Key takeaways:
- Strong capacity and insurer appetite are driving competitive conditions – but discipline is returning, with profitability pressures leading to tighter underwriting, selective rate increases, and more caution at key layers.
- Insurers are shifting toward forward-looking underwriting with governance and risk controls as key differentiators – as they place greater emphasis on operational resilience, regulatory readiness, and internal controls over historic loss data.
- A stable claims environment is masking rising severity and interconnected risk drivers – as defence cost inflation, EPL activity, financial crime, and investor litigation create more complex and costly claims.
- Expanding regulatory demands and geopolitical fragmentation are increasing exposure across FI – raising compliance burdens and amplifying risk, particularly for fast-growing and cross-border firms.
Rates, capacity, and insurer appetite
Financial lines insurance conditions remained favorable for financial institutions in 2025, supported by ample market capacity and strong competition. However, mounting profitability concerns signalled a possible shift ahead so as we move into 2026. Insurers are expected to apply greater rate discipline, pursue modest increases in select sub-sectors, and tighten underwriting standards.
At the same time, scrutiny is intensifying around financial and operational resilience, fraud, digital assets, AI-related exposures, cybersecurity, M&A integration, and defense costs. Although the market remains generally favorable, success over the next year will depend on preparation, transparency, strong internal controls, and proactive engagement with underwriters.
Conditions tighten as banking sector evolves
The banking sector has proved its resilience in the face of recent market shocks – the result of stronger capital positions and enhanced regulatory oversight. Ultimately, this has served to keep pricing and retentions stable for well-managed institutions.
Buoyed by an influx of new entrants, market capacity also remains healthy. However, underwriters are increasingly prioritising discpline by lessening their reliance on historical loss data, in favour of forward-looking operational risk assessments. As a result, terms are becoming more conditional. Areas of scrutiny include banks’ deployment of artificial intelligence (AI), cyber security, regulatory controls, and third-party risk management. Banks’ exposure to Authorised Push Payment (APP) fraud, and the preventative measures they are taking, is a point of particular concern. Broadly speaking, terms are narrowing wherever risk visibility is limited.
Looking ahead, the weakening of the rules-base global financial system is expected to drive further fragmentation of the banking sector. Regulatory expectations are increasingly tied to divergent national security priorities, with sanctions, trade controls, and capital restrictions reshaping operating environments. As a result, banks face heightened risk around screening errors, cross border-control, and cumulative failures of oversight. Insurers are recalibrating their risk perspective accordingly, placing greater value on transparency and adaptability.
Ultimately, banks that proactively manage geopolitical risk – with strong governance and robust compliance infrastructure – will continue to attract favourable coverage. Institutions with weaker controls may see tighter exclusions, increased retentions, and more restrictive policy conditions.
Fintechs enter window of opportunity
Rates for fintech insurance have stayed flat through 2026, and comes despite continued growth, which has driven increases in previous years. This is positive news for buyers, and follows insurers’ growing appetite for fintech risk, as they look to offset wider FI rate reductions. Not all fintechs are feeling the benefit of this shift, however. As insurers zero-in on larger excess layer placements, size continues to dictate outcomes. Early-stage start-ups pose a greater risk than their larger counterparts; to offer cover, insurers need to be confident in their understanding of the business and its operations.
Much like the wider market, APP fraud-linked claims are a key underwriting concern. Insurers are likely to become more willing to offer cover with time, but for now historical loss data remains limited. Insurers are also paying close attention as traditional fintechs, including challenger banks and payment firms, increasingly adopt technology and protocols more common to digital asset risks. While many insurers are open to covering these risks under their policies, others are not. Alongside this, increasing regulatory scrutiny – including s.165 information requests and s.166 reviews – is adding to cost and complexity, particularly where rapid expansion is perceived to heighten risk.
There has been a noticeable uptick in EPL claims in the fintech sector, a trend also seen more broadly across financial institutions. As growth opportunities narrow but valuations and incentives remain high, firms are increasingly targeting competitors’ talent pools. This has led to disputes where employees are alleged to have breached non-compete clauses, only to be dismissed for gross misconduct, often despite tacit or explicit encouragement from senior management to bring business with them. More broadly, as fintechs mature, there is a rise in claims relating to discrimination, harassment, and wrongful dismissal.
Financial crime exposure is also evolving. With increasingly interconnected financial systems, allegations of money laundering and related regulatory or criminal investigations are rising, with AML compliance failures a key driver – particularly where firms struggle to maintain controls at scale.
Regardless, continued downward pressure ensures that now remains an opportune time for fintechs to evaluate the size of their limits, and secure excess layers at a competitive price. Should a hard market develop in the months ahead, those who fail to act, or who choose instead to bank their premium savings, may soon come to regret their decision. Firms should also remain alert to evolving regulatory expectations – including developments such as the EU AI Act, enhanced US data protection rules under SEC Regulation S‑P, and Basel III capital and risk standards – which may influence both underwriting scrutiny and future claims activity.
A healthy market for asset managers
Insurers are showing ample appetite for asset manager risks – a fact that has helped to drive reductions at renewal close to five percent. Likewise, the market has profited from the widening of policy terms and conditions, including the removal of sub-limits and non-standard exclusions.
One notable area for which coverage is newly available are claims relating to Section 166 (s166) reviews. Such reviews, which require firms to hire an independent ‘skilled person’ to report on specific business aspects, have historically led to expensive claims, while their relation to Professional Indemnity (PI) or Directors’ and Officers’ (D&O) insurance has proved ambiguous. Nevertheless, insurers are now willing to write protection for s166s into defence wordings, with named individuals.
Beyond this, underwriters continue to apply scrutiny around transparency of fees. This follows recent criticism of the opaque fee structures offered by multiple high-profile wealth management firms, and the resultant impact on consumer outcomes. Sanctioned investors are another source of risk, with many firms in the unwanted position of holding funds belonging to sanctioned investors, thereby placing them in breach of their own guidelines. Yet, returning these same funds is likely to constitute a sanctions breach. Affected firms will occur costs to prepare for, and defend against, likely legal action.
Claims have also risen from entity Employment Practices Liability (EPL) insurance triggers, including unfair dismissal. Despite this, the coverage line is purchased by fewer than 10% of institutions. This continues to create a lingering exposure – especially where insureds have employees in the US, where a fiercely litigious environment quickly causes defence costs to spiral.
Illiquid investments weigh on private capital
More than most, the fate of private capital institutions is tightly bound to an increasingly unpredictable macroeconomic environment. The joint US-Israel war in Iran is the latest event to spike already elevated interest rates, placing yet greater pressure on firms’ financial health. Meanwhile, share price volatility – largely driven by US foreign policy decisions – continues to depress overall deal volume, exerting further downward pressure on returns. Firms’ underlying investments will have their own revolving debt facilities, and will incur similar strain on bottom line if inflationary effects persist.
With firms unable to dispose of loss-making assets, many are utilising continuation fund vehicles in an effort to meet shareholder obligations. Unsurprisingly, these are a key target for underwriter scrutiny. As insurers seek to gauge exposure to potential lawsuits, requests for information are likely to centre around anticipated timelines for investor returns.
In search for new income, private capital firms are increasingly turning their attention to retail investors, with many offering fractional ownership of stocks and other trading instruments. The retail market remains largely untapped, yet the promise of a broader client base comes not without firms fundamentally altering their risk profile. The FCA’s Consumer Duty imposes a greater responsibility on firms to handle consumer care, and to ensure that services offered are fit for purpose. Rules proposed by the US Department of Labor to open 401(k) plans to private equity firms may further accelerate these trends.
As advancements in artificial intelligence (AI) continue apace, risk continues to mount for funds that are weighted heavily towards more traditional software giants. By contrast, a boom in data centre construction has delivered welcome returns for a growing number of infrastucture funds. Insurers continue to monitor these developments closely.
Insurance companies navigate ‘bad faith’ claims
Conditions for insurance companies remained broadly buyer‑friendly in late 2025, supported by significant capacity and easing reinsurance conditions at 1 January renewals. Despite this, underwriters are placing increasing weight on governance maturity. This echoes the direction of the FCA’s 2026 regulatory priorities for the insurance sector, which describe a structural shift to a smarter, outcomes-based model, spotlighting consumer understanding, claims handling, and access to insurance. The burden of proof now falls on insurance companies to demonstrate – with evidence – that their products, pricing, and claims processes deliver positive consumer outcomes. Where they can, companies will continue to enjoy favourable terms.
An exception to this trend is to be found among UK programmes with meaningful US exposure, who are facing firmer insurer positions. This is largely influenced by evolving interpretations of bad faith, with several recent high-severity verdicts emerging from jurisdictions once considered lower-risk. Where governance is weak, firms can expect to see US-specific sub-limits or deductibles, alongside narrowed extra-contractual cover.
To protect against these exposures, firms should seek to identify the claims types and venues where allegations are most likely. In particular, they should take time to evaluate “most favourable jurisdiction” or “venue” wordings and, where appropriate, wrap solutions to address state prohibitions, or uncertainty on punitive insurability. More broadly, firms who are able to successfully navigate a competitive but selective market, and who subsequently secure capacity and superior terms, will be those who provide evidence of claims KPIs and governance frameworks in their submissions.
Claims steady but defence costs rise
The claims environment across financial institutions remains broadly steady, with consistent notification levels and no single systemic loss event to materially disrupt the market. However, this relative stability sits alongside continued inflation in defence costs, which remains a primary severity driver. While no “shock” comparable to past market-defining events has emerged, there is a growing sense of latent risk within the system – whether linked to geopolitical tensions or potential valuation corrections in AI-driven sectors.
Employment Practices Liability (EPL) claims are expected to rise, particularly as new regulatory requirements increase scrutiny on workplace conduct and governance. This trend is most acute for firms with US exposure, where litigation risk and defence costs are significantly higher. As a result, insurers are becoming more cautious in deploying capacity for EPL, tightening terms or reducing appetite altogether. Alongside this, claims linked to underperforming financial products – particularly derivatives, pensions, and investment-linked instruments – are emerging as a key area of concern. In a constrained and less liquid market, investors are increasingly willing to pursue recovery actions in an effort to maximise returns, driving a more contentious claims environment.
Financial crime continues to evolve, with a notable rise in deepfake and social engineering incidents. These events often exploit senior executives, for whom larger transaction values may not immediately appear abnormal, making crime difficult to detect. A lack of clarity around policy response adds further complexity; while cyber policies may help determine how an attack occurred, they do not always respond to the financial loss itself, which typically sits within commercial crime cover. In parallel, shareholders and insurers are placing greater scrutiny on governance frameworks and internal controls, with a clear expectation that firms can demonstrate robust checks and balances.
Against this backdrop, programme structure is becoming increasingly important. There is a clear benefit in aligning insurers across multiple lines to reduce the risk of coverage gaps and ensure consistency in claims response. As claims scenarios grow more complex and interconnected, firms that take a holistic approach to coverage design and limit adequacy will be better positioned to manage both financial and reputational outcomes.
Looking ahead
Over the next 12–24 months, the FI insurance market is expected to become more selective despite continued capacity. Slowing rate reductions, insurer consolidation and uneven profitability point to greater rate discipline and tighter underwriting, particularly at the primary layer. Loss expectations are increasingly driven by cumulative governance, conduct and regulatory failures rather than single‑event incidents, with elevated defence costs and litigation risk acting as key pressure points.
Looking ahead, insurers are signalling a sustained shift toward qualitative underwriting, with governance maturity, claims handling discipline, data transparency and regulatory readiness acting as core differentiators. Expanding retail exposure, persistent asset illiquidity, AI‑enabled processes, fraud reimbursement obligations and geopolitical fragmentation are expected to heighten scrutiny across all FI subsectors. Firms able to demonstrate forward‑looking risk frameworks, resilient controls and proactive engagement with underwriters will remain best positioned to access capacity on favourable terms.
To position your organisation to see the most favourable results at renewal, risk professionals and others should:
Start the process early.
Begin discussions with brokers and underwriters well in advance of renewal dates. As underwriting scrutiny intensifies, early diaglogue will create the time to address queries and position your risk more positively in a more selective market.
Tell your differentiating story.
Meet with your brokers to discuss how best to effectively communicate about your unique risks to the underwriting decision-makers. Highlight what sets your organisation apart and how it contributes to risk mitigation.
Strategise your programme.
Work with your broker to market your programme, to ensure that you maximise the potential for premium decreases or broader cover. If you purchase a programme with multiple layers, brokers can also review the programme structure to ensure it operates in the most efficient manner from a price and coverage perspective.
Update your risk registries.
Identify the key risks with the greatest financial and operational impacts on your organisation, ensure they are highlighted in your underwriting submission, and pinpoint areas where insurance coverage is needed or can be improved. This ensures that all potential vulnerabilities are well-documented and addressed.
Foster internal communication and collaboration.
Promote a culture of risk awareness, and align stakeholders with risk management objectives to improve risk profiles and drive better outcomes across your organisation.
Protecting your success
In today’s fast-changing, highly regulated financial landscape, businesses like yours face many risks. To safeguard your future success, you need tailored insurance protection and a risk partner who truly understands your needs. That’s where we come in. With global reach and deep sector expertise, we’re powerful advocates for your interests. Working side by side with your team, we create comprehensive insurance solutions that protect you against current and future risks.
Luke Speight
Head of Global Financial Institutions Professional & Executive Risk +44 (0) 207 933 0811 luke.speight@lockton.com
Harry McKelvey
Vice President, Global Financial Institutions Professional & Executive Risk +44 (0) 207 933 0513 harry.mckelvey@lockton.com
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