This article was provided by Chris Muir (pictured), senior development underwriter in the Financial Institutions team of Travelers Europe.
The recent bankruptcies of Silicon Valley Bank (SVB), Signature Bank and Silvergate Capital in the US, alongside the hastily arranged buyout of Credit Suisse by UBS, have led to speculations that we are in the throes of another 2008-esque financial crisis.
Whilst the dust has settled a little since, and we haven’t seen the chain reaction that saw Lehman Brothers go bankrupt and companies such as RBS, AIG, and HBOS requiring government bailouts, there is still a significant level of concern around the financial future of banking entities and financial institutions in general.
Currently, directors might be focusing on their balance sheets and ensuring the on-going future of their business, but now might be just the time to review whether they have a suitable and comprehensive insurance policy in place, as the cover provided could protect themselves and their business from the fall out.
Directors & Officers’ Liability insurance is a key component of any insurance package at the best of times, but in times of turbulence it can provide invaluable protection to those running a company.
In 2008, we saw a claim against the directors of RBS for misleading investors who subscribed to a rights issue to fund the purchase of the Dutch bank ABN Amro. In an almost mirror image of events, we have already seen shareholder claims against SVB and their CEO and CFO, alleging that they misled shareholders over the liquidity issues that the bank faced. A comprehensive D&O policy can be the difference between directors being funded by an experienced insurer or having to meet the costs out of their own pockets.
It’s not just D&O policies that have been triggered by recent events. Given some of the concerns around the performance of commercial real estate, with higher interest rates increasing the cost of borrowing, alongside the change in working patterns post the pandemic causing depressed valuations in the office space, the protection provided by a Professional Indemnity policy can provide a real estate investment manager with the headroom to survive.
As dissatisfaction grows with investment returns in this sector, investment managers may be subject to allegations of a failure in their due diligence prior to purchase, or allegations that they over leveraged properties at times of low interest rates and failed to put in place appropriate hedging strategies to protect against rising interest rates. Allegations such as these can be expensive and also time consuming at a point when directors want to focus on their business. Having an experienced claims professional on hand to guide your responses can take away a lot of the stress.
Crime is the third main pillar of cover that financial institutions buy, and the value of having this cover in times of economic difficulty cannot be overstated. In previous recessions, fraud cases have spiked. Despite the UK technically avoiding a recession at the moment, 2022 saw a 151% rise in fraud cases reaching UK courts. During times of prosperity, a fraud loss can be damaging to a business but when income is down and margins are tight, then the additional cost could be devastating for a business without the right insurance protection.
It's not just the case that more frauds are being perpetrated in times of economic hardship. This also tends to be the time that more frauds are discovered. With business leaders placing a microscope on all outgoings, this is when fictitious payments and fraudulent transfers that may have been going on for years are uncovered.
Some previously overlooked covers also provide significant benefits in current times. We’ve recently noticed a number of investment banks looking to cut back on staff numbers due to record low deal volumes. Undertaking a redundancy program means following strict rules and if carried out incorrectly, the employers will find themselves being taken to tribunal by unfairly sacked workers. An Employment Practices Liability policy helps to ensure that a redundancy program does not end up costing a company more money than it saved.
The now infamous mini budget of September 2022, and the ensuing crisis around Liability Driven Investment strategies, have also brought Pension Trustee Liability cover back into focus. This is an insurance that can help protect trustees of a scheme against claims that they have been negligent in running the scheme.
Rather than considering whether to cut back on insurance covers to save costs, directors should take a minute to ensure that their business is adequately protected to see out this economic storm.
Whilst it’s important to ensure you purchase the right insurance covers, it is also vital to choose the right provider of cover. A cheap premium may appear very tempting at the time, but the offering should be considered fully for its breadth of cover and the financial strength of the insurance provider. Insurance companies are not immune from the market conditions, they were also bailed out in 2008 alongside the banks.
However, if your insurance company was to fail or pull out of the market for certain lines of insurance, it could leave risk managers scrambling to find a new long-term partner at the toughest time in the market cycle when rates are increasing and capacity is being restricted.
For more information on Travelers Financial Institutions cover – visit https://www.travelers.co.uk/industry-solutions/financial-institutions-insurance
