not easy. It's not for the weak hearted. You better be ready to roll up your sleeves. And I think we do a really good job of trying to emphasize the communication, cooperation and consent. If you stick to those three items, you can make the road ahead a little bit easier for yourself, but that doesn't mean it's not going to come with challenges like allocation issues and other sort of interpretations of the law and language. So, one of the things that I continue to feel the strongest about and the most proud of is that we're very particular when it comes to the details. And we're not perfect. Nobody is. We're doing great work in some cases in a very short period of time because everything is always very time sensitive.

I think making sure that there continues to be that appropriate level of communication both during the renewal process, during the renewal cycle, and then periodically post cycle to make sure that the parties involved and who are engaged in the transaction and the contract itself are doing the work. Doing the work to not just say there's a relationship there but demonstrating there's a relationship there and a desire to want to work together through actions and outcomes and not just saying it for the sake of saying it, because I hear that used all the time. We're at these conferences, we're at these events, we're a relationship business, we appreciate the relationship, we value the relationship. We say all the right things, and then unfortunately it gets to a situation where we're sitting across the table trying to resolve a complicated matter.

The only way we're going to keep up with the demand that underwriters have right now is to continue to bring new customers into the market. We need to get new premium dollars into the market if everybody, both from the brokerage side and the underwriting side are competing for the same dollars here in and here out, we're never going to grow and get to a place where this business is going to have that growth that we all want and need there to be. So, let's make sure that to those listening here and to those that are doing what we do, and there are a lot of people on entry that do it, let's make sure that we continue to challenge ourselves to earn that respect and that confidence from our customers because that's probably one of my big concerns is that we're leading into an area where clients are starting to get to a place where they just don't have the confidence in the product that they're purchasing.

Steve Shappell (12:34):
Agreed. I walk around with a flag that says, “These policies must perform.” And it's just so critical.

Ryan Farnsworth (12:43):
And the other side of that is, if the clients don't have that expectation, they're going to treat us and the policy as a commodity, and that's not what we want. Because that's not what having a D&O and professional liability policy is all about. It truly provides protection for the balance sheet, for the individuals when they need it most. And you better believe that we, together with Steve and his team, are keeping track of those markets that are not behaving well, especially at this point in time. We're keeping track of the markets that are hiring outside counsel almost immediately once we notify an insurer of a claim. And because these trends are not going away with the regulatory risk that we have with the macroeconomic risk that we've seen, not just in the banking sector that we saw earlier in 2023, but now it's spreading to other areas of the industry. And it's spreading into the regulatory risk component with the SEC. And that all said, Ron, do you expect the market to be any less competitive six months from now?

Ron Borys (13:46):
No, not at all. I think the market is, if anything, if we don't figure out a way to get some new buyers and some new opportunity into the marketplace, I think it's going to continue to get worse. I think one of the scary trends that I'm starting to see, there's no surprise we're looking at a year where inflation, It appears to maybe be under control, but you're starting to see companies announcing layoffs in some cases, competitors of ours, because there's that pressure that people have to drive certain outcomes for investors and for equity holders and shareholders. People in many ways are fighting for their job. And if it means going out and making a spontaneous decision when it comes to pricing risk, I think it's really important that the people on the receiving end of that recognize that. I remember that because it's going to be their turn next to compete for that business.

And again, it goes back to the credibility of the client. At what point do clients start to say to themselves, how do the underwriters price my risk? We're giving them tons of information in the application process. We're spending in some cases, hours of our time meeting with them. We're certainly trying to answer all the questions and be as transparent because we understand that underwriting financial lines products is very much about people as it is about the information that's provided. But at the end of the day, if it's strictly a supply and demand market right now, and people are going to go out there and make these decisions regardless of what their underwriting says or regardless of what their raters say, again we're going to get to a place where the buyers are going to really be concerned about credibility. They're going to think anybody on any given day will quote their price or their risk for 10, 15, 20 or more percent less than what it was. And, I'm just not sure that's sustainable in the market that we're in long term.

Ryan Farnsworth (15:42):
We talk about the market being bad, but by and large, that's good for clients. It's good because right now you may be going through a scenario where your client's stock is down 80% year over year, but guess what? They're getting a 20% decrease on their D&O insurance renewal; it doesn't really make sense. And I think if we're thinking about, again, back to the New Year's resolution for 2024, as you're approaching your 2024 insurance renewal, be ready to have the conversation for those of our friends in the industry. Understand what your client's expectations are, and if you're on the client side, understand what your priorities are as a business and understand how you can best take advantage of this market while making sure you have long-term stability with your insurance carriers that the policies can perform. The thing that's easy to do in a soft market is to sell price.

The more challenging thing for brokers to do, but the right thing for brokers to do is to increase the contract certainty within that scope of coverage that you go through and identify priorities. So, when you sit down with your broker in 2024, it should not just be, how much money am I going to save? It should be how can we best approach this renewal process to increase our ability to gain greater contract certainty into the policy, gain a stronger understanding of our insurance company partners, and do it at the most appropriate price for our risk. And it should not just be about price and decisions should not just be made based upon the lowest premium for any given attachment point, but all those things. And Ron, please feel free to add any others that you think should go along with those priority lists, but the renewal strategy discussion before you start the renewal process has never been more important than it is right now.

Ron Borys (17:33):
I couldn't agree more. As we like to say, we are price-conscious brokers, but we are coverage-driven. Really cheap insurance becomes really expensive when it doesn't perform the way you expect it to perform. And in my own personal life, the way I buy things is I generally take the lowest and the highest and I rule them out, and I usually try to find something in the middle. My wife is a huge value shopper, so she doesn't like that. She always likes to get the best bargain. And, pretty cliche as we're right after the holidays or right after Thanksgiving, everybody's going out and shopping and everybody's looking for a deal. Listen, there are deals to be had. We are driving huge rate increases for our clients. But there are some clients who are not seeing those same rate decreases because they didn't see the same rate increases during the hard market.

So again, I think every situation is different. There's a lot of focus right now on pricing, pricing indexes. Pricing is really important, don't get me wrong. Nobody likes paying their insurance premiums, but nobody likes it when they find themselves in that unthinkable situation where their car gets stolen out of their driveway and they need to call on an insurance claim to replace their car or their home burns down and they have to call on an insurance claim to get somebody to replace all their valuables and things. So, again when you think about insurance, think about what it's there to do. It's there to respond in a time of dire need. Those situations hopefully are far and few between, but when they do arise, you want to know and you want to have the confidence that A, you have a product that is going to stand up and fulfill its obligations, and B, that you have a team like we have at Alliant, making sure that people are behaving and adhering to the obligations that they have under that contract.

Ryan Farnsworth (19:25):
Steve, from a legal and claims perspective, as we try to wrap this up here, as you think about priorities that clients should have from a legal and claims standpoint, as they think about contract certainty and the partnership, the counterparty risk that they're trying to mitigate with their insurance company, what are some priorities that our clients should be thinking about going into 2024 from your perspective?

Steve Shappell (19:43):
Echoing what we've said, these policies are not going to accidentally perform. These carriers are under a lot of pressure with rate decreases, frequency of claims up, severity up and rate down. There's going to be a lot of friction here. And so getting this right, these policies must perform and they're only going to perform if we put the work in and it takes a lot of work, getting the terms and conditions correct, and then picking the correct partners, which I talked about previously. This market is going to distinguish some carriers and some carriers aren't going to like how they get distinguished, and others are going to rise to the top in their performance. It's the dumbest thing in the world to pay a $5 million claim, and everybody is so unhappy and annoyed with the process and the way it went and the delay tactics to lose that business. It's moronic, we're going to see more and more in that. Because not every firm will behave the same. Every carrier behaves slightly different, has a different approach, has a different philosophy, slightly. So long-winded answer a lot of work and preparation and discussion to have success in 2024 and beyond.

Ron Borys (20:53):
Well, good. I think that's probably a great place to wrap up this episode. As we've all said, this industry is interesting. It's challenging at times, but the work that we do is really important. And I know three of us as well as many of our colleagues, both in financial institutions and legal and claims, have put a lot of work in this year trying to drive good outcomes for our clients, whether it's on renewals or on claims resolutions. So, I encourage anyone here to reach out to us if you're having any questions, concerns, problems with renewals and/or claims. We have some of the best in the business on our team here and certainly would love any opportunity to help and provide value. If anybody else is looking for information on Alliant, you can visit our website at With that, we'll wrap things up and hopefully we'll get a chance to talk again before the end of the year. If not, wishing you all the best this holiday season. We’ll look forward to talking to you all again real soon. Thanks so much.


Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.