XL Catlin has launched an operational risk insurance product within its financial institutions practice.
The specialty insurer says its approach is tailored to each policy by peril or specific scenarios, but with a potential claim limit up to $300m, dependent on the particular scenario.
“Anything meaningful has to be of a large capacity. We don’t shy away from that. Basically you need a 'go big or go home' approach,” says Angelos Deftereos, senior underwriter for operational risks at XL Catlin, speaking to Reactions.
Deftereos outlines three aspects which have influenced the development of the op risk product – which goes some way to linking the banking sector’s approach to risk management with an underwriter’s eye view for insurance.
The first is a shift in insurance buying patterns among banks and other financial institutions, he suggests, towards the “bigger tail end catastrophe risks”, and the necessary insurance result of seeking big covers for those risks: “large capacity”, he says.
“The second point is that the cover is customised to the specific risk the client is telling us about, so it can be as granular as their own internal model is telling them,” he says.
“Because each firm’s profile is different, when it comes to insurance, one size does definitely not fit all. Each solution reflects the firm’s risk as they themselves have articulated it, using their own terminology, and understanding of their operational risk,” he adds.
The third aspect he mentions is “confidence” that the product will pay out in the event of a loss, with “few exceptions” built in.
“These highly tailored and specific solutions are designed to provide absolute clarity of coverage giving operational risk practitioners and regulators the confidence that they will work as intended when needed,” says Deftereos.
Within banks' risk management, op risk groups together myriad liability and specialty insurance risks, such as: rogue trading; internal or external frauds; money laundering; physical losses; business interruption or supply chain losses; fat finger trading or accounting goofs; cyber risks and data breaches; and corporate governance failures leading to legal or regulatory costs and penalties.
For banks, risk transfer via insurance offers not only the cover itself but also regulatory capital benefits under the international Basel III framework, according to XL Catlin. European regulators as well as those in Australia and elsewhere have implemented Basel in detail.
Asset managers also face comparable compliance demands, while in Europe, insurers face a similar regime through the enterprise risk management approach of Solvency II’s Pillar II. The structure of the EU insurance directive – slated for January 2016 implementation – is itself based on its Basel forebear in banking.
“The potential for this is hundreds of clients around the world,” says Deftereos.