Top five claim trends for asset managers to watch out for in 2023

The claims seen by the Howden Asset Management team continue to be influenced by a number of fast-changing commercial and societal changes, creating an evolving risk environment. As a result, asset managers will need to remain vigilant as new trends emerge in 2023.

Here we look at our claims data and trends over the last year and explore what the future holds for Q1 and beyond. In 2022, the team saw 129 claim notifications^*, increasing from 124 in 2021.

The majority of the claims notifications we have seen during this time relate to investor complaints and regulatory investigations. Undoubtedly, investor relationships and the regulatory environment underpin a number of the trends outlined below and remain key risks for regulated firms. The FCA has placed specific focus on asset and fund managers in the past few years, which we expect to continue in to 2023.

Large Employment Practices Liability claims

Expanding ESG beyond the ‘E’, and perhaps related to the #metoo and other social movements, 2022 was certainly the year of the large EPL claim in the UK. This is reflected in our data, and is the 6th largest loss type notification we saw for asset managers even despite coverage being focused on individuals (as opposed to the legal entities themselves). Whilst large compensation payments are common in the US, last year was the first year in which we have seen a number of UK financial institutions making payments in excess of £1m to individuals alleging discrimination and other employment-related wrongs. Regulators also continued to crack down on non-financial misconduct.

Cyber

Cybercrime continues to be a prevalent issue. According to the Bank of England’s 2022 Systematic Risk Survey, 72% of executives in the financial sector believe there is a big chance of a high-impact cyber-attacks in the sector in 2023 – and 74% see cyber-attacks as the biggest risk in their industry.^[1]

Looking at our data, cybercrime notifications were perhaps more focused on financial fraud (see Social Engineering below), as opposed to data or infrastructure breaches Cyber breaches are an important trend to be aware of for the year ahead, with cyber-attacks becoming increasingly more sophisticated and harder to prevent. More information on cyber risk management and how we can help reduce cyber threats can be found here.

Social engineering

Social engineering is an umbrella term used to describe circumstances in which individuals are duped into paying funds to the account of a fraudster. The most common methods of perpetrating this fraud are to hack into email accounts, or to impersonate a senior member of staff and apply pressure to make a transfer quickly.

Despite detailed training programmes, advanced account checking procedures, and a steady stream of news stories warning about the real and present threat of online fraud, social engineering remains a source of significant losses. We consider this a significant risk for 2023 as criminals sophistication and understanding of the flow of money, particularly in Private Equity fund structures, increases and can result in large claims.

Trade errors

Trade errors remain a frequent source of claims. Unlike ‘long tail’ claims where underlying litigation might not result in claims payment for months, possibly longer, and continues for longer, trade errors tend to occur and conclude within months. Whilst 2022 was a relatively quiet year already in 2023 we are set to have a record year for trade error pay outs even before the conclusion of Q1.

As we continue a period of economic uncertainty, the conditions remain for large market movements to result in significant trading error losses throughout 2023.

Environmental, social and governance

As regulators gear up for more stringent policing of environmental claims, greenwashing remains a mis-selling and investigations risk for asset managers.

Sustainability is undoubtedly the right way forward for 2023. But in adapting to the necessary ESG remit, regulated entities will face new and increased exposures – and this will have implications for insurance.

The FCA analysed the issue in a report in 2021 and has taken a more proactive approach since with its climate-related disclosure requirements, bringing life insurers, asset managers, pension providers and standard listed companies into its scope.

It produced its first climate-related financial disclosure report in July 2022 and acknowledged that some asset managers have made commitments to exit carbon-intensive sectors, such as coal.^[2]

In addition, Net Zero Asset Management Initiative (NZAMI) has set an expectation that members disclose the initial percentage of their portfolio that is being managed in line with net zero, fair-share interim targets. A 2030 target should be consistent with a fair share of 50% reduction in carbon emissions and member firms are expected to reach 100% of assets under management being net-zero aligned by 2050 at the latest.

According to an initial disclosure report by the NZAMI in May 2022, 83 asset managers had set initial targets so far, with 39% of total assets under management committed to being managed in line with achieving zero by that time.

The FCA consultation paper on Sustainability Disclosure Requirements and investment labels (the SDR) was published in October 2022, and is likely to result in a policy statement and ruling by summer 2023. The consultation aims to increase confidence in the United Kingdom as a trusted centre for investment, whilst proposing new sustainability disclosure and labelling requirements.

Whilst we have not seen an increase in specific ESG claims during 2022, we do expect the constantly evolving regulation relating to ESG to influence claims going forward.

* A notification is a fact, event, happening or state of affairs that may give rise to a claim.

The trends and the claims notifications mentioned in the above article are featured within Howden’s Asset Management brochure, should you wish to view this information in more detail please contact your usual Howden representative.

References
^1. https://www.bankofengland.co.uk/systemic-risk-survey/2022/2022-h2
^2. https://www.fca.org.uk/publication/annual-reports/climate-financial-disclosures-2021-22.pdf