Insurance Strategies for Financial Institutions: Balancing Risk and Reward

It’s often said that there’s no risk without reward. However, for financial institutions, balancing risk and reward requires careful consideration. Thoughtful insurance strategies can help financial institutions grow and prosper while managing risk.

What Risks Do Financial Institutions Face?

Effective insurance strategies start with strong risk assessments. Financial institutions face many risks, notably the following:

• Litigation. Lawsuits can come from many sources, including stakeholders, accountholders and employees. For example, stakeholders might sue the financial institution’s leadership over poor decision-making that resulted in investment losses, while accountholders could sue over anything from improper fees to negligence in managing funds. Employees and job seekers may also sue over employment-related issues, such as discrimination and retaliation.
• Cyberattacks and Data Breaches. Financial institutions are prime targets for hackers looking to get their hands on sensitive financial records and scammers trying to access accounts directly. When financial institutions are hit, they can face regulatory action, reputational harm, and lawsuits for failing to keep records and funds safe.
• Credit Risk. While financial institutions generally anticipate that some borrowers will default, if a financial institution has too many bad loans, it can face liquidity problems and could even risk failure.
• Regulatory Change and Action. Financial institutions are heavily regulated, and compliance is necessary to avoid lawsuits and regulatory action. When the relevant regulations change, financial institutions can face significant costs as they try to comply.
• Property Damage and Bodily Injury. Financial institutions with physical locations have many of the same risks as businesses in other industries. For example, a customer could slip and fall while in the lobby of a bank, resulting in a lawsuit against the bank. Fires, storms and other disasters can also strike financial institutions, putting all the valuables and important documents stored within at risk.

What Insurance Products Do Financial Institutions Need?

Even within the financial industry, insurance needs can vary depending on the specific exposures of a company as well as its risk appetite and ability to self-insure. However, for many financial institutions, the following coverage types could be appropriate.

• Commercial Property Insurance protects property from many common perils, including fire, storms, and vandalism, and is important for any physical location.
• Commercial General Liability Insurance covers third-party claims involving bodily injury and property damage. It also covers third-party claims involving advertising injury (such as copyright infringement) and personal injury (such as defamation).
• Cyber Liability Insurance provides coverage for many cyber incidents. In addition to securing coverage for data breaches and ransomware attacks, financial institutions should also consider coverage for social engineering attacks, including phishing and business email compromise.
• Business Interruption Insurance is often tied to commercial property insurance and covers business disruptions stemming from the same perils. Cyber liability insurance can also provide coverage for business interruption stemming from cyber events.
• Directors and Officers Insurance provides protection for the executives and board members of a company, who could face lawsuits over their actions and decisions when performing their duties.
• Employment Practices Liability Insurance provides coverage for many common employment-related claims, including lawsuits alleging discrimination, harassment, wrongful termination and retaliation.
• Professional Liability Insurance provides coverage for third-party claims alleging financial loss stemming from negligence, errors and omissions when providing professional services.
• Fiduciary Liability Insurance provides coverage for claims alleging a breach of fiduciary duties, including mismanagement of accounts.
• Trade Credit Insurance provides protection against the risk of non-payment of invoices.
• Financial Institution Bonds provide security for financial institutions and those they serve in case of employee dishonesty and other criminal exposures.

Other policies, such as kidnap and ransom insurance, may also be needed. A broker can help you review your risks to see which policies make sense.

Fine-Tuning Your Financial Strategies

To customize your insurance strategy to the unique needs of your financial institution, consider the following questions:

• Can coverages be combined to simplify claims and lower costs? For example, you may be able to combine D&O, EPLI and fiduciary liability insurance into a single policy. This can simplify claims when it is not clear which insurance policy provides coverage, and it may support lower premium costs.
• Can the financial institution retain more risk? This could be done through higher deductibles or self-insured retentions, as well as carving out certain coverages.
• Are alternative risk management strategies possible? Examples include parametric insurance as well as captive and self-insurance strategies.

Do you need help creating insurance strategies that meet the needs of your financial institution? Heffernan Insurance Brokers can conduct a review of your risks and policies to determine a strong path forward that balances risk and reward. Contact us.