Financial R&R: Financial Institutions Third Quarter Market Update

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):
Well, welcome everyone. This is Ron Borys and I'm here today with Ryan Farnsworth and Steve Chappelle. And it's hard to believe that we're almost through three full quarters of 2021 and thought it'd be a great opportunity to just provide folks with an update as to what we've seen sort of in the last 90 days. And then also talk a little bit about fourth-quarter expectations. Maybe even start talking a little bit about 2022, and really try to give some people some guidance and direction with regards to what we're seeing broadly in the marketplace from a financial institution's perspective and certainly want to hit on claims and legal. You know we certainly realized that's an area of focus for folks. So, Ryan, why, don't we start on the brokerage side, lots of things going on when you think that the third quarter started on July 1st, and we're now coming up at the end of the quarter, we've certainly seen some ongoing challenges, particularly in certain segments of the FI portfolio but maybe you can talk a little bit about what we're seeing from a rate environment perspective.

Ryan Farnsworth (01:12):
Sure. And the market is truly that right now. It’s a market after coming off of a very turbulent and difficult 2020, where many of our clients and policyholders did not face options for their renewals this year, the market has opened up a bit. There's more capacity available on an excess, which in turn allows carriers to take more of an open approach to primary terms and provide alternatives to incumbents that are seeking perhaps more of a rate adjustment than looking at the actual risk exposures that are there. But this is normal behavior in a harder market environment. We have seen more of a soft approach over the past few months as that capacity has come in, wanted to be more competitive. The good news is we're not seeing significant changes in the terms and conditions and the coverage of the policy, but we are seeing a greater focus on the retentions that are applicable.

The self-insured retentions that apply prior to the policy kicking in for D&O for E&O for fiduciary liability for employment practices, liability, cyber liability, you name it. The coverages are being main in terms of breadth within our portfolio, but it's a true focus on the underwriters to ensure that it's priced effectively. And I think we've seen that probably a positive way that the market has seen that type of development because it signifies that the breadth and the scope of the policies that we've been able to expand over time. Over the last few years it has been brought enough to maintain coverage for defense costs and other costs that are now breaching the retention, but carriers are trying to adjust that as necessary and its traditional market behavior. I think the best thing that our clients can do right now and where we find this success in managing the market is starting early, not just starting early from a process perspective and talking about our strategies for the upcoming renewal process, but also returning the information that underwriters are requiring for their underwriting and ensuring that the meetings that we're having with those underwriters are far in advance at least 45 to 60 days in advance of the actual expiration date of the policies.

Because there's, you know, as we all know in this world right now, whether we're underwriting claims, brokerage, we're all stretched very thin. And the more time that we have to truly focus on the risks associated with a particular placement, the more success that we're having in finding, the optimal result in the market.

Ron Borys (3:40):
Yeah, listen, I agree wholeheartedly, right? I mean, at the end of the day, we've seen a tremendous amount of success this year in the form of growth. We continue to add staff, feels like almost by the month, right? Because we realize that not only is our business growing through the acquisition of new clients, but these deals are more complicated. They take a lot more time, but it's certainly it's a supply-and-demand market. And the reality of it is in order to achieve an optimal outcome and an optimal outcome may be an increase in premium, but obviously less than what the broader market is seeing, you really have to get out in front of this stuff.

You really have to exhaust the marketplace. You have to keep under right interest. You have to just make sure that you're, you're following through in the process. And, you know, I think that that certainly carries over into the claims world, Steve. We've certainly continued to see our fair share of volume and the claims segment, claims, particularly securities class action litigation have historically been a driver in sort of underwriter appetite relative to public company, D&O, but certainly, we've had a lot of concerns regarding SPACs. So, maybe you can just talk a little bit about what you and your team are seeing from a macro claims and legal perspective.

Steve Shappell (4:50):
Sure. Ron, you know, one of the things that has been very interesting this year, and I'll say truly the, probably the only silver lining is the frequency of shareholder action litigation, this year is down substantially. On my last look, it looks like we were at a tick over 150 shareholder class action suits year to date which will put us probably around 200ish for the year, which would be almost an eight, nine-year low. So, that's the good news. The challenge, more broadly is we're seeing a lot of claims. The marketplace in cyber, for example, has exploded. We are seeing volumes and volumes of cyber claims come in. It's created almost a crisis of resources, particularly within insurance companies, right? Insurance companies are, I'll say doing a great job, but one of the things that we're seeing as a result of this incredible spike of cyber-related claims is the ability of insurers to react within hours, which is what they used to be able to do on some of these ransomware and cyber tax rate with retaining coaches and moving rapidly.

We're talking days now. And sometimes weeks it's become a crisis of resources. It's an area that we're going to have to, as an industry, particularly insurers make massive investments into talent and start building our own. There are only so many cyber experts. I know we as a firm have spent a great deal of time, energy, and money on developing our cyber expertise. And I'm pretty proud of what we've done. It's been kind of an impressive offering that we've been able to deliver to our clients.

Ron Borys (6:29):
Yeah, listen, I think we could change the acronym from RFP to RFF requests for Finz, right? David, it's hard to believe he's coming up on his one-year anniversary. You're coming up on your one-year anniversary. It feels like we've been working back together for a really long time. But think about the timing of that, right?

Steve Shappell (06:46):
Having a guy like David, come on board to help out with these cyber things. It's just been fantastic. Yeah. David Finz has been a godsend and he's really delivered. Right? So, one of the things I'd like to highlight and remind people that I started doing here at Alliant is a monthly newsletter. The volume of claims, the volume of coverage litigation, and the volume of legal and claims developments is pretty astronomical, right? It's something that we track rather religiously all day, every day. And I say, we right it's a team of people, including people like David Finz, people like Matia Marks, another recent hire who's come on as innovation and wording expertise. And this newsletter is pretty impressive, each and every month we're tracking the securities litigation, SEC involvement, financial institution claims and legal developments. So, it’s something I would encourage everybody on this call to find and review.

You know, just the coverage litigation alone that we're tracking, which is truly the tip of the iceberg. Right? I spend a lot of time weeding out coverage disputes to write about because there are so many, so it is the tip of the iceberg, but it gives a real flavor for the challenges we're up against and why we're making such massive investments in people like David Finz, Matia Marks, Abby Dar, is because we got to get this right, because these policies, as evidenced by the coverage litigation are being stress tested all the time. And it's becoming more and more of a factor within the cyber world as there are more and more claims. And the claims are larger. These policies are being stress tested. And it's something that we want to keep our finger on the pulse of, and that newsletter will help others keep a finger on their pulse.

Ron Borys (08:23):
Right. We know the business has been cyclical, but the one thing that has been fairly consistent over the last 15 to 20 years is financial institutions from a regulatory and claims perspective, continue to be a target.

Steve Shappell (8:33):
Yeah. The last comment I'm going to make is SPACs, right? We have to talk about SPACs. It remains a hot topic. We have Congress all over this. We have private litigation attempting to, in my mind, do the SEC’s job and try to get a declaratory judgment that the 40-Act applies to SPACs and certain types of SPACs. So, it remains a very fast-paced environment. And so again, we've got our finger on the pulse of this. We have what I call the SPAC attack, and we have a group of people within Alliant that are dedicated to following these trends, these developments, and staying ahead of it from both policy placement and terms and conditions.

Ryan Farnsworth (09:11):
One of the huge benefits of being one of the leaders in this space over the last 12 to 18 months is just the data that we've been able to accumulate, whether it limits retention pricing. And certainly, probably the most important one, which is trends and sort of ideas and sort of tracking about the claims that are starting to impact this base. So that's great, Steven, and as I've said before we're super fortunate to have you and a team of really talented folks partnering with our clients to help solve these issues. Ryan I'll pivot back to you, right? I mean, we're just coming off of a nice recognition last week by the folks at HFM being recognized their best insurance broker. We certainly look at the brokerage side of the business and we can see trends in certain segments. Maybe we can kind of just go through those quickly, right? Private equity continues to be somewhat of a challenge and anything tied to private equity is the market is challenged there, but, you know, maybe we can go through some of the industry classes at a high level, not drill down too deep and just give people sort of a, an idea of what we're seeing across industry classes.

And I think you generally, we're going to categorize private equity within asset management, but I think as you indicated that insurance markets are viewing it as a different beast, just given the history of claims activity, both in terms of the frequency and severity compared to other aspects of the asset management business, private equity, as I alluded to earlier, those private equity firms continue to see pressure on self-insured retentions and pricing and carriers trying to manage the limits that are exposed to the private equity universe, whether it's through portfolio company insurance or through the traditional private equity GPL product outside of that asset management continues to be one of the more favorable aspects of the insurance marketplace for financial institutions.

You know, everything from mutual funds to traditional investment advisors, to hedge funds. We see on the regular right now, many of those programs renewing flat. Some of them even at a decrease, if there was a significant adjustment in 2020, that was unwarranted or at worst single digit percentage increases outside of that, we start to see banks and insurance companies continue to see pressure from underwriters. The results in those industries tend to be a little higher than asset management. But again, if we're able to work with our clients on adjustments to perhaps necessary retentions adjustments or management of limits through marketing exercises, we can try to mitigate the cost associated with that and try to help understand. So, I want to take a little, actually a little bit of a segue on your question, Ron, because one thing that that's actually been so critical for our clients, whether they be insurance companies, banks, asset managers, hedge funds has been the risk modeling resources that are specialty analytics group provides to our clients right now.

It seems as though everyone wants to talk about data and analytics in the industry, but sometimes that just means glorified benchmarking, right? And one thing that we are doing different at Alliant to help our clients find a more rewarding way to manage risk is to use our risk modeling, resources, to help them make informed and objective decisions through stochastic tools and resources. We had Kevin Habash from our specialty analytics group on this Financial R&R podcast earlier this year. And Kevin spoke about it in much more detail and much more articulate than I can speak about it, but our clients, and especially in the financial institutions world, they're used to making purchasing decisions whether or investment decisions in capital efficiency frameworks. Right? And so, what our tools do from an analytics perspective is it helps our clients, whether they're a bank, whether they're asset manager or even a private equity firm, help them understand what the transfer of risk is to the marketplace by evaluating not just the reach tensions and the limit structure and the pricing of the insurance, but also evaluates the risk appetite and the tolerance levels that our clients have.

And we just went through a situation where one of our hedge fund clients was looking at a potential change in the retention. We went through the analytical process and resource with them with a specialty analytics group. And at the end of the day, the optimal outcome was actually to take a higher retention to buy additional limit. As that result actually fell more in line with how they were viewing the transfer of insurance and risk to the marketplace. And the client felt very empowered by making that decision, because this was the best decision for them. It wasn't trying to play games with the marketplace and understand what the best insurance option was from the market was, what's the best solution for us and our firms. And I think that's what clients want to be focused on is how do we take this dislocation in the market and use it to our benefit.

Ron Borys (13:46):
All great points. And when I look at how our business has evolved, particularly our financial institutions team over the last three to five years, having resources on the analytic side is huge. Having folks and lawyers in the legal and claims group who can give our clients that sort of that advice. And that perspective is huge. The reality of it is as we sort of go into the fourth quarter, we've started our budgeting season. The underwriters have started their budgeting season. We'll probably know sooner rather than later what to expect in 2022. And we'll certainly have a year-end discussion just to try to give some people, some insight into that. But at the end of the day, that the takeaway here is differentiation is important, but understand that many of these carriers are managing to a rate plan. If they don't get the rate that is being sort of pushed upon them by their management on your deal, then they got to make up forth somewhere else.

And a lot of their ability to get that rate is contingent upon our ability to present clients' risks into the marketplace and get them options. Options are important, whether it's higher retention options, alternative structure options, alternative carrier options. And, you know, that is something that we are really committed to, to doing, you know, in the near and long term. And like I said, I think we'll continue to, to evolve. We'll continue to invest for the benefit of our clients. And, you know, I think we'll finish the year on a high note and certainly have a lot of great things to about going into 2022. So, listen, I appreciate you both for joining me today and certainly I'm thrilled to continue to have you guys on my team. That's for sure, but that's it for now. And thanks for tuning in. If you have any questions on Alliant, you can visit our website at www.alliant.com, but for now, we'll talk to you again soon and stay well and good luck with the renewals. Thanks so much.