Underwriting in a Turbulent Financial Climate
These are volatile times for financial institutions. Rising interest rates, stubborn inflation, and the impacts of ongoing supply chain challenges on investment performance have created a difficult trading environment for financial institutions around the world. As underwriters insuring these institutions, we experience the effects of this environment both via our clients and within our own organisation.
In recent months, the turbulence of the US market, in particular, has sparked a lot of concern. In the space of just a few days this spring, we saw the collapse of Silicon Valley Bank, the closure of Signature Bank and the announcement that Silvergate Capital would be winding down operations and entering into liquidation. While there were warning signs preceding these events – and the banks would have been more resilient if corrective actions had been taken earlier — these events still triggered shock waves in the banking world that we haven’t really seen since 2008.
While the size and scale of the banking environment is smaller in the UK and the rest of Europe, we’re experiencing difficulties here too. The rescue of Credit Suisse, which was purchased by rival bank UBS recently, is one example. The bank had been under significant strain for some time and regulators had voiced concerns in recent years over serious failings in controls and reporting deficiencies.
Beyond banks, other financial institutions are feeling the effects of the volatile climate too. Inflation and interest rate increases are having a material impact on every piece of business that asset managers review and write. For insurers, high interest rates may generate a better return on investment but claims expenses will likely worsen, with varying impacts across different insurance lines.
Connecting all pieces of the puzzle
As underwriters of financial institutions, navigating these challenges requires us to make connections between events at home and overseas, knowing the complexity of the institutions’ operations and how what happens in one jurisdiction can easily impact events in another. It’s important to look under the surface to understand how well these businesses are operating today, as well as how they are preparing for the future. A bank may be large, but that doesn’t necessarily mean it is stable. A bank may be experiencing rapid growth, but that doesn’t mean it is balancing that growth by making its risk management practices more robust.
We also need to be aware of the speed at which changes happen in the financial institutions sector. Gauging the pace of events and responsive regulatory action will be critical aspects of our role.
Regulators cited social media as a contributing factor to the collapse of Silicon Valley Bank, which received over $140 billion in deposit requests over two days. The merger of UBS and Credit Suisse happened over a small span of time, even though mergers of that scale are challenging to complete successfully. Underwriters must be able to stay abreast of regulatory changes and assess the impact they will have on an institution. We need to assess its board and governance framework to ensure management can navigate the changing regulatory environment. Multi-jurisdictional banks only increase the complexity of regulatory oversight required.
Taking a step back, we’re also considering financial institutions in the context of the larger economy. Consumers and businesses are still feeling the effects of a global pandemic. They’re recovering from the Great Resignation, where many people left the workforce or retired early. They’re also trying to manage the continued escalation of the war in Ukraine, which has impacted supplies of raw materials and energy, putting a significant strain on consumer finances. Wages have struggled to keep up with inflation, putting a significant squeeze on people’s living standards. Against this backdrop, it’s likely that consumer confidence will be low, deposits will be unstable, credit quality will deteriorate, and non-performing loans will increase.
Despite the significant disruption in the financial markets here and abroad, our investment portfolio, capital position and liquidity at Travelers remain very strong. To support that record, we expect strong risk management from our policyholders. We will be evaluating how financial institutions treat their financially distressed customers. How do they manage customers who are struggling to keep up with loans and mortgage repayments? It will be important for us to meet clients face to face and get a sense of the culture of the firm and its ability to navigate a complex regulatory framework that continues to evolve.
Chris Unwin is director of the financial institutions team at Travelers Europe. Sam Meehan is a development underwriter on Travelers Europe’s UK and Irish team.
“The information provided in this document is for general information purposes only. It does not constitute legal or professional advice nor a recommendation to any individual or business of any product or service. Insurance coverage is governed by the actual terms and conditions of insurance as set out in the policy documentation and not by any of the information in this document.”
