Financial institutions have rebounded and are stronger overall since the subprime loan crisis more than a decade ago, and nonbank lending has emerged as a high-growth business. Even though capacity for financial institution risks remains plentiful, some insurers have become more conservative in their appetites for certain classes and sizes of business. While certain accounts are seeing higher premiums rise due to increased exposure, some new market entrants are pricing accounts aggressively low. What does all this mean for retail agents? Financial institution clients need help to navigate a complex marketplace to obtain the best coverages and pricing.
Since the financial crisis in 2008, insurers have recalibrated their appetites — particularly for lenders. As banking regulations tightened in the years following the crisis, there was sharp growth in the number of nonbank entities offering loans. In 2018, a majority of the largest originators of home mortgages were nonbanks and online lenders, such as Quicken Loans, PennyMac, and Freedom Mortgage (source). An analysis by the Federal Deposit Insurance Corporation in 2018 found that nearly one in three, or 32%, of all loans are issued by nonbank entities, such as finance companies, hedge funds, venture capital or private capital firms, investment banks, and investment management firms (source). Another reason for the growth of nontraditional financial institutions is the continuing consolidation of smaller banks. The costs of complying with stricter regulations following the financial crisis in 2008 and 2009 are forcing many smaller institutions — those with less than $3 billion in assets — to seek merger partners.
Here’s an example of how divergent some insurers’ appetites have become when writing financial institutions:
A community bank was seeking $10 million in limits for directors’ and officers’ liability, another $10 million in limits for errors and omissions liability and $5 million in limits for ancillary lines. But the maximum aggregate limit that insurers were willing to offer was well below what the bank sought. It looked like the bank would need a program that combined primary and excess layers. Another insurer, relatively new to the financial institution segment, quoted the primary layer so aggressively that the bank’s excess coverage would have cost more. When some insurance markets are competitive and others are conservative, retail agents have work to do to ensure they understand the best options for their clients.
BY THE NUMBERS
Nonbanks Among Top Lenders
Largest home mortgage lenders, by originations, in 2018
Sources: The Wall Street Journal, Sept. 6, 2018; Inside Mortgage Finance
Number of Commercial Banks Shrinking, but Deposits Up
The rising costs of regulatory compliance are driving M&A in banking Peak: 14,496 in 1984
HOW INSURERS ARE REACTING
From a risk management perspective, the majority of financial institutions purchase these principal types of insurance coverage: Directors and Officers (D&O), Errors and Omissions (E&O), Employment Practices Liability (EPL), Crime, and Cyber Liability (Lender’s Liability and Fidelity Bonds, when applicable). Limits purchased in these lines vary by institution, their exposure, and their risk tolerance.
By and large, insurers are interested in the growth opportunities afforded by the increase in nonbank lenders. Along with plentiful capacity for such risks, a number of insurers are competing to write this type of business. Lenders Professional Liability facilities have emerged in the past few years from several insurance markets. Since the subprime loan crisis, however, underwriters are looking at lenders’ risks more closely. Another segment of the financial institution market that is attracting insurer interest is financial advisers and smaller securities firms, which have many of the same liability exposures as their larger counterparts.
Underwriters in the current marketplace are looking into the business details of financial institution accounts and applying premium increases that are consistent with changes in exposure. If a financial institution has experienced revenue growth, added new employees or grown its assets under management, for example, then a premium increase should be expected, though the insurer may keep its rate unchanged. Generally, D&O and E&O rates for financial institutions are increasing 5% to 10% across the board. Absent an exposure change, renewing accounts are typically seeing flat to modest increases over their expiring rates. Notably, insurers are not accepting decreased self-insured retentions, and for some accounts are requiring somewhat larger retentions.
Cyber insurance has been a growth line for nearly all industries over the past several years, and it remains a critical coverage for financial institutions. More insurers are applying cyber exclusions to D&O policies to clarify that stand-alone cyber insurance is where financial institutions should seek that coverage. Some policies may include a carveback granting cyber liability coverage to individual directors and officers, but entity coverage is typically excluded. A few markets are willing to negotiate on this, though the trend is toward excluding cyber from D&O in the financial institution sector.
WHAT RETAILERS CAN DO
Retail agents serving financial institutions can do several things to assist their clients, including:
- Gain knowledge of the current marketplace. Because insurers’ appetites and product offerings vary widely, understanding what’s available will be critical to obtaining the appropriate insurance coverage.
- Manage clients’ expectations. The insurance marketplace is not softening, even though insurers are competing for some classes of fast-growing financial institution business. Premium increases should be expected for most accounts. Quotes take longer than for other lines, because underwriters need time to understand each account’s business.
- Get the details. Closer underwriting scrutiny means that insurers will spend more time on each account, so detailed submissions — and starting the renewal process earlier — will be beneficial to getting the best consideration.
Financial institutions are fortunate that insurance capacity for their risks has not diminished. The marketplace has become more selective for certain types of institutions, but sharp rate increases are not yet evident. A characteristic of the marketplace is that insurers’ appetites and product offerings vary, so retail agents should seek the help of an experienced wholesale partner. With access to additional markets, benchmarking analyses, and a track record of obtaining the broadest coverage available, a wholesale specialist can help retailers secure the best protection for financial institutions’ risks.
Contact your CRC Group producer for more information.
- Tammy Little is the Office President of CRC’s High Point, NC, office and a member of the ExecPro practice.
- Dirk Vanderwall is a Director in CRC’s Los Angeles office and a member of the ExecPro practice.
- Mark Waldeck is the Office President of CRC’s Chicago office and a member of the ExecPro practice.