Financial R&R: First Quarter Financial Insurance Market Update

Intro (00:00):
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 lead the financial institution's industry vertical at Alliant. Joining me today are Ryan Farnsworth and Steve Chappelle, you know, it's hard to believe that we're coming out of the first quarter of 2021. It seems like you blink and time is flying and, you know, thought it would be a good opportunity here to just cover some of the things that that we've observed, throughout the first three months of the year, focusing on just market conditions for financial institutions and, and some of the things that we're seeing there, um, continuing to talk about SPACs and, and how the SPAC palooza, SPAC attack, the SPAC whatever you want to call it continues to sort of be a hot button and sort of headline type issue within the insurance community. And then sort of talk about the recently released SEC exam initiatives and priorities for 2021. So, Ryan, why don't you kick us off? Where do we want to start?

Ryan Farnsworth (01:09):
No, I think you spoke about it right where we're coming out of the first quarter now, and we've got 2020, well in our rearview, thankfully, right? And now we're focused on 2021 and what's ahead. And, what we're seeing in the market for all financial institutions is an appetite for risk-based underwriting and looking at risks for each and every submission and account on a risk-specific basis. And at least here at Alliant, as we try to help our clients find a more rewarding way to manage that risk, we are focused on ensuring that the underwriters are being held accountable for rate increases or coverage amendments that they're seeking to put on a lot of concerning risks that they have out there. The underwriter scrutiny has never been greater, but there are pockets of the financial institution's marketplace that are softer than others and others that require a little bit more underwriting, a little bit more focus, and maybe a little bit more disclosure from clients. And I think that the broader discussion that we have today revolves around disclosure and uncertainty about what's ahead, right? SPAC has become a four-letter word in the marketplace right now as we think about how our clients are trying to manage their risk, and help underwriters understand their risk profile, communicating that clearly to them. And as we'll talk about communicating that risk clearly to the SEC and other regulators is something that we're going to be focused on as we go throughout 2021.

Ron Borys (02:36):
We saw a challenging insurance market overall in 2020. You know, we started to see a lot of the same trends going into the first quarter of the new year but I will say we did secure a decrease this quarter in premium. There is a client that actually got a decrease, you know, we're challenging the broader market conditions. We are not accepting things as status quo. We're doing what our clients expect us to do, which is going out and partnering with the right insurers and getting them the best possible outcome at a fair price. I think that's the key to just managing the challenging environment. We saw some news earlier this week about some more M&A activity occurring in the insurance carrier space, which could certainly provide another sort of element of change relative to the market environment. Because we know, as certain larger insurance carriers potentially look to acquire mid-size or smaller carriers, just taking less capacity out of the marketplace could potentially result in more challenging times from just a supply and demand perspective. But I think we just continue to be added. I mean I see our team working harder than ever just out there working with clients, setting up meetings, trying to tell the story the right way, and just really working our relationships towards the best possible outcome.

Ryan Farnsworth (03:52):
I think the regulators are working as hard as ever too, right? The Financial Stability Oversight Council met recently for the first time since the Biden administration took over and identified a lot of priorities that our clients are going to need to understand going forward. They were focused on the importance of sharing data, identifying risks, and strengthening the financial sector, coming off of the heels of the GameStop situation, and the Archegos Capital Management issues this week, there's intense scrutiny towards Wall Street and towards financial institutions being held accountable, but also being able to communicate those risks clearly is going to be crucial.

Steve Shappell (04:30):
Yeah. I mean, it's a great point, Ryan. The SEC, for example, has come out with its enforcement, you know, focuses for 2021. And then on the heels of that, to your point last week, we've got Archegos and the announcement of the SEC looking deeper into SPACs and requesting some details on fees and volumes and regulatory compliance consistent with some of the guidance they had given a month or so ago. So, the SEC is going to create, I think, some significant regulatory hurdles here going forward, you know, and the cry from Archegos in the marketplace was this was a regulatory failure, right? With more regulation, and more oversight these kinds of events could be prevented or mitigated, right? It remains to be true. These events happen, it's not a regulatory oversight issue, but that's the cry from, you know, the political response to the high-profile losses on Wall Street.

Ryan Farnsworth (05:35):
And that impacts all D&O insurance policyholders too. Right. A case could be made the more disclosure was apparent in Argo's investments, you know, perhaps the companies they were invested in wouldn't have made the decisions that they made with respect to their stocks and other plans if those disclosures were known. And so, it can benefit everyone. I think the one thing that our clients are asking us and asking themselves is what can they do from a policy perspective to prepare themselves for additional SEC scrutiny or additional disclosures. And I think we can talk about that right now is we think as the terms and conditions have expanded since the financial crisis, and since the last push for a culture of compliance within financial institutions, coming out of, 2010, 2011, you know, we saw the coverage expand both for investigations as well as from the broader definition of claim. And it's very important, even critical for our clients to understand those triggers are within their policy and what they want them to be. And Steve, I'd love to get your comments on this too, about how the notice provisions should be, tied into those considerations.

Steve Shappell (06:51):
The SEC kind of enforcement priorities and the belief that there will be the greater SEC involvement presents some really interesting challenges. One of the issues despite the kind of the broadening of the terms and conditions and the policies over the past few years, one of the significant issues that continues to be in the marketplace is the friction between the massive cost that issuers can sometimes incur in the face of SEC informal and formal regulatory investigations, which are occurring simultaneously to this some 400 shareholder class action suits that we see a year and there's still a disconnect there. And just this week there was a decision issued out of the Southern District in New York, addressing this very issue involving Hertz where the opinion articulates some 27 million in fees and costs that were the subject of this dispute as to whether the SEC formal investigation constituted a quote securities claim as defined by the policy.

And the court concluded that the entity did not enjoy any coverage for that SEC proceeding. So, this really highlights this issue that, you know, kind of wax and wains from time to time. And it really should put a spotlight on this issue, again, of, in the face of SEC's kind of promised enhanced enforcement in 2021 and beyond, you know, looking hard at the potential costs that can be incurred. And how can we cover those costs in the insurance policies, right? And there are products out there, they don't come cheap, they don't come free because it's meaningful cover as they just articulate $27 million in expenses is a lot of money, but it really does highlight the importance of thinking about and talking about how issuers protect themselves from what can be massive cost in responding to SEC in investigations both formal and informal, simultaneous to shareholder class actions or shareholder derivative actions.

Ron Borys (09:03):
One of the things that I thought was really interesting on the list of stated priorities was I think for the first time financial technology and digital assets we just took some time early, earlier this week with our, our team members leading that initiative for us, Glenn Morgan, if you haven't had a chance to listen to that podcast, I would certainly encourage you to do. So, we've assembled some great talent around the area of financial technology, cryptocurrency, digital assets and it's interesting to see the commission sort of taking that as a top stated priority, certainly information security as many of you are aware there was a big ransomware event occurring in the insurance industry this past week. And I know, that continues to shine a bright light on the fact that these types of things are continuing to happen, and can happen to just about anybody and are certainly things that we need to make sure we're paying attention to and, you know, listen at the end of the day, as, these things are all moving in the market.

As much as I laugh. Sometimes when I hear underwriters say, you know, the market is changing by the day. I find it hard to believe that the market is that fluid at times, but I guess sometimes it really does feel that way with certain events happening that we know will potentially impact risk evaluations and losses at the end of the day.

Ryan Farnsworth (10:15):
At the same time at don't necessarily disagree with them, right? Unfortunately, it moves both ways, right? It's not always just moving up and up and it is a market. And it's been interesting that even though there's been focus on these SEC priorities and other uncertainties ahead, it's still a competitive marketplace. And the reality is there's fluidity, as you said, M&A activity, underwriters changing companies and changing jobs. And that creates competition, which moves the market both ways. And so, you know its similar to the SEC, as long as clients can be focused on what the identifying their risks and communicating those effectively to the underwriters, no one can complain about or should be able to complain about where the market dictates the price and the coverage available to them. Steve, your point was a great one. You know, there was a lot of focus on this entity investigations cover back under the Obama administration. And everyone kind of took their foot off the brakes a little bit because so did the regulators, but now that it appears to be ramping up again, there are coverage solutions and discussions, it be had to address the risks that are presented by regulators.

Ron Borys (11:22):
So, one of the things I wanted to just spend a couple minutes on before we have to wrap things up is, you know, Steve, obviously you're one of the leaders within our SPAC group, some recent press from the SEC this week about just warnings, informal investigations into that world. We saw some articles this week. We know the underwriters have struggled with that risk tremendously. And we saw some articles earlier this week that suggested alternative risk transfer, whether it was forming captives or other types of vehicles to help with the challenges associated with getting D&O insurance for those folks who don't necessarily study this space, the way we do the captive one was a little interesting because I foresee some challenges, right, for anybody that knows what a captive is. It's essentially a company funding and starting their own first party insurance company for the purposes of managing their risks. And just given how SPACs are set up and the duration of a SPAC. I think that presents one big challenge but then you also have to think about the whole component of non-indemnifiable, the fileable loss and whether or not a SPAC could use a captive insurance company in order to fund the non-indemnifiable loss or fulfill an obligation to a director. So, I don't know if you've spent any time looking at that or you have any thoughts on that.

Steve Shappell (12:32):
Yeah, it's an issue that I've spent a tremendous amount of time on in my career, right, as markets have fluctuated and hardened over the years. We look hard at captive as a solution and in the SPAC world, it presents a particularly challenging issue because one of the problems with captive is it, it’s likely in essence your own money. Even though it's somewhat regulated as a captive insurance company. And when you file for an S one to take a SPAC public, the 33-Act requires an acknowledgement that you will not be indemnified for certain exposures of the 33-Act. So, it's actually one of the kind of key exposures that drive the need for D&O insurance, particularly A-side D&O insurance, because a SPAC can raise hundred billion dollars, but if the 33-Act and the SEC prohibits the indemnification of a director that is assigned an S one, the individual directors personal assets are at stake and would not be able to benefit from indemnification from the entity and likely from a captive since it's once removed, but it is money that is put there by a captive, it would be circular and likely prohibited by the SEC.

Ron Borys (13:58):
Yeah, no, I couldn't agree with you more. And we're just about out of time here. I really love recording these sessions. It reminds me how fortunate I am to have such great colleagues like you Ryan, and you Steve. And the work that we're doing for clients, certainly creating a more rewarding way to manage risk for our, without a doubt, we've covered a lot of topics here. And if anybody's interested in learning more about that, or hearing more, you can feel free to reach out to us or visit www.alliant.com. So, with that, we'll wrap up this series this session and look forward to talking to you again soon. Thanks so much.