5 biggest risks for financial services: Allianz
Cyber risks and COVID-19 impacts top the list of risks the financial services industry faces in the coming months, but three more risks are just as significant.
Following months of tumult ranging from a global pandemic to civil unrest and recently a major cyber attack that shut down one of the nation’s largest gas pipelines, it should come as no surprise that the financial services industry faces a period of heightened risk. According to Allianz Global Corporate & Speciality’s Financial Services Risk Trends report, COVID-19 on its own has caused one of the largest shocks to the global economy ever.
Despite an improved economic outlook, considerable uncertainty remains related to the pandemic and financial and government responses to it, which comes at a time when technology adoption and increasing global, social and governance issues as well as climate change are having a notable impact on regulations and economies.
Respondents to Allianz’s risk survey named cyber incidents as the top risk the financial sector faces, followed by pandemic outbreak, business interruption, changes in legislation and regulation, and macroeconomic developments. The firm took a deeper dive into the various risks, how they are interrelated, and ways they might impact the financial services industry in the near term.
1. COVID-19
Although there is increasing hope that the virus itself may be starting to wane, the financial ramifications of COVID-19 could linger. The loans and grants extended by governments to businesses are beginning to expire, and various government actions have contributed to a low interest rate environment and growing government debt. Governments around the world have borrowed a total of $24 trillion during the pandemic, according to the International Institute of Finance, including $6 trillion in the U.S. alone.
This dynamic could lead to asset bubbles that could trigger claims against almost all lines of insurance and stoke fears of inflation, said Allianz. In addition, large corrections in equities, bond and credit markets are possible and could spur litigation from investors and shareholders.
Allianz expects the financial services industry to face closer scrutiny about how entities prepare for unexpected events and warns that directors and officers could be held accountable for a failure to foresee COVID-19 risks.
In addition, the transition to remote work has created heightened risk around cybersecurity, while return-to-work plans could make companies vulnerable to liability around potential COVID-19 infections, privacy practices related to health information and vaccination requirements, and whistleblowing if they do not have an adequate plan in place, said Allianz.
2. Cybersecurity
As much of the world’s workforce was sent home to work remotely during COVID-19, and new technologies were implemented to keep the workforce productive, cyber criminals found new opportunities and vulnerabilities they could use to exploit businesses. Attacks against the financial sector increased 238 percent worldwide just during the first months of the pandemic, according to data compiled by VMware. Hackers even targeted stimulus checks and Paycheck Protection Program (PPP) loans.
Financial services firms continue to be targeted and consistently rank in the top 5 sectors for severity and frequency of attacks, said Allianz. With such high stakes, the financial services industry takes cybersecurity seriously and invests heavily in it, but cyber criminals also see high value in breaching the industry’s systems and invest considerable time and money in attacking them.
Meanwhile, financial services firms face increasing regulatory scrutiny around their efforts to stave off cyber attacks. More aggressive enforcement, higher fines and regulatory costs, and growing third-party liability are all risks the financial services industry faces.
Business continuity and resilience strategies along with reducing the human elements that increase cyber vulnerabilities are becoming more important than ever, said Allianz.
3. Technology
The lines between technology companies and financial services entities are blurring, and in some cases even merging, said Allianz. Companies like Apple, Google and Amazon are offering or developing banking and financial applications. Facebook is even launching its own virtual currency called Libra. Meanwhile, technology is changing the nature of work as AI-powered robotics automate processes, collect data and make decisions.
On a positive note, advances in technology can benefit the financial services sector through risk management applications, improved security, and compliance controls. But technology also creates new exposures, including the creation and collection of even more data than we see today on health, behavior and preferences, which could create privacy and data protection risks and open companies up to lawsuits.
Allianz also noted risks around cryptocurrencies, which could create operational and regulatory risks for financial institutions. The popularity and acceptance of cryptocurrency is growing rapidly, but there are many uncertainties around virtual money and the potential to exploit it through money laundering and theft.
4. Environmental, social and governance factors
The financial services industry is increasingly seen as a key driver to impact climate change and other ESG issues. This is translating into tougher disclosure and reporting requirements for banks and insurers around ESG, which in the past have been largely voluntary. At the same time, growing awareness of social inequalities is leading to new requirements around diversity, pay and supply chains, said Allianz.
Rules-based disclosure is expected to come to fruition under the Biden Administration, according to Allianz, and both the Federal Reserve and the Securities and Exchange Commission have taken action to increase their focus on ESG.
The industry can also expect new regulations around climate change reporting and disclosure and greenhouse gas emissions controls, said Allianz. However, compliance can be challenging thanks to a growing number of regulations in an environment marked by inconsistent approaches across jurisdictions and lack of data availability.
5. Claims
Insurers continue to see large claims among financial institutions relating to compliance and increased regulatory activity, said Allianz. The SEC collected a record $4.7 billion in fines last year for foreign bribery charges, disclosure and accounting violations, and misconduct.
Financial entities and their leadership are more readily held to account by regulators in an environment marked by increasing regulation in a growing number of areas.
Large claims against Directors and Officers, as well as claims related to mergers and acquisitions and initial public offerings are also growing. Large compliance claims are long tail, lasting upwards of 10 years and involve complex regulatory investigations, prosecutions, and large fines or settlements, said Allianz.
In addition, SEC class actions are being filed in record numbers, and COVID-19-related claims are beginning to surface and could impact the sector for years to come.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.
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