The collapse of Silicon Valley Bank (SVB) continues to generate concern. As the second-largest bank failure to occur in the U.S., and the largest since the 2008 financial crisis, it has sparked fears for the future of similar financial institutions, and for the wider economy.
While things seemed to have stabilized in the wake of the initial collapse, companies in financial services, and especially those in the insurance sector, still need to be paying attention.
In addition to some insurance companies having exposure directly in SVB, there are others facing risk from the same investments that led to the SVB collapse. Amid all this disruption, it’s important for those in the industry to take a step back and reevaluate their approach to risk management in insurance.
To help your company manage the repercussions of SVB and continue to be successful, you need to understand why SVB failed, the impact on the insurance industry and what you can do to respond.
Why did SVB fail?
In simple terms, SVB failed because they didn’t have the cash needed to pay their depositors, forcing regulators to take over their institution.
Why SVB lacked the cash is more complex.
Prior to the failure, SVB actually saw an increase in deposits, and over the course of the previous few years, they had been investing this extra revenue in U.S. Treasury securities.
Normally, securities aren’t considered a risky investment, but the value of bonds and other securities decrease as interest rates rise, and vice versa. SVB had originally taken advantage of a period of low interest rates, so as the interest rate environment increased in 2022 and 2023, the value of the securities SVB had invested in plummeted.
Simultaneously, the higher rates meant that their tech startup customers were having to make larger withdrawals to cover debt and facing more challenges in raising capital.
Because SVB’s securities had taken on large loss positions, when SVB needed to liquidate them to meet these increased deposit outflows, there wasn’t enough capital to absorb the losses.
The implications for the insurance industry
When a financial institution fails, the effects are never isolated. Just as the 2008 crisis had far-reaching impacts, the collapse of SVB has implications for the entire financial services industry.
For insurance companies, many of these impacts are centered on liquidity risks.
Some companies are having to consider whether their liquidity risk is greater than they originally thought. The possibility that other financial institutions could fall to the same issues as SVB has left companies needing to evaluate the soundness of their exposures. And there is also the risk of the unrealized losses insurance companies may have in large bond portfolios.
But there have been more direct impacts as well, with the stock prices of companies with investment and exposure in SVB taking a hit.
How to strengthen your risk management
The important takeaway for many insurance companies is that they need to consider how much concentrated risk they’re carrying.
Your response to the SVB collapse should start with a look at whether your liquidity management processes can meet your company’s needs and your stakeholders’ concerns. When things such as interest rate volatility and inflation indicate economic uncertainty, take time to reassess these processes and look for ways to strengthen them.
This is especially true for products such as life insurance. Claims for property and casualty can be unpredictable in both magnitude and timing. If companies want to be able to meet payouts, they need to ensure they’re maintaining a strong liquidity position.
To help your company better manage risk, evaluate how you are:
- Using interest rate risk-based strategies with your investments.
- Implementing liquidity risk management, such as process validations and stress testing.
- Providing quality training for your board of directors and management.
- Funding your balance sheet.
It’s also important to increase your liquidity monitoring and the frequency of your liquidity reporting. Companies that face decreased liquidity due to bond portfolios should be increasing their reporting to monthly, or even weekly. And they should be monitoring liquidity triggers so that they can better prepare for any potential crises.
If needed, consider hiring an outside advisor. They will be able to help you evaluate how your internal controls are mitigating risks and whether your processes and products are truly serving your customers. They can also provide guidance in any areas where your company may be lacking.
If you want your insurance company to be successful, it’s not only about having a strong balance sheet. You need to ensure that you’re practicing effective risk management and that you’re on top of liquidity.
How Wipfli can help
At Wipfli, we understand the challenges your insurance company faces in adapting to ever-evolving economic realities. Our team brings our decades of experience to helping ensure your company can thrive in any conditions. We offer quality solutions and strategies for everything from risk advisory to cybersecurity and more.
Contact us today to learn about how we can help you realize your future success.
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