Say the words “financial institution,” and a money-center bankor a big regional bank with a correspondingly big ad budget oftencomes to mind. But in many small towns, a financial institutionoften takes the form of a locally owned community bank. We insuremany of them, and in this article, I'll give you an overview of howwe meet their needs.

Iowa Bankers Insurance and Services Inc. is a wholly ownedsubsidiary of the Iowa Bankers Association, a state affiliate ofthe American Bankers Association. While the association first ownedan insurance agency in the 1920s, Iowa Bankers Insurance andServices Inc. itself was started in 1972 and recently observed its35th anniversary. Originally, our agency concentrated on threebasic coverages: the financial institution bond, D&O liabilityinsurance and a health-insurance program, the self-funded IowaBankers Benefit Plan. Today the agency offers a complete line ofcoverages for financial institutions. It has more than $100 millionin premium volume, a big chunk of which is still attributable tothe health-insurance program.
Iowa is a rural state. So our typical client is a community bankwith $150 million or less in assets. We also insure some savingsand loans. The IBA has about 390 members, which is 93% of the banksin the state. As you would expect, we have good penetration withinthe market, but by no means have it to ourselves or can take it forgranted. Nor do we write all coverages for each of our clients. Atlast count, we had written about 277 financial institution bondsfor our clients, 252 D&O policies and 226 package policies.That includes a number of policies we write for perhaps a few dozenbanks in Illinois and Minnesota.
About 225 of the IBA members operate insurance agencies themselves,which we may work with when placing coverage. The presence of theinsurance agencies also creates an exposure, for which we recommendthe agencies purchase coverage from the Independent InsuranceAgents & Brokers of America's agent E&O program. Some banksalso have financial consultants working out of in-house investmentcenters, an exposure we cover with bankers professional liabilityinsurance.
Many community banks like to keep at least part of the account witha local independent agent. Such agents often are valued bankclients; occasionally they even serve on the bank's board ofdirectors or may know bank executives from their common involvementin a church or local business organization. We respect theserelationships. After introducing ourselves to a bank and earningits trust, we may, if it desires, write some or all its coveragethrough a local agent. In these cases, the agent keeps the bulk ofthe commissions, so it's a win-win for both of us. The bank, ofcourse, also wins since we generally can provide greater expertisein regard to such products as the financial institution bond andthe D&O insurance, coverages which most independent agents,particularly in rural areas, don't write in enough volume to obtainin-depth knowledge of them.
Indeed, coverage for financial institution insurance is aspecialty. Here are some of the bank-specific products theytypically require.
Financial institution bond: In talking to banks abouttheir financial institution bonds, we ask if the bank has reviewedthe adequacy of the limits lately and considered whether they haveall the coverages they require. Financial institution bonds havenumerous coverage parts, some of which are optional. One majorissue we've been addressing lately is coverage for loanparticipation fraud.
In a loan participation loss, a bank that has, say, a $2 millionlending limit may be approached by a scam artist posing as areal-estate developer who wants to borrow $10 million for aproject. The bank may be persuaded the venture is legitimatebecause of the presentation of fraudulent financial statements ortax returns, or counterfeit stock certi-ficates or other boguscollateral. The bank lends the scam artist the full $10 million andthen sells off the obligation in excess of its $2 million legallending limit to other lenders. The participants buy these loans ona non-recourse basis. If the loan goes bad, they cannot recoverfrom the originating bank, which does not guarantee the loan.
The financial institution bond provides coverage for some loanparticipation frauds. It is important to note, however, that thiscoverage is not credit guaranty insurance. It is intended toprovide first-party coverage to the financial institution forlosses associated with forged or counterfeit documents orcollateral used to secure the credit. Banks are well-advised toturn to their insurance companies' claims department for anexplanation of just what their financial institution bond covers inthis area.
The seriousness of the loan participation exposure was dramaticallyhighlighted earlier this year by the arrest of music impresarioLouis Pearlman, who was accused of running a Ponzi schememasquerading as a savings program offered by a company he owned. Bythe time regulators took it over, investors had lost more than $500million-including $20 million by North Dakota banks.
First- and third-party Internet liability coverage: Banksalso are increasingly opting for coverage for Internet liability,which can be obtained under the financial institution bond'scoverage for computer systems fraud. This coverage addresses abank's first-party losses arising from such things as hackerattacks or damage caused by computer viruses.
Third-party liability coverage for such things as identity theft isavailable as a separate Internet banking policy or as anendorsement to the D&O policy. I've seen increasing interest inthis product, although it can be expensive. Some insurers alsooffer “privacy coverage,” which is similar but covers such risks astheft of data by means other than the Internet. For instance, athief might simply take files from a banker's desk or steal alaptop loaded with Social Security numbers from an employee's homeor auto. Banks are showing increasing interest in this coveragebecause regulators are paying much more attention to the securityof customer data.
Directors and officers liability insurance: Banks seem tobe purchasing “Side A” coverage for individual directors more oftenthese days. Such coverage provides a separate, dedicated limit thatprotects individual directors and officers if for some reason thebank's D&O coverage is exhausted, rescinded or otherwiseunavailable to cover them. When writing D&O, we recommendseparate per-claim and aggregate limits for all coverages providedby the D&O policy.
We do not attempt to recommend limits for D&O and otherliability policies. For banks that ask us for guidance, we referthem to peer-group comparisons. We review the data with clients,but the choice of limits ultimately is theirs.
Excess deposit bond coverage: Some carriers are nowoffering an interesting coverage that in essence enables banks toattract and serve wealthy individuals, municipalities or otherparties that may have more than $100,000 on deposit at the bank,the largest amount the Federal Deposit Insurance Corp. will cover(other than for $250,000 in self-directed retirement accounts). Oneof our markets, Progressive, will insure deposits as large as $15million.
Commercial package policy: This product includes thetypical coverages any business may require, including commercialproperty, commercial general liability, commercial auto, workerscompensation and umbrella. With Chubb, we offer a safety-groupprogram covering such exposures that pays participants a dividendfor good loss experience.
When reviewing a bank's insurance program, we use comprehensiverisk management guidelines to gather information for submissions.We have one guideline for the financial institution bond, anotherfor D&O and all professional liability exposures, and a thirdone that covers our commercial package program. For each coverageon each checklist, we note whether the bank currently has it,whether they would like a quote on it if they don't, or whetherthey wish to decline coverage or a quote. The checklists are quitedetailed. For instance, under the bankers professional liabilitysection, it asks if the bank has, or wants, coverage for suchactivities as appraisal services, real-estate sales or management,tax planning or tax preparation services, bookkeeping services anddata processing for others.
In addition to our completed checklists and information aboutdesired limits and coverages, we provide insurers with supportingunderwriting information, including current claims data, lists ofdirectors and officers, and current financial statements. Muchinformation about banks, including financials and the results ofbank audits, is available to underwriters online. If they seeanything of particular concern, they ask for a copy of the bank'sresponse letter to the audit.
The market for financial institution insurance is extremelycompetitive today. Therefore we attempt to write three-yearpolicies, which can provide a discount for clients and alleviate abit of the competitive pressure. We work primarily with fiveinsurers. Besides Progressive and Chubb, they include Travelers,OneBeacon and Zurich. Given how competitive the market is today, wemay approach all five with a given submission.
On renewals, we always quote the incumbent, and the mostcompetitive market offering “like-for-like” coverages. If Company Ais the incumbent, and their proposal is $15,000 higher than acompetitor's, we will inform the incumbent of the difference. Ourrule, in all fairness to the incumbent, is to give them the lastlook. If they decline to match the competitor, we then look at whatthe next two most competitive markets will offer.
After we receive quotes back from our markets, we prepare ourproposal for presentation for the chief financial officer and theCEO. As a service, we also offer to meet annually with the bank'sboard of directors to review all the coverages we write for thefinancial institution. We are not certified risk managers, but whenwe come across good articles germane to financial-institutioninsurance, such as from the FC&S Bulletins or the InternationalRisk Management Institute, we pass them on to bank clients afterobtaining permission from the publishers.
Our parent, the Iowa Bankers Association, also has an excellentcompliance department. Its compliance manager and staff arewell-versed on all federal regulatory requirements, and can be usedas a resource by all IBA-member banks. Sometimes we also receivereferrals from the auditors.
To better serve clients, we encourage professional development.Everyone in our agency working on the property-casualty side of thebusiness has a designation or is working toward one. Most of thepeople on our marketing staff have, or are in the processing ofobtaining, the Certified Insurance Counselor (CIC), the CharteredProperty Casualty Underwriter (CPCU), the Certified Risk Manager(CRM) or other relevant designations.
To thrive in a highly competitive business, community banks stressresponsive, personal customer service. We do no less in meetingtheir needs. Lawrence Gille is senior vice president andproperty-casualty manager of Iowa Bankers Insurance and ServicesInc. The agency is owned by the Iowa Bankers Association and is amember of the Independent Insurance Agents & Brokers ofAmerica. Mr. Gille began his working career with two banks inMinnesota. In 1972, he joined North Central Life Insurance Co., forwhich he sold credit life insurance. Mr. Gille joined Iowa BankersInsurance and Services in 1978, working on the property-casualtyside. He became manager of the property-casualty department in1997. He holds the CPCU and CIC designations.