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European financial institutions are buying less insurance or decreasing their sums insured in an effort to reduce costs, despite an increase in claims notifications. While the tactic may have a positive impact on cash flow in the short-term, Marsh, the world's leading insurance broker and risk adviser, is warning financial institutions that such actions may leave them potentially under-insured in the event of claims.

Marsh's latest research reveals that many European financial institutions are now revising or lowering their insurance spend despite a steep rise in claims notifications which, in some lines of insurance, have risen by as much as 400% in the last four years. This uptick in claims notifications has had an impact on insurance rates for financial institutions: in 2009, rates for directors' and officers' liability insurance increased on average between 10% to over 100%.

Frédéric Boles, the Continental Europe Placement Leader for Marsh's Financial and Professional Practice, explained: "The prevailing economic headwinds across Europe mean that firms are increasingly looking to buy the insurance coverage they need for the least possible cost. While this strategy delivers short-term savings, in the longer-term it may leave firms underinsured in the event of a claim."

Separately, Marsh's research shows that the lines between credit, investment and operational risks are becoming blurred. Firms are trying to claim for losses under multiple insurance policies, in order to maximize their chances of receiving indemnification. This means that parties are focusing on policy wordings and possible interpretations meaning that legal expenses, which vary depending on the type of claim, can be substantial.

"The claims landscape for European financial institutions remains particularly challenging this year," Mr. Boles added. "Claims negotiations have become increasingly tough and insurers are taking a firmer stance, as the value of losses has risen sharply in the last 12 months. Insurers are also under greater pressure from their clients to settle claims faster, enabling firms to mitigate their reputational and operational risks.

"The insurance industry needs to be able to articulate clearly the value of these sophisticated and complex policies to buyers. In turn, European financial institutions need to map robust claims processes to improve the claims payment cycle. Increased cooperation among buyers, intermediaries and providers of insurance is critical to extract further value in these policies."