Rapid growth in the financial technology (FinTech) sector is quickly changing how financial services are delivered, creating both opportunities and challenges.
But this growing field is often incongruous with the traditional insurance products that companies turn to for coverage, says Jacob Decker, Vice President and Director of Financial Institutions at Woodruff-Sawyer & Co.
“The exposure of technology services and financial services are much more closely related with some of these new business models,” Decker says.
“But we are not seeing the blending of the errors & omissions (E&O) policies for these two segments with any regularity, which is ideally where the insurance industry would go. Right now, the technology and financial service industries are underwritten by separate specialists within dedicated underwriting groups who bring very different perspectives in terms of how they underwrite.”
Smart Business spoke with Decker about the challenges FinTech companies face and what they can do to protect their interests during this time of transition.
What do these companies need to be concerned about from a liability standpoint?
The challenge arises when you have a technology product or service component and then a regulatory, fiduciary duty or suitability component that is unique to delivering financial services.
You may have investors that rely on your platform to efficiently underwrite credit risk and provide liquidity should they want to exit their investment. If there is a problem with functionality, such as a flaw in your software or lack of availability of a trading platform, that would generally fall under a technology E&O insurance product.
If it’s a matter of your underwriting criteria being applied inappropriately or inadequately to price credit risk, which is in turn relied upon by investors and holders of any notes backed by extensions of credit, that’s more of a financial service E&O matter.
Shocks to the system often stemming from macroeconomic events can lead to significant stresses to financial firms and test the limits of their technology platforms’ ability to respond. Investors, borrowers and regulators tend to bring legal action with the benefit of hindsight, so solid risk management practices and bespoke insurance solutions should be implemented while the sea is calm.
How prepared are FinTech companies to address these issues?
Many companies in this sector are intently focused on the user experience and the technology, but may underappreciate the additional regulatory and consumer protection exposure they take on.
Another concern is they may have the best physical and IT security system that money can buy, but that doesn’t change the fact that their customers and employees are much easier to breach from a login credential and overall security standpoint.
How are you going to deal with fraud that occurs from what appears to be a legitimate customer logging in and conducting a financial transaction? From a reputational standpoint, it will likely be untenable to push that responsibility onto the consumer, even if that is where the fault lies.
How can a business protect its interests?
Review contracts with third-party vendors you use for Web hosting, warehousing, data storage or any other functionality on the back end of your platform so that you understand what, if any indemnification may be available.
Understand that you are the brand that is known to your customer and it’s your responsibility to protect their information, so knowing where sensitive information resides and how it’s protected is crucial. A breach at the cloud provider hosting your platform doesn’t eliminate your legal liability to protect their data.
As the insurance industry adapts, you need a trusted adviser who can walk you through what could go wrong and how your current policies would respond, even if that means you ultimately decide to self-insure a particular exposure.
Make sure you’ve optimized all of the potential policies that could be involved to eliminate or reduce the potential for gaps in coverage.
You’ll likely need to adjust a number of different policies to arrive at the most comprehensive level of coverage. ●
Insights Business Insurance is brought to you by Woodruff-Sawyer & Co.
