Author: Eileen Yuen
This market conditions report details the current state of the insurance market for US-domiciled banking institutions. We start by taking a look back at 2022 trends in bank insurance pricing, terms and market capacity, claims activity, and other pertinent factors specific to management and professional liability for banks. We then look ahead at some key factors likely to influence market conditions for banks over the course of 2023.
2022 state of the bank insurance market
The insurance market aside, 2022 proved to be an eventful year for banking institutions that found themselves delicately navigating head winds arising from record high inflation and the corresponding tightening monetary policy that followed, increased geopolitical tensions from Russia's invasion of Ukraine, volatile digital assets and capital markets, and the general economic uncertainty of what lies ahead.
Banks, like most industries, faced a challenging insurance market for much of 2022. After years of struggling to achieve rate increases that could keep pace with what they were paying out in losses, in 2022 insurers began seeking to improve profitability through continued rate increases, higher retentions and attachment points, reduced capacity and some coverage restrictions. However common these trends were, they weren't universal. Each coverage line had its own intricacies, and there was even some variance among asset classes and between privately held and publicly traded institutions, as follows below.
Cyber Liability coverage for banks
Remaining a hard market throughout most of 2022, many banks saw renewal rate increases anywhere from 30% to 50% and even higher for those with claims activity or substandard controls. Underwriters heavily scrutinized organizational cyber hygiene, focusing on areas such as implementation of full multifactor authentication (MFA), endpoint detection and response, patch management, data backups and restoration, and thorough employee training. For banks with cybersecurity deemed below average, it was common to find carriers restricting coverage by applying cyber extortion sublimits, and in some cases, coinsurance, where the insured shares part of the cost up to the sublimit.
The second half of 2022 saw a lower level of rate increases, but a concerted focus on cybersecurity controls remained.
Bank Directors and Officers (D&O) Liability insurance
We saw a bit of a bifurcated market for D&O in 2022, with rates for publicly traded institutions trending flat and even decreasing toward the second half of the year, while privately held banks saw stabilization with more moderate single-digit rate increases. This rate relief over prior years was largely due to increased capacity in the marketplace and less severity in claims. There was still a strong emphasis on carriers wanting a better understanding of financial performance; environmental, social and governance (ESG) initiatives; and cybersecurity planning throughout the underwriting process.
On a very limited basis, multiyear policies for banks were available, with a handful of carriers offering these policies primarily in the small to midsize community bank segments for the best risks. These were more available for privately held institutions than those that were publicly traded.
Financial Institution (FI) Bond for banks
Renewal rates throughout 2022 on this line of coverage remained fairly consistent, ranging from +10% to 20%, largely dependent on each individual bank's loss experience and growth. The FI Bond is one line of coverage where claims regularly persist, arising from social engineering, employee dishonesty, forgery and alteration, wire transfer fraud, and more. Crossover between FI Bond and Cyber Liability coverages continued to demand consideration to avoid potential gaps and/or duplication of coverage.
Bankers Professional Liability (BPL)/E&O
Throughout 2022, we saw upward rate pressure continuing for most banks, but saw some variance by asset size of the institution.
Community banks under $5 billion in assets written on combined package programs commonly saw more modest rate increases while larger institutions on stand-alone programs saw greater increases in the 15% to 25% range, especially for those with claims activity, impaired financials or regulatory issues.
Additionally, fewer carriers are writing primary BPL for larger institutions, which also has bearing on pricing. Underwriters continued to focus on services offered and loan portfolio composition/ performance, and would commonly look for banks to take more risk themselves via higher retentions.
Employment Practices Liability (EPL) for banks
We saw moderation in the EPL market as 2022 progressed, and most banks saw modest rate increases ranging from 5% to 15%, with the exception of banks with California exposures, claims activity or those adversely impacted by COVID-19. One common trend that gained traction in 2022 was that of split retentions, with a separate higher retention often applied for claims involving highly compensated employees.
Fiduciary Liability coverage for banks
The market for Fiduciary Liability in 2022 saw pressure predominantly emanating from continued litigation around excessive fee matters.
Premium increases were seen in the +15% to +25% range for most midsize and large banking institutions, higher for those with claims activity.
Bank insurance claims trends
Claim activity for banks has been and continues to be varied. Notable areas with heightened activity included claims related to Cyber; BPL and Trust Errors and Omissions (E&O) claims, and a variety of Fidelity claims. We have continued to see event-driven D&O claims, particularly related to cyber events. In such a case, an adverse cyber event has often led to a claim against the bank and/or its board, alleging issues like mismanagement of the event or failure to protect from the event. For those banks engaged in mergers and acquisition (M&A) activity, resultant shareholder claims persisted.
In the BPL/Lender Liability arena, 2022 saw an uptick in redlining investigations from regulators. We expect these to continue in 2023, and it's important to examine policy language, as some carriers do aim to restrict coverage for redlining.
Other challenges for banks continue to be related to fraud, such as fraudulent transfer instructions and related social engineering claims. These matters often cross policies, affecting both the FI Bond and Cyber coverage, depending on the nature of the circumstances. A careful look at both of these policies is required to avoid both coverage gaps and duplication. Finally, from a cyber-perspective, banks remain a target for bad actors, and ransomware attacks have persisted.
Looking ahead: What to watch in the 2023 bank insurance market
As 2023 progresses, we expect to see a market environment that continues to moderate for banks, with average overall rates varying between flat and +15% across most management liability lines.
Outside of this group, the D&O market for publicly traded banks will see some rate decreases on primary layers and greater saving in the excess layers for well-performing risks.
2023 brings a number of factors that will have significant bearing on the banking sector. Those we're closely watching include the following.
The effect of economic uncertainty on banking
According to Deloitte Insights 2023 Banking and Capital Markets Outlook, "The global economy remains fragile going into 2023. Uncertainties abound due to an unprecedented confluence of factors — Russia's invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation, and tightening monetary policy across the world. And the potential for a mild recession or stagflation in certain economies is high."1 Some already are feeling the effects of this economic uncertainty — as this graph from The Federal Reserve shows — with individual net worth decreasing in early 2022 for the first time since the COVID-19 pandemic began.2 The decreased net worth will inevitably impact the total deposits individuals keep with their banks, which in turn could weaken financials, raising the risk for D&O lawsuits as well as challenging renewals.
Mergers and acquisitions
- M&A in banking for 2021 vs. 2022 shows an 18.5% decrease in number of deals and a 70.5% decrease in total deal value.3
- Though US banks announced just 38 fewer deals compared to 2021, total deal value dragged significantly and plunged to the lowest yearly total in eight years.3 Factors contributing to this downturn were and continue to be economic uncertainty, rising interest rates and increased regulatory oversight.
- Where we may see banks invest in acquisitions will be in additive services that aim to support growth and pace with an ever- evolving environment — for example, fintechs or artificial intelligence (AI).
- As fintechs struggle to raise capital and suffer valuation declines, near-term opportunities for these kinds of acquisitions will likely proliferate. In McKinsey & Company's recent survey of US banking corporate-development professionals, some 75% expect banks in general to buy more fintechs in the near future than in the last two years.4
Digital assets and cryptocurrency
- The European Council agrees on Markets in Crypto-Assets Regulation (MiCAR) framework.5 Will the US follow?
- According to the Deloitte Insights 2023 outlook:
- Retail banking is envisioning new ways to service and engage with customers: "In the long term, banks should develop inventive new applications for ESG, embedded finance and digital assets."
- Moreover, digital payments should accelerate and transform the payment experience on multiple fronts. Yet where money goes, so could fraud.
- Underwriting challenges are associated with digital assets.
- Cyber risk and security continue to be top boardroom concerns for banks. Ernst & Young's annual survey of bank chief risk officers found that 72% of respondents ranked cybersecurity as the top priority for this year, moving ahead of credit risk.6
- Banks maintain cyber risk as both a short-term and long-term focus, looking not only at internally managing this risk, but also at external concerns like vendors and supplier networks.
- The US marijuana market, already the world's largest, is expected reach $57 billion in regulated sales by 2030.7 Yet many banks are hesitant to begin lending to this industry given the legal uncertainty and have been lobbying for legislation permitting them to do as much.
- Already passed by the US House of Representatives, the Secure and Fair Enforcement Banking Act (SAFE Banking Act) would seeming prevent federal banking regulators from penalizing depository institutions for providing banking services to legitimate cannabis-related businesses. Should this legislation pass the Senate, astute underwriters will surely begin to inquire on how insureds intend to approach this growing segment.
- Currently, we're still seeing a cautious underwriting approach and some restrictions in coverage, depending upon the size and scope of a bank's cannabis-related business.
- There have been many new entrants into the financial services market over the past several years, whose online offerings became attractive to consumers during the pandemic, thus accelerating growth in this area.
- These online platforms have eliminated the need for a brick-and-mortar footprint, thereby reducing costs, enabling fintech firms and nontraditional lenders to pay higher rates on deposits than more traditional banks.
- Additionally, these firms are not currently regulated to the same degree as traditional banks, perhaps allowing for more flexibility.
- Traditional banking institutions continue to work to find ways to maintain deposits and market share amid this explosion of online lenders.
Recent bank failures
In the US, two recent bank failures have prompted regulators to take swift action, with this action serving as the impetus for heighted scrutiny in the global banking sector. In roughly a week and a half's time, we saw unprecedented change in the industry, with the second and third largest bank failures in US history and those entities being shut down by regulators. The US government stepped in, creating a new program called the Bank Term Funding Program (BTFP), which aimed to make additional funding available to eligible depository institutions to help ensure that banks have the ability to meet the needs of depositors. The BTFP will offer loans up to one year in length to banks, savings associations, credit unions and other eligible depository institutions that are "pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral." The BTFP is intended to offer such banks and lenders another source of liquidity, therefore eliminating the need to quickly sell those securities.8
Additional events have continued to unfold in the sector, including downgrades of other US banks and the sale of a significant Swiss bank. These issues have resulted in stock market volatility both in the US and abroad, consumer and investor anxiety and overall concern for the health of the global banking system.
Banks can expect to see repercussions manifest in the underwriting process, including underwriter examination of customer base, particularly any concentration in a specific industry sector; a more thorough analysis of financial metrics; a focus on management team structure and tenure; and a review of regulatory status/relationship.
We are continuing to monitor these events and will provide further communications as merited.
Please note: Adverse loss history, stressed balance sheets, regulatory activity or some combination of these factors may result in underwriter responses disparate from those discussed in this report. Banks experiencing these deficiencies should be prepared for more challenging conditions than outlined herein.
Now more than ever, it's important to start renewals early and work with your Gallagher team to deliver a comprehensive and professional submission to underwriters.