What it Means to Insure Financial Institutions

September 4, 2018

Financial institutions face unique risks in their daily operations – risks that many other business types simply do not experience. Because of intense regulatory scrutiny, financial institutions must have in place rigorous risk management protocols, including information security strategies as well as specialized liability insurance. Special risks insurance brokers work with these financial firms, helping them to develop insurance plans that protect assets from the losses associated with property damage, data breaches, negligence, and legal claims.

Typical Risks in the Financial Industry

Increasingly, financial institutions depend on computerized data to extend services to their clients. Information technology has transformed the way these institutions do business, from electronic transfer of assets to personalized financial services using cloud computing strategies. Data breaches, including the loss or theft of personally identifying information, has become one of the leading risks financial firms face.

There are several other unique risks that financial institutions must take into account when choosing risk management and insurance protection. These include:

• Lenders Liability claims revolving around wrongful foreclosures
• Claims regarding unfair, discriminatory, or predatory loan practices
• Errors & omissions claims from the administration of trusts
• Risks to directors and officers of the firm from shareholder actions
• Derivative claims
• Claims against regulatory non-compliance
• Disclosure claims, particularly in misleading, inaccurate, or falsified financial reporting
• Liability claims arising from physical loss or damage of assets, including assets stored in safety deposit boxes and during transfer between locations

When presented with these varied risks, it becomes clear that insurance solutions must be tailored to the unique risk exposures of each financial institution, and that one-size-fits-all insurance packages may not be sufficient to protect against unforeseen risks faced by certain organizations. Special risks insurance brokers with industry knowledge are an invaluable resource when financial institutions need to protect their assets and the assets of their customers from loss.

The Components of Financial Institution Insurance

Now that we have a clearer understanding of the types of risks a financial institution may face in its operations, it can be valuable to break down the insurance categories to protect against those risks. The first component of insurance solutions for financial institutions is property insurance, which is designed to provide financial assistance in the event of loss or damage to the firm’s physical assets. Losses can arise from unpredictable natural disasters like hurricanes or tornadoes, referred to as “catastrophic perils”, or from man-made or predictable losses such as acts of terrorism, vandalism, or fires, all of which fall under the “non-catastrophic perils” category. Commercial property insurance may consist of named perils policies, all-risk policies, or hybrid commercial packages that include liability and property risk management aspects.

Cyber liability insurance is the next critical part of financial institution insurance. This specialized form of insurance protects against the losses associated with data breaches/thefts, and provides financial assistance for notifying customers about data breaches, recovery of lost or damaged data, and the legal fees associated with claims against the financial institution.

Professional liability insurance coverage is the next and final component of a comprehensive insurance solution for financial firms. This liability coverage can take many forms, including:

• Management liability
• Directors and Officers (D&O) liability
• Fiduciary liability
• Employment practices liability
• Errors and Omissions (E&O) liability

With these insurance components in place, financial institutions are able to protect their assets, their personnel, and their customers. Special risks insurance brokers have a thorough understanding of the varied risks and exposures financial institutions must deal with as they do business. Financial institution insurance is a critical aspect of a comprehensive risk management plan, and with this insurance protection, covered firms can continue to provide services to their customers. ◼