Financial Crime World

Top 10 Future Risks Facing Financial Institutions

Financial institutions are exposed to a multitude of risks that could impact their operations, reputation, and profitability. Aon’s 2023 Global Risk Management Survey identified the top 10 future risks facing financial institutions, which are outlined below.

Top 10 Risks

1. Cyber Attack or Data Breach

  • 12% of financial institution respondents have quantified their cyber exposure
  • Viewing cyber risks from an organization-wide perspective is crucial for effective mitigation

2. Regulatory or Legislative Changes

  • Regulatory changes can impact business operations and profitability
  • Institutions must stay up-to-date with changing regulations to remain compliant

3. Failure to Attract or Retain Top Talent

  • Building a strong Employee Value Proposition (EVP) is essential for retaining talent
  • Investing in training, communication, and reskilling can help address this risk

4. Economic Slowdown or Slow Recovery

  • Economic downturns can impact business operations and profitability
  • Institutions must be prepared to adapt to changing economic conditions

5. Artificial Intelligence

  • AI presents both opportunities and risks for financial institutions
  • Institutions must invest in training and upskilling to take advantage of AI

6. Cash Flow or Liquidity Risk

  • Managing cash flow and liquidity is critical for business operations
  • Institutions must have a solid understanding of their cash flows and liquidity needs

7. Failure to Innovate or Meet Customer Needs

  • Failing to innovate can lead to loss of market share and revenue
  • Institutions must stay up-to-date with changing customer needs and preferences

8. Asset Price Volatility

  • Asset price volatility can impact business operations and profitability
  • Institutions must have a solid understanding of asset prices and their potential impact on the business

9. Interest Rate Fluctuation

  • Interest rate changes can impact business operations and profitability
  • Institutions must be prepared to adapt to changing interest rates

10. Tech or System Failure

  • Tech and system failures can impact business operations and reputation
  • Institutions must have a solid understanding of their technology systems and infrastructure

Mitigating Risks Effectively

To mitigate these risks effectively, financial institutions should:

  • View cyber risks from an organization-wide perspective rather than just a cybersecurity lens
  • Invest in training, communication, and reskilling to address these risks
  • Upgrade the existing workforce with necessary skills to understand and innovate using new tools
  • Retain talent by building a strong EVP to balance pay with other benefits
  • Integrate loss quantification, scenario analysis, and insurance optimization across top operational risks

Products and Services for Mitigation

Financial institutions can use various products and services to mitigate these risks, including:

  • Captive Insurance: A captive insurance company is a subsidiary of the parent company that provides insurance coverage for its own risks.
  • Cyber Insurance: Cyber insurance provides financial protection against cyber-attacks and data breaches.
  • Errors and Omissions Liability Insurance: Errors and omissions liability insurance provides financial protection against errors or omissions in professional services.
  • Climate Risk Consulting: Climate risk consulting helps institutions understand and manage climate-related risks.

Proper risk assessment and quantification are essential for effective mitigation of these risks, particularly for ESG considerations. Regulation of climate-related risk quantification and disclosure is ramping up in the financial sector, making it crucial for institutions to be prepared.