Local Banks See Steady Trickle of Deposit Declines

Local Banks See Steady Trickle of Deposit Declines


Slow Trickle of Deposit Declines Raise Concerns for Local Banks

Although the runs on Silicon Valley Bank and Signature Bank did not sink the economic ship they exposed slow leaks of deposits raising concerns for local banks and the economies they support.

Growing Problem for Local Banks

Even before the collapse of Silicon Valley Bank and Signature bank, local banks were losing large depositors. Conversely, the accounts they attracted brought less money.

Banking customers with more than $10,000 in an account have dropped from 44 percent last year to 28 percent in 2023, according to J. D. Powers’ Retail Banking Satisfaction Study. Conversely, deposits carrying balances below $1,000 almost doubled from 17 percent to 30 percent.

“It’s an incredibly tenuous time for both bank customers and financial institutions, and the need for trust between these two parties has never been more pronounced,” said Jennifer White, senior director of banking and payments intelligence at J.D. Power. “Although our study was conducted prior to the recent high-profile bank crisis, the difficult economic conditions that contributed to the Silicon Valley Bank and Signature Bank failures have been building for quite some time.”

Charles Schwab

Even a large national concern like Charles Schwab has been affected.

Morgan Stanley downgraded Schwab from buy-overweight to equal weight Thursday. An overweight designation means the analyst thinks the company will outperform similar companies. However, stocks rated equal weight are expected to be average.

Several other firms see Schwab as a good bet. Goldman Sach and Citi continue to recommend Schwab for the long term. Although Citi lowered its price target for Schwab stock from $75 to $65. That is near Morgan’s estimate of $68.

Noting that Schwab is not losing money, the Morgan Stanley review said more investors are moving funds from the firm’s Charles Schwab Trust Bank to money market accounts.

Like many banks, Schwab Trust holds some low-interest long-term investments. Morgan’s concern is that Schwab Trust might have to sell some of those investments at a loss to cover withdrawals from the bank. However, Schwab CEO Walter Bettinger maintains the firm has the liquidity to cover all the funds in the bank.

Depositor Flight Builds

Following the collapse of SVB and Signature Bank two weeks ago, depositors began pulling money out of local banks. 

Aside from the 25 largest banks in the United States, bank deposits dropped $119 billion, following the bank failures, according to a Federal Reserve Bank report. That is more than double the previous dollar drop and the biggest percentage decline since 2007.

At the same time, deposits at the 25 largest banks grew by $67 billion, according to Fed data.

Other than large banks, many large investors moved their money into Treasury and money market accounts.

Money Markets Draw

Money markets may offer higher interest rates than banks. In addition, they are not weighed down by low-interest loans.  

One of the main functions of local banks is to provide loans for individuals and small businesses. Many, if not all, banks are carrying loans they issued before the Fed launched its rate hike campaign last year. As a result, banks may be earning about three percent on those loans.

Conversely, money market funds are not weighed down by consumer loans. They make money by putting depositors’ funds in short-term Treasury bills and similar investments. As a result, they can respond to Fed rate increases quicker. 

Investors moved $65.99 billion into money market funds for the week ending Wednesday, according to the Investment Company Institute. That brings the total in money market funds to $5.2 trillion.

The rising influx of funds into money markets has raised some concerns.

Yellin Urges Caution

“If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut,” Treasury Secretary Janet Yellin said Wednesday, “it is money market funds.”

Yellin’s comments came as she accepted the Paul Volker Award from the National Association of Business Economics.

There have been two runs on money markets since the turn of the century. One was triggered by the financial crisis of 2008. The other took place in 2020, at the height of the pandemic. In both cases, funds quickly sold investments to cover the cash withdrawals of nervous investors. Those sales resulted in losses in many cases.

Yellin came into office with an eye on the vulnerability of money market funds.

Less than four months after being sworn in, Yellin told her first meeting of the Financial Oversight Council, ”Last March (2020), we saw evidence of how these vulnerabilities in nonbank financial intermediation can take the existing stress in the financial system and amplify it.”

At the same meeting, she noted that the Securities and Exchange Commission (SEC) is reviewing measures to tighten the regulation of money market funds. The SEC’s report on money market funds is expected later this year.

However, previous attempts to add regulatory safeguards have been shot down by industry lobbying.


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What The Sims Can Teach You About Money

What The Sims Can Teach You About Money


When The Sims hit the gaming scene in 2000, I jumped on board. At the time, I was much younger and broker than I am now. That game gave me hours of entertainment for relatively little money. (Of course, that was before the current model of never-ending DLC content that can just about break you if you have to have it all. I still play but now you have to be much more judicious if you want to avoid DLC creep.) Aside from the relatively cheap entertainment, The Sims taught me many lessons about money. Granted, the teaching happens in an abstract way that’s masked by the fun factor, but if you (or your kids) pay attention, there’s a little financial education hidden in amongst all the woo-hoo, Grim Reapers, thieves, and vampires. 

Here are some financial lessons from The Sims:

Money can make you happy… To a point

In the game there is a definite relationship between money and happiness that’s not unlike the real world. People may say that money can’t buy happiness, but it’s not entirely true. Having money can make life easier, which can result in a happiness bump. In the game your mood takes a hit when you don’t have enough money to pay the rent, do repairs, buy new things, or have some fun. The more the money problems mount, the worse your mood gets. This is true in life, as well. Money problems are going to make you unhappy. Making more money won’t solve all of your problems, but it does boost happiness by smoothing the way. 

Once you have “enough” money, life has to offer other meaningful things

The flip side of the above is that having tons of money won’t always make you happier. In the game if you’ve either earned a boatload of money or cheat-coded your way there, you don’t gain much of a mood boost from buying new stuff. Once you’ve bought the nicest stuff in the game and you have the cash to travel and go to events, there’s very little to be gained from “more.” At that point your life satisfaction needs to come from your career, relationships, and/or the things you pursue for enrichment and enjoyment. Real life is the same. You may be Jeff Bezos, but without other things that fulfill you, money cannot make you happy. 

The more stuff you own, the more of your life is devoted to that stuff

And while we’re on the subject of the relationship between money, stuff, and happiness, let’s not forget that more stuff tends to equal more problems. In the game you are constantly faced with things that break down, or need upgrading or cleaning. There’s also the risk of theft or loss due to fire, and don’t forget that your overall bills are higher when you have more electrical stuff or higher rent. The more stuff you have, the more of your sim’s life is devoted to caring for that stuff. Or you’re spending more money to outsource the repairs and care. Sound much like real life? 

DIY skills save you money 

The game also teaches that you can relieve some of the financial burden imposed by your stuff if you improve your DIY skills. The better your DIY, the more you can do yourself, saving some money along the way. This is true in real life, as well. However, there are times, both in-game and in life, where you have to weigh the value of your time against the money you’d spend for someone else to handle the problem. If your sim can go to work and earn three times the cost of the repair, the DIY is less worthwhile, unless your sim derives satisfaction from the effort. We real humans must make this calculation, as well. 

You have to balance your career with life

Which brings us to the next important lesson. Having a career can be great. In the game it can be a source of socialization, skill-building and, of course, cash. However, if you pursue promotion and money to the exclusion of all else, your sim will be miserable. Their mood will crash and their social life will suffer. In real life you also must balance your work with the rest of your life. Promotions are great, as is more money, but you can’t neglect your relationships and the things that fulfill you outside of work. Otherwise you look up one day and wonder what happened to your life. 

Improving your skills is key to moving up 

As your sim gains skills in life, they have more opportunities in everything from their social life to work. They can gain skills that make them better cooks, friends, lovers, gamers, artists, and workers. The broader the range of skills, the easier their life becomes. This is the case for us humans, too. The more we can do in life, and the more attuned we are socially, the easier life becomes. You have more opportunities at work (and in your hobbies/passion projects) and can enjoy a greater range of relationships. If you choose to remain on the bottom rung as far as skills go, everything in your life will be more difficult. 

Quality items can improve quality of life

Money may not buy happiness, but it can buy a higher quality of life. The Sims teaches this well. The cheapest items in the catalog (beds, appliances, home goods, etc.) are functional but basic. The beds are not the most comfortable and the ovens don’t turn out quality meals. The lower quality items also break down more often. Your sim doesn’t sleep, eat, or live as well with the cheapest items. You know this is true in real life, as well. A cheap bed is never going to give you the rest of a high quality mattress. While you may not need a super-deluxe chef’s range, one that heats reliably and has the features you need will result in quality meals. You may not need the top of the line items, but your quality of life improves when you buy quality items. Just don’t buy more than you need. 

Passive income still requires work 

In newer versions of The Sims your sim can pursue passive income. They can write books, sell the rights to music and other items, program apps, or become a content creator. Over time this can yield a nice passive income, but there is a lot of work required to get there. You have to build your skills and reputation in order to start bringing in the bucks. Real life is the same way. There is no get rich quick. Anything that will eventually earn passive income requires a lot of up front work. You have to write those books or songs, produce images for image sites, and create a lot of videos before you gain the kind of following that will result in decent money. 

You don’t have to be great at something to make money

The good news is that while it can take a while to make big money in the game, you can start making money immediately, even if you’re not very good at something. Even your earliest photographs, songs, or art pieces will sell for something. The amounts go up as you get better at the skill. This is generally true in life. Many people make some money at things long before they’re considered “great.” It may not be much and it may require more hustle on your part, but they key is to just start. Don’t wait until you’re great at something to try to monetize it. (How many people have wasted their lives thinking they’d start their business once they have all their questions answered and are creating perfect items? A lot. Don’t be one of them. Just get started.)

The best parts of life happen outside of your job

In the game and in real life, life happens outside of your job. No matter how much you love your work, the relationships, passion projects, travel, and other life events are what really make up your life. I’ve always thought it funny that most jobs in The Sims are “rabbit holes” where your character simply disappears for eight hours. You generally can’t control them while they’re at work. It’s analogous to life. We go to work (or school), put our head down and do the job. It’s only when work is over that we begin living life again. Sure, there are exceptions and The Sims shows this well when you freelance or own your own business. In most of those cases your sim is controllable and is “living.” But the corporate grind is often one big rabbit hole and you need to find your life’s meaning outside of that work. 

Have you ever played The Sims and thought, “Hmm. That’s a good real-world financial lesson?” If so, let us know what you learned in the comments!

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Here’s How Inflation Affects Stocks-5 Things You Need To Know

Here’s How Inflation Affects Stocks-5 Things You Need To Know

How Does Inflation Affect Stocks

While the inflation rate is lower than it was in mid-2022, the rate is still pretty high overall. Since inflation has been an ongoing issue, many people are increasingly wondering, “How does inflation affect stocks?” Ultimately, inflation can impact the stock market in many ways. Here are five things you need to know about how inflation impacts stocks.

1. Broad Inflation Impacts Nearly Any Stock

While most reports about inflation focus on a single figure based on average price changes of products and services listed in the Consumer Price Index (CPI), it doesn’t show the disparities between the various product and service categories. Some consumer categories may see double-digit inflation, while others may see minor changes or even declines.

The trick is that broad inflation has an impact on practically every stock. When consumer prices are rising in many core categories – such as groceries, utilities, and gasoline – it significantly impacts household budgets. This can lead to a widescale spending decline, potentially affecting the bottom line of any consumer-oriented business, particularly those deemed non-essential. Essentially, those companies are seeing falling revenues, and when revenues decline, stock prices usually suffer.

However, even companies selling essential consumer goods and services aren’t shielded from stock market declines. Rising prices can mean that consumers scale back, looking for ways to save on their essentials. Again, this can lead to diminishing revenue even if consumer prices are rising, which drives stock prices down.

Additionally, all companies are seeing their costs rise. Inflation also impacts the price of materials they require for producing the products they sell. Since their costs are going up, profits can fall, which is something else that lowers the stock price.

2. Rising Inflation Reduces Access to Money

When inflation goes up, a common path for countering it is increases to interest rates by the Federal Reserve. While this doesn’t seem like it would impact stocks, it actually does. Higher interest rates – and the stricter borrowing requirements that come with it – limit businesses from getting credit. That can hinder a variety of activities, including developing new products, expanding facilities, replacing aging equipment, and more.

As a result, companies can become relatively cash-strapped, preventing them from pursuing actions they would if funding were more accessible and affordable. In some cases, the ramification of waiting is lower stock prices.

3. Inflation Triggers Market Volatility

Market volatility often accompanies inflation. Along with issues like those above leading to quickly shifting prices, inflation also influences investor sentiment. Those with established portfolios may see the total value of their investments decline, causing them to make reactive investment choices. They may sell for fear of losing more value or might avoid investing more since they’re worried the investment will continue declining after purchase.

Investors with less income may also scale back from investing, particularly if they’re otherwise struggling to make ends meet when prices rise. Again, this is a change in broader investor behavior, and it can lead to more volatility.

Individuals getting close to retirement may also move their investments quickly during inflation. Often, it’s a means of preserving as much of their portfolio value as possible, something that’s more necessary if you’re planning on tapping those funds in the near future. They may also need to withdraw more than originally anticipated to cover their rising expenses, leading to more money withdrawing from the market than would otherwise.

4. Rising Interest Rates Make Stocks Less Appealing

During periods when interest rates are low, stocks end up more appealing. Often, that’s because getting returns anywhere near what the stock market offers through safer options like high-yield savings accounts or Treasury bonds isn’t possible. If growth is the goal, stocks seem like the only option.

When interest rates rise, returns on lower-risk options usually go up while stock market returns decline. As a result, transitioning funds to Treasury bonds or high-yield savings accounts could actually lead to more growth until the situation stabilizes, which can potentially negatively impact the broader market.

5. Inflation Could Create Opportunities for Bargains in the Stock Market

One benefit of lower stock prices is that it could lead to opportunities for some bargains in the stock market. Long-term investors could pick up shares below the price they’ve seen in the period leading up to the high levels of inflation. Then, if the economy recovers, the values of those stocks usually rise, leading to potentially solid returns.

Ultimately, there is risk in using this approach. It isn’t clear how long inflation will remain an issue or how high interest rates will go. Additionally, some companies may fail to weather the current storm, causing them to lose value and not recover. However, businesses with a history of stability, even during challenging times, are worth exploring. Just make sure to research any investment thoroughly when volatility in the market and uncertain economic conditions are part of the equation. That ensures investors can find opportunities with risk levels they’re comfortable with, and that makes a difference.


Did the information above help you answer the question, “How does inflation affect stocks?” or is there something else you wanted to know? Do you have any points you’d like to share that could help others see how inflation impacts stocks? Share your thoughts in the comments below.

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Insurers are not banks

Insurers are not banks

Lincoln Financial Field, affectionately called “The Linc”, has been at the centre of plenty of chaos over the years.

The Philadelphia stadium — home of the Eagles — has seen the city’s notoriously rowdy American football fans throw batteries, climb lampposts and trash its surroundings. It even briefly had a jail for fans to sober up after brawls, though it didn’t rival its predecessor’s jail-and-courtroom combo.

A different type of mess is now surrounding Lincoln National Corp, the Radnor, Pennsylvania-based insurance company that lends the stadium its name. Its stock has slid 31 per cent in March, and has lost 68 per cent of its value over the past year.

Some of Lincoln’s share-price tumble came after it took a Q3 charge of around $2bn, largely because it adopted new accounting assumptions. These new estimates reflect a smaller number of policyholders letting their coverage lapse in the future, which would force the insurer to pay out more policies. (For readers who are inclined to learn more, this 2016 academic paper covers why it’s good for insurers when people let their life-insurance policies lapse.)

That might seem like an idiosyncratic one-time accounting quirk. But the slide didn’t stop there.

Other big life insurers have been under pressure too: Prudential Financial is down 18 per cent this month, AIG is down 20 per cent and MetLife has declined 21 per cent. Pet insurer Trupanion (not shown below, as it’s not a lifer) is down 29 per cent in just one week, after its chief financial officer announced plans to resign.

There are a handful of broad market stresses on life insurers. One that stands out in the harsh light of the regional-banking mess is that they own large portfolios of fixed-rate bonds. And like US banks, those portfolios have experienced unrealised losses as the Federal Reserve has raised rates.

Many life insurers have spent the past decade investing in longer-dated bonds in an attempt to boost yield when rates were near zero, as Piper Sandler’s John Barnidge pointed out in a late 2022 note:

Seems not great for rising rates . . .  © Piper Sandler, SNL Financial

if you care about that sort of thing. © Piper Sandler, SNL Financial

A few examples from 2022 annual reports: Lincoln had roughly $12bn of net unrealised losses on its $111bn available-for-sale bond portfolio. Prudential had more than $23bn, or 7.5-per cent of its AFS portfolio, AIG had nearly $30bn of unrealised losses on its $226bn portfolio, and MetLife had $29bn, or 12 per cent of its AFS bonds.

One important caveat applies to this part of the story, however.

Safe assets’ unrealised losses are mainly worrisome if those assets need to be liquidated. Treasuries and safe bonds presumably have no default risk, so investors are guaranteed to have their principal repaid if they hold them to maturity.

But life insurers have also been using riskier assets to combat low Treasury yields. Depending on the insurer, those holdings may become less forgiving over time.

The chart below, from Piper Sandler’s Barnidge, shows the quality of just insurers’ bond portfolios over time. Lower numbers mean higher quality, and all investment-grade bonds get a score of 1 or 2:

© Piper Sandler, SNL Financial

Lincoln Financial again proves to be a helpful example. It reported in its latest 10-K that it had $16.9bn of commercial-mortgage loans on its books at the end of 2022. The largest share of commercial mortgages — more than 27 per cent — are in California, home of Silicon Valley Bank’s panicky venture capitalists, and more importantly many of their portfolio companies.

In its latest earnings report, Lincoln’s management also cited unexpectedly low returns on $3bn of “alternative investments” as a drag on profits. The investment income from Lincoln’s portfolio of alternatives, which may include venture capital, hedge funds, real estate and oil and gas portfolios according to the 10-K, was literally decimated from the prior year:

Investment income from alternatives

That decimation — meaning it is one-tenth of its prior size — happened even as Lincoln’s alternative investments made up a larger share of its portfolio:

Alternatives were 2.3% of investments at the end of 2022, up from 1.7% the year before.

Income is certainly crucial for insurers’ business, but lower-than-expected investment returns don’t create the type of stress experienced by SVB Financial and its peers this month. Those were classic depositor runs, driven by flighty depositors getting spooked and racing to withdraw their money before others, which could force sales of underwater securities and crystallise the losses.

That’s where life insurers differ significantly from the banks; their liabilities aren’t really comparable to deposits that can be withdrawn on demand.

Insurers can experience sudden changes in their liabilities when they change their actuarial assumptions, the way Lincoln did with its predictions about policy lapses. Prudential, for example, saw a drag on its 2Q22 results from an increase in reserves on its individual-life-insurance business. That reflects, rather morbidly, fewer policyholders giving up their coverage before dying, along with higher mortality rates from Covid-19’s shift to an “endemic” disease.

And life-insurance policyholders can also decide to withdraw their cash and cancel their policy, so a slow-moving run is technically possible.

But for life insurance policies and some types of annuities, people have to pay “surrender fees” to withdraw the cash value of their policy. Insurers sometimes have waiting periods of 30 days or longer before customers get their cash, according to CreditSights. That creates significantly more protection from withdrawals than most banks have on their deposits.

What’s more, three of the big life insurers under pressure — MetLife, Prudential and AIG — have in the past been named as systemically important financial institutions. Those designations have since been withdrawn, but the category was required to stress test for “run” scenarios, meaning “this isn’t some nebulous or unknown risk factor” for life insurers, writes CreditSights analyst Josh Esterov.

Still, the CreditSights analysts don’t think it’s impossible for an individual insurer to experience a run. So they estimated how much money policyholders would need to withdraw before life insurers need to worry about raising additional liquidity:

On an industry aggregate basis, in a given year we’d need to see somewhere between a 35% — 70% increase in surrender activity to breach this threshold. On a name-specific basis this is still well within the realm of possibility, but it’s unlikely such an event would be a systemic issue as opposed to an idiosyncratic issue.

In other words, insurers would need to see a lot more withdrawals before the industry as a whole needs to start worrying about liquidity.

That liquidity could have a range of different sources, the analysts add: “This is likely the point where insurers would consider strategic alternatives for raising capital (FHLB borrowing, selling securities, etc).”

That highlights another possible lifeboat for insurers that find themselves in trouble: The Federal Home Loan Banks, a popular financing option for regional banks under stress, can also lend to many life insurers. Approximately 216 US “insurance groups” can borrow from the FHLB system, according to CreditSights.

It’s important that the analysts cite “insurance groups” and not individual insurance companies, because life insurers’ corporate structures and regulatory environments are very different than banks’.

In the US, life insurers are regulated by individual state governments. This means bigger insurers operate multiple different operating companies, split up by state, all under the umbrella of one unregulated holding company.

If an insurer’s state subsidiary runs into trouble it has more options than a bank would, Esterov told FT Alphaville:

[Insurers] have a lot of freedom at the [holding company] level for how they want their company to look. It’s at the [operating company] level where things get very highly regulated. What you can see is because of that. You almost never see debt issuance at the [operating company] level.

Let’s say insurers decide to raise capital from public markets, issuing new debt or equity instead of selling investments at a loss or borrowing from a FHLB. They could borrow at the holding-company level and transfer funding to troubled operating companies, Esterov says. Because regulators don’t allow the funding to go back to the holding company, they treat it like equity financing, he added.

But for an isolated or small operating-company failure, insurers may have another option, which is to say f**k it and bail. As Esterov told Alphaville:

It’s very possible that [a hypothetical insurer’s] New York company is in distress and the Florida company is doing fine . . . At the holdco level, whatever capital exists, the insurer can support the opco or walk away. The ability to walk away, if [the subsidiary is] not a significant operating company, can be very helpful.

But there’s reputational risk.

To quote a problematic American novel: “Until you’ve lost your reputation, you never realise what a burden it was or what freedom really is.”

Philadelphia’s unruly sports fans, at least, know this well.

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Lloyd’s of London battles insurers over ‘state-backed’ cyber attacks

Lloyd’s of London battles insurers over ‘state-backed’ cyber attacks

Lloyd’s of London, the world’s oldest insurance market, is locked in a fight that will shape the future of the industry’s newest gold mine: selling protection against cyber attacks.

From next month, Lloyd’s will require the dozens of insurers that operate in the market to include exemptions that would prevent policies paying out if a major attack is judged to be “state-backed.”

Exclusions for acts of war have long been a staple of policies ranging from property to motor, shielding insurers from the potentially crippling claims that a physical conflict generates.

But Lloyd’s, a powerhouse in the global industry, believes war exclusions need updating for the internet age, when cyber warfare can be government sponsored even in the absence of conventional conflict. Failure to exclude significant state-backed attacks from policies would leave insurers exposed to “systemic risk”, Lloyd’s said when it first announced the plan last summer.

The move is the most significant attempt yet to overhaul the still embryonic market and comes as companies increasingly identify cyber attacks as one of the biggest threats to their operations. Businesses spend around $10bn a year on policies designed to compensate them for business interruption and other financial losses. Fitch Ratings forecasts the total spend could reach $22.5bn by 2025.

The “proliferation of imprecise cyber war exclusions could hurt the development of a sustainable cyber insurance market, which is in no one’s interest,” warns Simon Ashworth, head of insurance analytics and research at S&P Global Ratings.

The debate unleashed by Lloyd’s has also exposed how contentious the question of cyber insurance has become for the industry. A spate of attacks in recent years that disrupted hospitals, shut down pipelines and targeted government departments alarmed some industry executives and sent prices for cyber insurance soaring.

Opponents of the move to exclude state-backed attacks say it risks putting off companies buying the insurance at all, potentially squandering one of the biggest opportunities for the industry in a generation.

“If the insurance industry doesn’t step up, [cyber] will be one of the biggest missed opportunities with companies self-insuring or government schemes being developed to deal with the challenge,” said Michael Steel, head of Moody’s RMS, a major risk-modelling firm.

Some of the world’s biggest cyber insurers say the Lloyd’s episode has been a bruising one.

“It’s a public relations disaster for the industry,” said Joshua Motta, chief executive at San Francisco-based Coalition, a major cyber insurer that sells some of its policies within Lloyd’s. Though he is adamant that cyber insurers will continue to pay high levels of claims, Motta said the intervention by Lloyd’s “was designed to bring clarity . . . in practice it seems like it has done the opposite”.

The run-up to the deadline has been frantic as insurers seek to make sure their own policy wordings meet Lloyd’s requirements. Some businesses, fearful that the policies will no longer give them adequate cover, have taken their concerns to Lloyd’s leadership directly, according to people familiar with the matter.

“Where we feel the mandate has caused undue pressure is by not allowing enough time for the commercial market to come up with solutions,” said Sarah Stephens, head of international cyber at Marsh, the world’s biggest insurance broker. Insurers feel “handcuffed” by the timing and the requirements, she added.

Bar chart of Some of the main reasons companies give for not buying cyber insurance (% agree) showing Cost and distrust over payouts restrain demand

The ability to produce carefully crafted language has long been a vital skill for insurers, but as they have hurried to bring cyber policies in line with the Lloyd’s directive two key areas of concern have emerged.

The first centres on attributing attacks. Andrew Correll, insurance solutions director of SecurityScorecard, which rates companies on their cyber security defences, predicted confusion in the aftermath of an incident as insurers seek to argue it is state-backed, and victims try to prove the opposite.

“Rarely do countries take responsibility and sometimes threat actor groups don’t have clear affiliation,” he said.

Many attacks fall within what Elizabeth Braw, a senior fellow at the American Enterprise Institute, has dubbed “greyzone aggression”, when one country seeks to weaken another but without declaring war. She cites as an example the 2017 NotPetya attack, attributed by US intelligence to Russia, which disrupted Ukraine’s state infrastructure but spilled over to affect big US and European businesses. Some insurers argued that NotPetya was akin to a “warlike action” and therefore not covered.

The second point of contention is how to define attacks that create “significant impairment to state infrastructure”, a description used by Lloyd’s in its directive to the London market’s insurers.

This is especially difficult, said Marsh’s Stephens, for providers of services such as healthcare and finance, who are worried that any sabotage against them would end up being excluded as an assault on essential state functions. The ambiguity over both this and attribution meant Marsh still could not tell its clients exactly when policy conditions would be triggered, she added.

“Unless there is a very clear definition of war, you are not going to be able to apply the exclusion with any consistency,” said Mike Kessler, head of cyber at US-listed insurer Chubb. The insurer, which also has a Lloyd’s operation, has been in talks with Lloyd’s over whether the wording of its exclusions meet the new requirements.

Insurers that have already adopted Lloyd’s-compliant war exclusions ahead of the deadline say they are feeling the effects on the top line.

“Our new business [in cyber] went down in December last year and into this year because the cyber market has not universally approved cyber wordings yet,” Adrian Cox, chief executive at Lloyd’s insurer Beazley, told the Financial Times at its full-year results in March.

Still, he defended the step as the “right thing to do” to provide transparency, as well as being increasingly demanded by reinsurers, who share losses with primary insurers.

Regulators have also pushed for clarity. The Bank of England in January warned that insurers must assess the consequences if exclusions in cyber policies do not hold up when challenged by customers.

The move by the centuries-old market carries some risks as businesses can choose to buy policies elsewhere, including in rival international markets such as the US, or from UK and European insurers outside of Lloyd’s.

Coalition’s Motta said that the group, which does some business through Lloyd’s, will continue to offer cyber insurance with its existing exclusions on those policies it sells on other markets.

Speaking to the FT last week, Lloyd’s chief executive John Neal stressed “cover can be given” for major state-backed cyber attacks but only through add-on policies that clearly set out the terms and cover, such as is the case for other lines of business such as marine and aviation. But those in the market say there is, as yet, limited appetite among insurers to provide specific war coverage for cyber.

The controversy comes as Lloyd’s last year reported its best underwriting performance since 2015 as a sustained upswing in commercial insurance and reinsurance prices more than made up for big claims from the Ukraine war and Hurricane Ian.

Patrick Tiernan, chief of markets at Lloyd’s, was unrepentant when defending the need for exclusions earlier this month. “If folks in other jurisdictions . . . feel it is a good time to be giving away this cover to gain market share, best of British luck to them,” he told underwriters at a quarterly presentation.

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