Financial Institutions Face Growing Risks Amid Rapid Technological Changes
The highly regulated financial sector is facing a multitude of risks, from shifting political landscapes and regulatory changes to the rapid evolution of digital assets and artificial intelligence. According to Aon’s 2023 Global Risk Management Survey, the top 10 risks for financial institutions include:
- Cyber attacks or data breaches
- Regulatory or legislative changes
- Failure to attract or retain top talent
- Economic slowdown or slow recovery
- Artificial intelligence
Legacy Software Puts Institutions at Risk
The use of legacy or unsupported software can greatly exacerbate these risks, putting financial institutions at risk of system outages and consequent loss of income and customer trust. In addition, the need to respond to changing client needs is driving the adoption of new technologies, which can be a significant challenge for institutions that are not equipped to manage these changes.
ESG and Climate Change Risks Ignored
Despite being critical risks, climate change and ESG (Environmental, Social, and Governance) criteria were not included in the top 10 list of current or future risks. However, regulation of climate-related risk quantification and disclosure is ramping up in the financial sector, making proper quantification a key concern for financial institutions.
Mitigating Risks Requires Holistic Approach
To effectively mitigate these risks, financial institutions must take a holistic approach, integrating loss quantification, scenario analysis, and insurance optimization across top operational risks. This includes:
- Properly assessing and quantifying risks such as cyber, third-party, tech or system failure, and reputation
- Long-tail risks can be easily overlooked, and exposures related to digital and crypto assets could be catastrophic
Captive Insurance Can Provide Risk Transfer
Captive insurance can provide a valuable tool for financial institutions looking to transfer risk, particularly in areas such as cyber insurance. However, it is essential that institutions understand the risks involved and have a clear strategy in place for managing these exposures.
ESG Can Be a Strong Differentiator
If managed and communicated well, ESG considerations can be a strong differentiator for financial institutions. Proper quantification of ESG risks requires data and modeling to avoid any actual or perceived misrepresentation.
Conclusion
The financial sector is facing a rapidly changing landscape, with new technologies and regulations presenting both opportunities and challenges. To succeed, financial institutions must take a proactive approach to risk management, integrating loss quantification, scenario analysis, and insurance optimization across top operational risks. By doing so, they can mitigate the growing risks faced by the industry and remain competitive in an increasingly complex and interconnected world.
Recommendations
- Take a holistic approach to risk management, integrating loss quantification, scenario analysis, and insurance optimization across top operational risks.
- Properly assess and quantify ESG risks, using data and modeling to avoid any actual or perceived misrepresentation.
- Invest in training, communication, and reskilling to upskill the existing workforce and address emerging risks such as cyber attacks and artificial intelligence.
- Develop a strong EVP (Employee Value Proposition) to balance pay with other benefits and attract and retain top talent.
- Consider captive insurance as a tool for risk transfer, particularly in areas such as cyber insurance.