This piece is by Gerard van Loon, CEO of Alta Signa, and it looks at the changing face of digital asset risks:
As Europe’s financial sector continues to evolve, the risks facing banks, fintech firms, and other financial institutions are becoming increasingly complex. Emerging threats such as climate change, cyber risks, artificial intelligence (AI) integrations, and geopolitical instability are reshaping the landscape. Meanwhile, evolving regulatory frameworks—such as the increasing focus on Environmental, Social, and Governance (ESG) compliance and new sanctions rules—are creating additional pressures on financial institutions to adapt. For these organisations, the key challenge is building resilience in a rapidly shifting risk environment.
Emerging Risks for Europe’s Financial Institutions
The digitalisation of the economy, climate change, geopolitical tensions, and regulatory changes continue to dominate discussions around risk management in Europe’s financial sector. These risks are not just a matter of compliance; they directly impact operations, profitability, and strategic decisions. For financial institutions, navigating these emerging risks is crucial for maintaining their competitive edge.
- Digitalisation of the Economy
The digitalisation of financial services has fundamentally changed the nature of risk for banks and other financial institutions. As more financial transactions are conducted electronically and stored in the cloud, demand for traditional property and general liability insurance has decreased. Financial institutions are scaling down office space and physical branches, relying more on digital channels to serve customers.
However, digitalisation has increased the demand for insurance coverage related to digital assets. As these institutions rely more on cloud infrastructure and electronic data storage, insurers are seeing a surge in demand for coverage against risks like data theft, system hacking, and even wrongful advice generated by AI. This shift is driving increased demand for cyber insurance and professional indemnity products, forcing insurers to innovate their offerings. Captive (re-)insurance solutions and specialised insurance mutuals are also seeing a resurgence, as insurers grapple with the uncertainty surrounding digital assets and a lack of sufficient claims data.
Moreover, the rise of new financial services providers, including online banks and cryptocurrency platforms, introduces new risks, particularly in light-touch regulatory environments. These emerging players pose both opportunities and challenges for insurers, as they operate with higher risk profiles and less historical data.
- Increased Complexity of Regulatory Frameworks
The regulatory landscape is growing increasingly complex, particularly with the introduction of ESG-related requirements and sanctions regulations. Financial institutions are under scrutiny as they navigate this new regulatory reality. The increased demand for directors and officers (D&O) liability insurance and professional indemnity coverage highlights the pressure on executives to comply with evolving regulations.
One of the most significant regulatory shifts is the growing focus on ESG compliance, with investment managers now required to disclose the environmental and social impact of their products. This is creating an additional layer of liability, as non-compliance can lead to regulatory breaches and legal disputes. Furthermore, sanctions legislation has become a key concern, as financial institutions face potential legal challenges from sanctioned entities seeking to recover their assets through European courts.
The rise in regulation is also pushing financial institutions to hold more capital to cover increased operational risks, prompting a demand for capital relief deals underwritten by insurers. Moreover, regulatory complexity is expected to drive an increase in customer complaints, which may lead to a spike in legal defence costs for financial institutions.
- Climate Change and Geopolitical Tensions
Climate change and geopolitical tensions present a growing risk for financial institutions, particularly as they assess the physical and political risks to the assets in their portfolios. Banks and investment managers are scrutinising the adequacy of insurance coverage for their loan or investment assets exposed to natural catastrophes such as floods, droughts, and wildfires, and for assets located in politically unstable regions. Insurers are facing challenges in providing adequate coverage, given the increasing frequency and severity of catastrophic events driven by climate change.
In response to geopolitical instability, financial institutions are also expected to increase their demand for political risk insurance, particularly to protect against trade disruptions in their international trade finance portfolios. In addition, the risk of supply chain disruptions has led to an increased need for contingent business interruption insurance, and marine insurance for cargo and hull assets. Financial institutions that lease or fund these assets are increasingly demanding these types of insurance to mitigate risks tied to both climate change and geopolitical unrest.
- Artificial Intelligence: New Challenges and Opportunities
Artificial intelligence is rapidly transforming financial services, offering opportunities for increased efficiency and new product development. However, AI also introduces significant risks. Unlike human errors, which are often individual in nature, AI errors can be systemic and widespread, potentially causing operational failures across a wide scale. AI systems are also vulnerable to power outages and infrastructure failures, which could lead to widespread disruptions in financial services delivery.
The upcoming EU Artificial Intelligence Act, scheduled for implementation in 2025, aims to mitigate these risks by introducing stricter governance and transparency requirements for AI systems. Financial institutions will need to ensure that their AI systems follow these new regulations, particularly in high-risk areas such as fraud detection and compliance with anti-money laundering (AML) laws. The Act will also require AI systems to respect fundamental rights, such as data privacy, and ensure that they are used ethically in financial services.
The Regulatory Landscape: Shifting Sands
Alongside the EU AI Act, the Digital Operational Resilience Act (DORA) will come into effect in January 2025, aiming to improve IT security for financial institutions. DORA mandates stronger measures to prevent and manage cyber-attacks and operational disruptions. Together, these new regulations reflect the EU’s commitment to ensuring that the financial sector remains secure, resilient, and transparent in an increasingly digital world.
For financial institutions, compliance with these new regulatory requirements will be critical. But it will also represent an opportunity to build trust and strengthen long-term sustainability. Those institutions that successfully navigate these changes will be better positioned to adapt to the digitalisation of the economy and other emerging risks.
Strengthening Resilience in an Evolving Landscape
To thrive in this evolving landscape, financial institutions must prioritise strengthening their cybersecurity measures and governance frameworks. They must also adapt to the growing demand for ESG compliance and align their operations with climate-related risks. The forthcoming EBA sector-wide stress test in 2025 will provide critical insights into the vulnerabilities of financial institutions, further informing risk management strategies.
The Path Forward
Financial institutions are at a crossroads. The rapid digitalisation of services, the rise of AI, and the increased complexity of regulation will all shape the future of the financial sector. The EU’s regulatory initiatives, including the AI Act and DORA, will ensure financial institutions can embrace these technologies responsibly while maintaining security and resilience. For insurers, these shifts offer both challenges and opportunities to develop innovative products that address the emerging risks facing Europe’s financial institutions. Those institutions that successfully navigate this new risk environment will be well-positioned for long-term growth in an increasingly volatile world.
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