Introduction: Treaty renewals and bank failures created volatility and increased uncertainty while insurers continued to seek targeted growth in well-performing parts of their portfolios

Christine Williams

Global Specialty Products Leader, Global CEO Financial Services Group & Professional Services Practice, Commercial Risk Solutions

Joel Sulkes

Global Financial Institutions Practice Leader, Commercial Risk Solutions

We’ve recently seen a shock to the banking sector and the largest bank failures since the 2007-2008 Global Financial Crisis. The quick and unanticipated failures of SVB and Signature Bank in early March created wariness of bank fundamentals and quickly turned attention to other banks with perceived balance sheet or risk management weaknesses leading to Credit Suisse’s failure and sale to UBS. At the core of this crisis of confidence remains some fundamental issues that are not entirely resolved, as evidenced by First Republic Bank's failure last week, and thus leads many to believe that more volatility in the banking sector could still lie ahead. While the impact from these events may most acutely impact US regional banks, we have already seen and expect to continue to see cascading impacts globally. Two critical and interrelated issues pertain to:

Asset and liability risk management: as interest rates have increased, long-dated, low interest rate assets and investments on bank balance sheets are worth less and could generate losses if sold to raise needed liquidity.
Uninsured deposits: higher interest rates and concerns over uninsured deposits has caused depositors to reevaluate their banking partners and move excess deposits to other banking (or non-banking) institutions to maximize yield and deposit protection…putting further liquidity and funding pressure on regional banks

As governments and regulators turn their attention to these issues to restore confidence in global banking systems, regional and mid-sized banks will experience heightened scrutiny around their business models, sources of liquidity, balance sheet strength, operational resilience, executive compensation and risk management practices. And as always, with volatility and heightened regulatory scrutiny, will also come heightened insurance underwriting scrutiny. This market trend, and others related not only to financial institutions but also to the market at large, are highlighted in this quarter’s report.

Key Q1 findings include:

Precipitated by a confluence of events and conditions, including stubborn inflation (exacerbated by the events in Eastern Europe), a challenging 2022 storm season, ongoing climate change concerns, and pressure from investors to improve portfolio performance, the January 1st treaty renewals were the most delayed, complex and difficult in decades, introducing significant volatility into the market – especially for Natural Catastrophe exposed Property risks and Specialty risks impacted by war and inflation. The market for such risks was characterized by significant price increases, reduced capacity availability, and modified coverage terms and conditions, particularly around valuations.
While the market environment was challenging for Natural Catastrophe Property, as well as higher-risk sectors and occupancies, US-exposed risks (on non-US placements), and risks with adverse claims experience, insurers continued to expand their appetite and compete to retain and grow their portfolios in targeted areas where rates were viewed as adequate, and the scope of coverages had been clarified. Most notably, the Directors & Officers market experienced a continued moderation – with abundant capacity and price decreases available in some major markets – and Cyber market headwinds continued to subside.
Amidst the backdrop of recent bank failures, and evolving regulatory scrutiny on the banking sector, Management Liability and Financial Lines insurers reassessed their exposure to banks and depositors overly exposed to vulnerable banks. Regional US banks experienced rate and retention increases, and insurers signaled more disciplined underwriting and further capacity assessments.

In the Spotlight: Bank Failures section of this quarter’s report we highlight notable risk and insurance market trends and solutions that banks, and bank customers (for example, early-stage tech companies), will need to consider to navigate this period of volatility and be positioned to take advantage of opportunities when presented. Because the events in the banking sector are happening against a complex backdrop of global macroeconomic, geopolitical, and climate challenges that have impacted the risk environment and precipitated the need for innovative solutioning, the Spotlight: Parametric Solutions takes a closer look at how Aon is bringing creative concepts like Parametric insurance to life for clients.

Continue reading to learn more about how the risk environment continues to evolve - for financial institutions and society at large - and the ways the insurance market responded in Q1 to meet the ever-changing needs of our clients.

Spotlight: Bank Failures

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Introduction: Treaty renewals and bank failures created volatility and increased uncertainty while insurers continued to seek targeted growth in well-performing parts of their portfolios​

Spotlight: Bank Failures

Introduction: Treaty renewals and bank failures created volatility and increased uncertainty while insurers continued to seek targeted growth in well-performing parts of their portfolios