Spotlight: Navigating today’s complex and dynamic financial risk landscape requires a robust approach and multifaceted solutions

As companies continue to grapple with the direct and indirect impacts of the recent events in the banking sector, myriad solutions - from traditional insurance to capital management solutions to IP, M&A and Human Capital consulting - are available to help them navigate this period of volatility and be positioned to take advantage of opportunities when presented.

Traditional Insurance

The evolving risk landscape calls for stress-testing the robustness of insurance programs

With recent bank failures spotlighting banking industry volatility, financial institutions – indeed, all companies that rely on the banking industry to conduct business – should be mindful of the impact that such volatility is having on the insurance underwriting process. For example, management liability and other financial line insurance underwriters already are asking financial institutions and non-financial institutions alike about whether their deposits are too concentrated with any particular bank. For companies that are overly exposed to a given bank, a failure of that bank could spell disaster, and potentially could fuel shareholder claims alleging that the companies’ directors and officers did not conduct adequate due diligence of their banking partner. As for financial institutions, in particular, insurance underwriters already are probing such institutions’ internal controls and strategies with respect to asset liability risk management and customer diversification (e.g., are the institutions overexposed to customers in volatile industries?).

While insurers are working to assess whether their financial institution clients are the next SVB or Credit Suisse, they also are taking note of the evolving risk and exposure landscape. Examples include:

President Biden’s recent call on U.S. legislators to give regulators greater authority to claw back compensation from and otherwise penalize bank executives who have engaged in mismanagement
Enhanced scrutiny of insider sales among directors and officers of financial and other institutions, particularly against the backdrop of recent amendments to SEC Rule 10b5-1
Shareholder litigation and reported government probes involving SVB and Signature Bank in the wake of their respective recent collapses

These are amongst a litany of other recent instances of financial institutions settling shareholder and government claims for substantial amounts, funded at least in part by insurance. Against the backdrop of these kinds of exposures, the insurance market for financial institutions has begun to tighten. Among other actions, insurers of such institutions have refused to agree to rate decreases (notwithstanding softer market conditions leading up to SVB’s collapse, insurers have pushed for rate and retention increases, and have been reconsidering their own exposure to particular financial institutions). Although it is premature to predict exactly how financial institution insurance market trends will unfold over the coming months, one thing is clear already: the negotiation of pricing, retention, and other terms of such insurance already is becoming increasingly protracted and, accordingly, financial institutions should ensure that they have sophisticated brokers beginning these negotiations early and managing such negotiations through proactive communication with all insurers involved.

How Aon Can Help: Financial institutions can benefit from stress testing the robustness of their insurance coverage. Key coverage terms related to evolving exposures include regulatory investigation coverage; run-off provisions, including any pre-determined triggers for run-off; insured/entity vs. insured exclusions and exceptions to such exclusions; provisions governing the order of payments; and provisions concerning potential bankruptcy of the institutions.

Intellectual Property Solutions

Leveraging intellectual property solutions may provide access to additional capital and flexibility

We're seeing a tightening of financial conditions and bank lending following recent events, leading to a potential credit crunch. The ability to value and insure IP on a borrower’s balance sheet can enable banks positioned to take advantage of this dislocation to engage with the high growth community and offer them more creative and effective funding solutions than were previously available. Events over the last month have demonstrated the over-reliance of the venture community on a small number of banks; it is only natural that founders and investors will now have to consider alternatives. Growth companies burning through cash and challenged for funding in the current environment will be more active in the market creating opportunity for many entities, ranging from established venture funds through to new forms of capital seeking to lend against IP.

How Aon Can Help: IP is often a company’s most significant asset and an essential component of corporate value. Aon applies a comprehensive approach to IP across a client’s IP portfolio by applying our three pillars of strategy, valuation, and risk.

Deal Sourcing, Transaction and Investment Strategies Advice

M&A readiness positions companies for opportunities

M&A opportunities will continue to present themselves as vulnerable banks seek to maximize liquidity and adapt their business models. For the banks in question, this could entail a sale of the whole business or sale (carve out) of some of the loan book or other assets / business divisions. Enabling parties undertaking bank-to-bank M&A to work at speed to secure the broadest insights into the target business will be critical to ensuring optimal outcomes.

Clients of the challenged/failed bank impacted by a reduction in liquidity or credit availability will likely look to third parties to support M&A investment and financing, or otherwise potentially be targets for acquisition themselves – particularly considering record levels of capital ready to be deployed by private equity. This could lead to a spate of venture capital buyouts or investment, or an increase in private equity financing and recapitalizations.

For those considering buyouts or investments, due diligence will provide visibility into the transaction, including confirming the underlying insurance, cyber risks and people position of the target. When assessing tech start-ups, analysis should be undertaken to accurately value IP-rich companies to articulate and maximize value on any sale or investment. Transactional insurance products can also offer protection for buyers, including for litigation, tax and other identified risks. These and other balance sheet liabilities can potentially be ringfenced to mitigate risk for buyers/investors.

How Aon Can Help: With complex, time-critical and highly specialized M&A and finance deals, Aon can offer expertise around deal sourcing, transaction processes and investment strategies. Specialist M&A, capital, and credit professionals bring experience in times of financial uncertainty with the potential to unlock greater opportunities at all stages of the deal lifecycle.

Credit Risk and Capital Management Solutions

Accessing credit solutions from the (re)insurance markets can bolster resiliency through credit cycles

The recent events are another reminder that shocks to the banking system are inevitable during fiscal and monetary cycles. As financial conditions continue to tighten, credit deterioration is a mounting concern. This is thus another opportunity for banks to round out and maximize their credit risk management tool kit with solutions from the (re)insurance markets.

How Aon Can Help: Aon works with the insurers to offer a broad range of credit risk and capital management solutions across single name and portfolio risk leveraging (re)insurance markets to complement capital market solutions.

Human Capital Solutions

Prioritize human capital perspectives on the board’s risk committee agenda

For those banks directly impacted by this crisis, there are a number of critical considerations. Banks will need to consider how they can retain critical staff as they wind down operations through special retention incentives and post-wind down transition support. They will also need to examine clawback provisions in executive compensation agreements - and clawback pay, where appropriate. For banks whose wholesale funding costs have increased and there is a particular need to conserve cash, they will need to identify critical staff, conduct attrition risk assessments, and construct an optimal total rewards package that conserves cash.

Insolvencies highlight that human capital failures are often at the heart of risk management issues. Human capital perspectives should be a critical part of the board’s risk committee. Part of this process needs to include a review of executive compensation structures and clawback provisions to ensure they discourage excessive risk-taking. Clients of failed banks need to begin planning for liquidity challenges in the future as venture lending becomes scarce. This includes compensation programs that emphasize long-term incentives, carefully stewarding cash compensation and evaluating the cash implications of cash settled long-term incentive programs.

How Aon Can Help: Aon’s Human Capital Solutions team applies its expertise and workforce data, to help clients tackle transformational projects across rewards, talent assessment and performance analytics.

Aon has been focused on supporting mid-sized and regional banks well in advance of the recent volatility. To learn more about the tools and solutions we have developed specifically for our regional banking clients please reach out to your Aon Team.

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