Allianz: technological change driving increased risk exposure for FI market

A main driver for emerging risk for the financial institutions market is the sector’s growing reliance on technology and innovation, according to Allianz Global Corporate & Specialty (AGCS).

The observation was made as part of its new report, Financial Services Risk Trends.

According to Paul Schiavone , global industry solutions director for Financial Services
at AGCS, the spectre of Covid-19 hangs over a sector already embarking on a major transformation, driven by fast-paced technology adoption and growing environmental, social and governance (ESG) issues.

As such, he suggested, COVID-19 has introduced new business models and ways of working. However, he added, the move online is accompanied by an increase in risk exposure, driven by growing regulatory oversight in areas like data privacy, cyber security and business continuity, while in future the rollout of 5G ­– together with technologies like artificial intelligence and biometrics  ­– will bring new challenges in this area in addition to significant benefits.

In the UK, the Financial Conduct Authority (FCA) recently introduced rules and guidance on operational resilience for banks and insurers. The rules, which will come into force on March 31, 2022, require firms to address disruption to important business services from a range of events, including a cyber-attack, technical glitches and power outages.

In Europe, the proposed Digital Operational Resilience Act (DORA) would introduce an EU-wide regulatory framework on digital operational resilience for a wide range of financial services firms, with a focus on business continuity and the management of third-party risk.

There are other challenges on the risk horizon for the FI sector, according to Schiavone:

“The behaviour and culture of financial institutions is under growing scrutiny from a wide range of stakeholders in areas such as sustainability, employment practices, diversity and inclusion and executive pay. In an age of social media and increased disclosure, societal factors increasingly pose reputational risks for organizations and will influence regulation, litigation and liability for companies and directors.”

“Cyber and ESG issues only add to the challenging regulatory environment. Compliance issues are one of the biggest drivers of insurance claims for financial institutions with failings in governance and risk controls having brought large losses from a number of different areas.”

“These losses, compounded by Covid-19 uncertainty, have contributed to a recasting of the insurance market for financial institutions, characterized by adjusted pricing and greater risk selection by insurers, as well as a growing appreciation and interest in alternative risk transfer solutions.”

Ultimately, he added, financial institutions and their directors are having to navigate a rapidly changing world, and one in which risk management will increasingly need to focus on so-called ‘non-financial risks’ and emerging societal trends. At the same time, technology-led business models will require greater attention on business resilience and the management of third- parties and supply chains.