Think of an athlete attempting to beat a ‘personal best’ or someone scaling a mountain. Both are individual challenges. In the business world, we’re now used to hearing about another type of challenge, or more accurately, ‘challengers’. Namely, disruptive start-ups who are turning traditional business models on their heads and taking on industry incumbents.
Challenges may be exciting, but they come with risks. For an athlete pushing the limits, there’s always a danger of injury. And if your ambition is to conquer Everest, the hazards are even greater. For a challenger bank, the stakes are not quite so high, but every enterprise carries a risk – especially if it’s breaking new ground.
That’s why challenger banks must protect themselves with the right insurance. Regulations and compliance, corporate responsibility, media scrutiny, and cybersecurity are just some of the things to consider and manage.
Top 5 challenger bank insurable risks
Understanding how insurance can support a challenger bank is as important as identifying the risks facing the business.
1. Regulatory investigation costs
Accountability is higher than ever for challenger banks, and regulators the world over continue to raise the bar for disruptors. Challenger bank insurers know it’s essential to provide immediate support in the event of a regulatory investigation so that any issues can be suitably escalated and addressed. Insurers will typically pay the costs of a specialist regulatory legal expert, to help with any responses to regulators, and will advise on how best to handle a regulatory investigation.
2. Liability from financial crime
Financial crime is one of the key risks for a challenger bank. Controls may not be strong enough when the bank’s attention and energy are focused on developing the business. Criminals will be quick to exploit weaknesses for money laundering and other illicit activities. As the business grows and transaction volumes increase, the criminals can identify vulnerabilities in transaction monitoring which could result in significant liabilities for the bank as a whole, as well as for its directors and officers. Professional Indemnity (PI) and Directors and Officers Insurance will cover the legal defence costs in defending financial claims along with damages or settlements that may be awarded.
3. System glitch
Software development is inherently difficult to predict and plan. By nature, software is intangible and often involves a large number of stakeholders. This can create many risks that can lead to downtime and lost revenues. Insurers will cover increased work costs along with any loss of revenues or net profits during the time of the interruption.
4. Data breach
Acting as controller or processor of (sensitive) personal data exposes a business to a variety of risks which need to be carefully managed. The accidental or malicious breach of customer data will require some form of action to meet regulatory obligations. Insurers will cover the event management costs and resulting liability, including PCI and data protection fines, where insurable by law.
5. Theft of customer funds
When customer funds are compromised in a bank’s environment, for example through authorised push payments (APPs) or social engineering fraud, it can lead to investigation costs along with possible financial loss if the compromised funds are deemed to be the bank’s responsibility. Insurers can cover different loss scenarios including loss in the customer environment. Crime losses often involve significant sums and should be insured for balance sheet protection.
Mapping risks to insurance
We recommend that firms should map key risks to available insurance policies at least once every year. Because circumstances often change for fast-growing businesses, you should monitor work arrangements and styles, new product offerings, new fund raising, and operations in new territories.
At Elmore, we advise our clients to actively manage risks and optimise insurance at all stages of their growth. Insurance is a partnership between a business and an insurer, and when that partnership is based on a clear understanding and assessment of risks, both current and emerging, the business will be fully protected as it matures. If you’re a challenger, keen to develop and grow, managing risk should never be an afterthought.
Written by Simon Gilbert, Founder and Managing Director, Elmore Insurance Brokers Limited.