Under the regulatory spotlight: how European FIs are adapting their insurance needs for 2025

Europe’s financial institutions (FIs) face a mounting array of regulatory demands in 2025 that have implications for their supporting insurers. These shifts not only impose new compliance burdens but also introduce significant operational risks that are reshaping the insurance needs of FIs across the continent.

For insurers, this evolving risk environment presents both a challenge and an opportunity to support FIs with tailored coverage solutions that meet their complex regulatory and operational risk profiles.

As FIs grapple with the implications of these new regulations, insurers are responding with innovative products designed to offer robust protection against emerging liabilities.

1. The ESG regulatory push: expanding insurance needs for compliance

ESG requirements have transitioned from being a corporate ideal to a legal mandate. In recent years, ESG reporting has become a critical component of regulatory compliance, with frameworks such as the EU’s Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive now mandating stringent disclosures.

This shift in liability has prompted greater demand for D&O and professional indemnity (PI) insurances with the introduction of affirmative ESG-related coverage components.

FIs increasingly seek insurance policies that help them protect their assets and enterprise value from regulatory penalties, reputational and operational damages linked to ESG violations and shareholders’ actions that seek to recover their direct losses, or the company’s financial losses, caused by these ESG breaches or lack of disclosure.

As European regulators scrutinise ESG compliance more closely, and want FIs to actively promote a greener and more socially responsible environment through more effective investment capital allocation decisions, insurers are contemplating sustainable risk transfer solutions that specifically address the increased frequency and exposure of ESG-related claims and legal actions.

Policyholders should also expect a re-pricing of their D&O and professional indemnity insurance protections due to this increase in regulatory scrutiny and financial exposure.

Insurers should also focus on risk management and help European FIs measure and manage their ESG risk exposures by identifying and assessing the key risk areas and by sharing data and research, analytical tools and risk management methods that will help reduce the potential ESG loss frequency and severity.

2. DORA: ensuring operational resilience and cybersecurity

The Digital Operational Resilience Act (DORA), effective January 2025, is designed to fortify the digital resilience of FIs by enforcing comprehensive cybersecurity measures. With the rising incidence of cyber threats, DORA mandates that FIs establish a rigorous operational framework that safeguards against IT failures, cyber attacks and other digital vulnerabilities.

DORA underscores a growing need for operational risk transfer mechanisms such as dedicated cyber insurance policies that cover both the potential first-party losses and third-party liabilities that arise from the digitalisation of financial products and services.

Insurers are now crafting cybersecurity policies that address broader IT operational risks, encompassing not just the response management expenses to data privacy breaches or the reconstitution costs of compromised databases but also the first- and third-party business interruption due to system failures or cascading IT breakdowns in the supply chain.

Additionally, insurers are developing risk management tools and services that help FIs stress-test their cyber insurance programs against specific digital loss scenarios that could jeopardise their operational stability and indirectly their financial solvency.

A key digital loss scenario for FIs is emerging reliance on cloud computing, a service provided by a few major global technology companies. While cloud computing creates uncontested advantages in terms of IT cost reductions, flexibility, transaction speed and scalability, it also creates a dangerous concentration risk even insurers’ risk models will struggle to quantify with confidence.

3. AI Act: addressing liability for algorithmic risks

The EU Artificial Intelligence Act (AI Act), expected to be implemented in 2025, introduces stringent standards around the use of AI, particularly in high-risk applications such as credit scoring, fraud detection, and automated investment and lending decision-making.

FIs deploying high-risk AI models must now meet extensive obligations, including data transparency, ongoing monitoring and conformity assessments. Violations carry steep fines, amplifying the potential financial impact of regulatory breaches.

Concentration risk and transactional speed will uncontestedly lead to larger losses, again potentially destabilising the FIs that rely on AI for the delivery of their products and their services and general decision-making.

Insurers are responding by developing coverage options that specifically address liabilities tied to AI errors, including potential regulatory penalties and the reputational and financial fallout from mismanagement.

As AI permeates the financial sector, insurers’ role in covering algorithmic liabilities will continue to expand even if more research must be carried out to grasp or predict the potential systemic loss scenarios.

4. EBA stress test: bolstering capital and resilience

The European Banking Authority (EBA)’s 2025 stress test will assess the resilience of FIs in scenarios that encompass economic, technological and environmental shocks.

For insurers, the stress test’s focus on systemic risks and operational readiness translates into demand for risk transfer solutions that protect FIs from capital erosion and operational shortfalls. All types of property and logistics insurance products will fulfil a critical role in this respect.

FIs will pay much closer attention to protecting all types of physical assets underlying their finance or investment arrangements, certainly when exposed to the more frequent occurrence of catastrophic natural perils caused by climate change.

Liability products such as D&O and professional indemnity insurance will play critical roles in safeguarding executives and employees as they navigate compliance with these regulatory requirements. Similarly, capital relief products addressing contingent capital and financial guarantees will be essential for institutions seeking a safety net against potential vulnerabilities exposed by the EBA’s rigorous assessment.

The intersection of technology, regulation, and sustainability.

This is just a handful of examples of the regulatory pressures that face European FIs in 2025. The cumulative impact of ESG mandates, DORA, the AI Act and the EBA’s stress tests has elevated the importance of comprehensive risk management strategies that integrate insurance as a core component of compliance and resilience planning.

As the regulatory environment for FIs continues to evolve, the insurance market must remain agile and keep pace with both the technical underwriting requirements of new legislation and the local nuances across territories, providing tailored products that address the complexities of modern compliance.

Gerard van Loon, CEO of Alta Signa