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Article | FI Observer

Outsourcing and your financial lines insurances

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Hollie Mortlock | September 22, 2020

This article explores the disruption that COVID-19 may have caused financial institutions with respect to outsourced services.

WTW claims data

The COVID-19 pandemic has disrupted supply chains, outsourced services and tested firms’ operational resilience. Financial Institutions may have found or now find that suppliers/outsource providers are unable to perform their obligations or service levels may be negatively impacted. This creates risk for firms, and the senior individuals who oversee them, including in the form of customer claims or regulatory scrutiny.

In our recent article which can be found here we consider how outsourcing certain processes or functions may affect a firm’s risk profile and how financial lines insurance may respond when issues arise in respect of outsourced services. While the pandemic situation may exacerbate the risks associated with outsourcing, these risks are not new. Below we reflect on the claims data that Willis Towers Watson has collected and analysed from our clients to consider the outsourcing claims that have been notified to insurance policies by financial institutions pre-dating the pandemic.

At Willis Towers Watson we continuously analyse claims reported by our clients. This enables us to understand the nature, trends, causes and cost breakdown of loss events impacting businesses. A key part of managing and mitigating risk is understanding the circumstances that lead to claims. By building a detailed picture of the types of activities and mistakes that can lead to claims being made, a business can begin to control its exposure to risk. Here we provide specific insight into the types of outsourced services which are most likely to result in claims, in terms of frequency and also severity.

Frequency

The data below indicates that administration services are more likely to result in claims than other outsourced services. This could include incorrectly processing transactions, exercising investment rights or managing payments. Where companies providing outsourced administration services have access to customer data, there is also a risk of data breach through loss or misuse of customer data.

Source: WTW claims database: *Based on 407 FI claims (where outsourcing was identified as the issue at hand) reported to WTW between Jan 2007 – June 2020.

Source: WTW claims database: *Based on 407 FI claims (where outsourcing was identified as the issue at hand) reported to WTW between Jan 2007 and June 2020

Severity

The data below indicates that outsourced administrative services are most likely to lead to the most costly claims closely followed by claims arising from outsourcing IT services to a third-party provider which can also be severe.

Source: *Based on 407 FI claims (where outsourcing was identified as the issue at hand) reported to WTW between Jan 2007 – June 2020.

Source: WTW claims database: *Based on 407 FI claims (where outsourcing was identified as the issue at hand) reported to WTW between Jan 2007 and June 2020

The outlier claim excluded relates to a large business interruption claim which affected customers of a Bank.

Commentary

While outsourcing can result in cost savings and efficiency improvements for financial institutions, it may also increase the risk of customer claims and regulatory intervention. As usual, prevention is better than cure. Selecting suppliers / outsource providers carefully, vetting them thoroughly and regularly, and having strong contractual protections in place is key. However, in the event things go wrong and claims are made, or the regulators become involved, make sure your insurance cover is robust and effective. Broadly drafted Crime, Professional Indemnity, Directors’ and Officers’ Liability (D&O) and Cyber policies can include coverage for outsourced activities but as always, the devil is in the detail. Further information on how these policies may be able to assist can be found in our previous article “Outsourcing: risk and reward – will your insurance respond?” however consult with your broker to ensure you have the right cover in place.

Disclaimer

This article uses Willis Towers Watson proprietary analysed claims data to provide specific insight into the types of loss that your business may be exposed to. Claims reported by clients from January 2007 to the June 2020 are included in this report. Due to the distorting impact of very large losses, we remove “outliers” from the other charts within the report.

Author

Head of FINEX Financial Institutions Product Development

Contacts

Marcus Porter-Wright
GB Head of FINEX Financial Institutions

Susan Finbow
Global Head of FINEX Financial Institutions

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