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Survey Report

Insurance Marketplace Realities 2020 – Financial Institutions (FI)

Financial, executive & professional risks (FINEX)

Financial, Executive and Professional Risks (FINEX)
N/A

November 13, 2019

Financial institutions present unique exposures to the financial, executive and professional lines (i.e., FINEX) insurance market. In many cases insurers employ underwriters who specialize in this class, thereby creating a distinct marketplace. For those reasons we have created a dedicated section to financial institutions’ financial lines market conditions as part of this and future editions of Insurance Marketplace Realities.

Financial institutions present unique exposures to the financial, executive and professional lines (i.e., FINEX) insurance market. In many cases insurers employ underwriters who specialize in this class, thereby creating a distinct marketplace. For those reasons we have added a section dedicated to financial institutions' financial lines market conditions as part of this and future editions of Insurance Marketplace Realities.

Rate predictions
  Trend Range
Overall neutral increase Stable to up slightly
D&O: Publicly traded financial institutions Increase (pink triangle pointing upward) +2.5% to +10%
D&O: Private financial institutions Increase (pink triangle pointing upward) +2.5% to +10%
D&O/E&O: Asset managers (excluding private equity/general PL) neutral increase Flat to +10%
Bankers professional liability (BPL) Increase (pink triangle pointing upward) +2.5% to +10%
Insurance company professional liability (ICPL) Increase (pink triangle pointing upward) +2.5% to +10%

Note: For employment practices liability (EPL), fiduciary liability and fidelity (crime), please see dedicated sections in this report

Key takeaway

Decreases are essentially gone, but increases are manageable.

  • Overall competition: Leading insurers have demonstrated pricing discipline in general. While replacement capacity may not always be available at a more competitive price, it is often prudent to market programs to ensure optimal results, especially if not marketed in the past few years. The U.K. and Bermuda markets continue to offer solutions for the right premiums and retentions or attachment, but will pass on thinly priced programs.
  • D&O marketplace: On a relative basis, the FI D&O marketplace is more stable than the overall commercial industries marketplace, which is experiencing severe increases. One driver of this phenomenon is that rate decreases for FIs over the last 10+ years were not as pronounced as in other industries. While more stable than other industries, FI rate increases are no longer limited to the primary. Excess carriers are also pushing to follow underlying increases to avoid deterioration in their increased limit factors (ILFs). ILFs for FIs, however, had not dropped to the same levels as on commercial excess placements (<65%), and the needed correction is not as significant.
  • Side-A/DIC D&O: Even Side-A, which historically has remained very competitive, is now flat. Some carriers are trying to achieve rate increases on lead Side-A and follow underlying ABC increases, but in general, most carriers are supporting flat pricing.
  • IPOs: All public offerings are facing a much tougher marketplace, regardless of industry.
  • Retentions: Insurers are also looking to increase retentions applicable to merger objection claims (M&A claims) for public companies/D&O.
  • E&O (professional liability) marketplace: E&O is a historically challenging line of coverage for most FIs, with carriers wary of claims severity in their portfolios. Today, there is some upward rate pressure, but nothing materially different from prior years.
    • Asset managers: The overall market continues to remain relatively stable as an abundance of capacity is keeping rates more competitive. Middle market asset management is consistently the area that carriers are looking to grow, with many offering new policy forms and/or enhancement endorsements. Middle market advisors and funds are experiencing a more competitive environment, with pricing flat to +5%. Larger advisors and funds are experiencing more upward rate pressure — up to +10%.
    • Banks: Regulatory concerns seem to have waned in the last few years given the change in administration and the financial crises fading in the rearview mirror, but any shock to the economy could put banks back under regulatory scrutiny. Banks are particularly judged on the institution's loss history, loan portfolio quality and change or expansion in services. Bankers professional liability (BPL) primary capacity continues to be limited, and most markets will not write stand-alone BPL without other supporting coverages.
    • Insurance companies: Insurance company professional liability (ICPL) claims development continues to be adverse, driven by bad faith claims, cost of insurance litigation (which is impacting life insurers) and increased regulatory burdens. Primary capacity is limited, but we have seen a few excess-only markets selectively testing the primary market. Overall, carriers maintain a conservative appetite and are putting pressure on retentions and pricing. But they are still willing to offer broader coverage.
  • FinTech: Capacity fluctuates depending on the scope of services being provided and is most limited for those including cryptocurrency or blockchain exposure. Rates remain elevated compared to traditional FI industry classes given the novelty of this segment, as carriers are still refining their FinTech underwriting appetites.
Will commercial industry trends bleed into FIs in 2020? These general trends need to be watched.
  • Securities class actions (SCAs): Frequency trends remain at historically high levels, with 400+ SCAs annually now common. The severity of losses could worsen as relatively higher stock prices could produce precipitous stock drops.
  • Cyber, M&A and privacy: Social accountability, social media's impact (e.g., #MeToo), privacy compliance risks and dynamic cyber security risks could put pressure on D&O terms and conditions for all industries, including FIs. Privacy issues are blurring the lines between cyber insurance and D&O insurance, creating D&O insurer concerns for all industries.
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