Willie Sutton famously said he robbed banks “because that'swhere the money is.” Similarly, banks can make attractive accountsfor agents and brokers, because that's where the premium is. Butunlike Willie, producers have to earn what they get out of banks.The insurance requirements of financial institutions are complex,and it takes a specialist to cover them. Insurance expertise,however, is only part of what one needs to bring to the table.Banks also count on agents and brokers to provide a variety ofservices, including those that can help keep today's Willie Suttonsat bay. In this article, I'll explain how we take such acomprehensive approach to working with financial institutions andprotecting their assets.

My career in the financial-services industry began in 1983 atAmerican Research Bureau, a collections and data-gatheringorganization serving the banking industry. In 1989, I became anunderwriter of financial-institution insurance at ProgressiveInsurance Co. In time, I became a senior underwriter for afour-state region.

In 2000, I joined The Burnham Insurance Group as product managerover the Financial Institutions Insurance Practice, which had about35 banks as clients, all but one in Michigan. My job was to growthat book. Almost immediately after I joined Burnham, it wasacquired by Hub International, one of the nation's largest retailbrokers. It also was interested in the financial-institution niche.Today, we insure 123 banks, which are located all over thecountry.

Prospecting

Most of our clients are community banks, the majority of which haveless than $1 billion in assets. About 85% of our accounts have beendeveloped from referrals from other clients. Other leads come frombank executives who leave one bank we insure and go to another.They may then ask us to review the insurance at the new financialinstitution.

Accounting firms that provide auditing services to banks, aswell as other bank service providers, can be centers of influence.Suppose a bank is starting from scratch. Their auditors willinquire about their insurance arrangements. If they haven't beenaddressed, the auditors might suggest they contact us.

We also hear from other agents who perhaps don't have expertisewith financial-institution insurance but would like to work withsomebody who does. Often they are customers of a local bank orperhaps a board member. When we work with such agents, we requirethem to let us make joint presentations to the banks. We also mustbe the agent of record with our carriers. Perhaps 10% of ourbusiness is written with such agents.

When working with local banks, we may write just the directorsand officers liability insurance and the financial institutionbond, while the local agents continue to write the standardproperty-casualty coverages, which they are quite qualified to do.Community banks have a strong desire to do business locally, andsometimes resist the idea of taking their business away from alocal agent. When we compete only for the specialized coverages, abank doesn't have to pull the entire account away from its currentagent–which makes their decision to do business with us easier.

Going in prepared

Our approach to selling is to research a prospect thoroughly, thenschedule a first appointment, at which time we discuss why we wouldbe a good fit for them, based on our findings. Before calling onbanks, we use the Internet to look up their financial statementsand other information. Much of it is available on banks' own Websites as well as those of such regulators as the Federal DepositInsurance Corp. The FDIC site provides quarterly financialinformation for banks, whether they're publicly traded or not. Ifthey are publicly traded, there's a wealth of additionalinformation in all the regulatory reports banks are required tofile.

In our initial appointment, we offer banks a complimentaryreview of their insurance programs. By obtaining the review and analternative bid from us, they will gain a much broaderunderstanding of their insurance program, whether they elect towork with us or decide to stay where they are. Our approach leadsto a pretty good conversion ratio; we close on about 30% of ourquotes.

Our analysis starts with an examination of banks' insurancepolicies, focusing in particular on the D&O policy and thefinancial institution bond. No two D&O policies are identical,and it's often possible to find gaps. A few carriers, for instance,do not provide “broad form” entity coverage.

The main purpose of a D&O policy is to cover a financialinstitution and its executives for claims and litigation brought bycustomers, regulators and shareholders, among other parties. Whenyou add other coverages, you may erode the executives' protection.Some banks, for instance, add employment practices liabilityinsurance to their D&O policies, rather than buy a separatepolicy. Small banks with relatively few employees, for instance,sometimes think their EPL exposures are low enough to go thatroute. Yet I've seen $500,000 awards in employment-practices suitsagainst small banks. That can really erode the D&O limits, sowe always recommend a separate EPLI policy. At larger financialinstitutions, directors sometimes are interested in “side A”D&O coverage, which provides limits for their soleprotection.

Having a broad definition of a claim is important. With someD&O policies, the definition is a “written demand” or“administrative proceeding or lawsuit.” In better policies, it'sbroadened to include oral demands, which can start the clockticking sooner on deductibles and can get a carrier involved in anincident before it turns into a lawsuit.

We are extremely careful about advising banks on insurancelimits. They should pick their own, based on contractual andregulatory requirements, and their own risk tolerance. We do giveclients survey information from various bank-related insurancesources, however, to show them the limits their peers arepurchasing. In our experience, a bank tends to buy higher limits,regardless of its size, if an attorney sits on its board or if alawyer is directly involved in its insurance program. For example,one of my clients, a privately owned bank with $400 million inassets, maintains the same $15 million D&O limits as doesanother client, a publicly owned bank with $3.4 billion in assets.The smaller bank's purchase of higher limits was influenced by alaw firm engaged to review its insurance program. It told them tocarry $30 million D&O limits. They couldn't afford that (and nocarrier would offer it), but they did buy the $15 millionlimit.

D&O is a top priority for us, both before and after thesale. After we obtain a new account, we ask to speak to the boardat least once a year to review and explain its coverage. We callour presentation “D&O 101.” Many D&O policies offered todayare purchased on a three-year prepaid basis. Nevertheless, we stillconduct annual insurance reviews, because you can't assume nothingwill change while a policy is in force.

We also have a thorough discussion with banks about theirfinancial institution bond policies. Check-clearing increasingly isbeing done electronically, rather than via the exchange of paperchecks. Some financial institution bonds exclude some forms ofcheck fraud because of this absence of paper checks. These bondpolicies must be properly endorsed to extend forgery and alterationcoverage to losses arising from “substitute checks.”Customer-initiated wire transfers pose big risk to financialinstitutions that do not have proper controls to mitigate loss fromfraudulent requests. Furthermore, if banks are not in compliancewith the conditions set forth in their financial institution bondpolicies, such losses will be denied, resulting in a hit to thebank's bottom line. We make sure banks understand that theirinternal policies must jibe with these financial institution bondconditions. The FDIC recently issued a bulletin on the importanceof complying with the conditions, which was helpful in getting theword out.

Banks also increasingly are allowing their retail-businessclients to use so-called “remote deposit devices,” which enablethem to transmit customer receipts to banks electronically, ratherthan physically bring cash and checks to the bank for deposit.Banks can cover this exposure via a readily available endorsementto the financial institution bond.

It is important for banks to understand a financial institutionsbond's exclusions, so they are aware of exposures they must treatin some other manner. One is for credit- and debit-card fraud.Banks historically have self-insured this exposure, although atleast one carrier has announced a product to cover it. If banks arenot going to buy such coverage, which tends to be expensive, theycan turn to third-party fraud-monitoring services, which track cardactivity and flag atypical transactions.

Financial institution bonds cover some, but not all, types ofcheck fraud. If a bank accepts a cashier's check that turns out tobe counterfeit, the loss may not be insured if the cashier's checkfor any reason is not finally paid. To minimize losses, banks musttrain tellers to examine such checks carefully. They also can callthe banks on which the checks are drawn, to make sure they'reauthentic.

Various types of losses arising from Internet banking servicesare insurable, but D&O policies and financial institution bondforms do not provide broad-form affirmative coverage for liabilityarising from them. Some bond forms will provide first-partycoverage for this exposure but not third-party coverage. Severalforms are available to fill this gap, but the coverage is expensiveand probably fewer than half of all banks have bought coverage.Still, that's an area in which coverage is likely to grow.

Ancillary opportunities

Our review includes not only an examination of banks' insuranceexposures and current coverage, but also an analysis of otherproducts we could help them add to their portfolios to generateadditional income. These can include products ancillary to loans,like credit life, disability and accidental-death insurance. Wealso can provide banks with software that enables them to access anInternet-based program they can use to sell term life insurance toanybody, not just a loan customer. This is a point-of-sale product.Customers answer a brief list of questions. If they qualify forcoverage, the bank can print a policy on the spot and close thesale. We can offer banks a similar point-of-sale product forannuities.

If a bank has a significant portfolio of auto loans, we can helpit sell “gap” insurance to its customers. It pays the differencebetween a car's actual cash value and the loan balance, whichfrequently is higher, given the rapid depreciation of mostvehicles. Then, in the event that a car is totaled, or stolen andnever recovered, the customer will not have to worry about anunpaid loan balance.

Markets

In placing D&O and financial institution bonds, we primarilyuse Progressive, Chubb and St. Paul Travelers, all admittedmarkets. Agents or brokers working in this niche sometimes needaccess to excess and surplus-lines insurance companies as well.Financial institutions that operate under a regulatory order, orthat experience excessive claims or deteriorating financialperformance are likely to be insured by Lexington Insurance Co. orLloyd's, which specialize in writing “troubled risks.”

In our submissions, we don't have to provide insurance companieswith as large a stack of paper as we once did, since many of thefinancial and regulatory reports they require are now availableonline, particularly for publicly owned banks. Underwriters alsowant to see a list of directors to ensure the board represents afair cross-section of the community. They also want proof that theboard members regularly attend meetings and otherwise carry outtheir responsibilities. If there have been recent changes in seniormanagement positions, underwriters will ask for r?sum?s of the newexecutives.

Banks used to just be lending and deposit-taking institutions.Now they offer brokerage, insurance, etc. Consequently underwritersare asking more questions about such “alternative services.”

The insurance market for D&O and financial institution bondsis soft and getting softer. I remember when a $1 million D&Opolicy went for a minimum of $15,000. Today you can get the samecoverage for $3,500. One thing we are doing to counter this trendis pursuing account-rounding more aggressively.

Soft markets, however, come and go, and we try to take themphilosophically. In the long run, we think Willie Sutton had itright. Financial institutions are a great class of business topursue.

Debra McManigle is a vice president of the Battle Creek, Mich.,office of Hub International and a producer/manager of her own bookof financial institution insurance. Part of her job is to trainproducers at other Hub offices and otherwise help them sell andservice financial-institution business. She holds the CertifiedFinancial Security Officer designation.

Helping banks improve their security

My job is not only to sell insurance to financial institutionsbut also to help them improve their security. In a small bank, thesecurity officer typically wears five other hats, so our securityservices are seen as a big value-added and a major sellingpoint.

I hold the Certified Financial Security Officer designation. Theknowledge I obtained in getting it has been extremely useful to mycareer. The financial institution bond, one of the main insuranceproducts sold to banks, provides coverage for robbery, fraud andemployee dishonesty, among other things. Of course, loss controland prevention also must be used to treat these exposures. What Ilearned in becoming a CFSO enables me to provide banks with riskmanagement advice that goes beyond merely selling policies. Suchadvice and service also helps our clients meet the securityrequirements of the federal Bank Protection Act.

As part of our inspection of a bank's premises, we check theirsurveillance monitors, which in the event of a crime are vital toproviding law enforcement good visual identification of theperpetrators. I examine the equipment and the quality of the imagesit produces. I walked into a bank one day and found its VCR wasn'tworking, so the bank immediately got that fixed.

Procedures for opening a bank are quite important. Two employeesshould arrive at the parking lot in separate vehicles. Only afterboth are present should one get out and inspect the immediate area,then open the bank and check it. The other should remain in his orher vehicle until getting the “all clear.” If the proper responseis not given, the employee in the parking lot immediately summonshelp.

We check banks' behind-the-counter procedures to ensure thatlosses are minimized in the event of a robbery. Are the tellersadhering to their cash limits? Is there dual control over thevault, where most of the cash is? Lately we've seen high six-figurerobbery losses. That's due to such things as a teller leaving thevault open instead of locking it up and putting it under a “timeddelay,” which makes it impossible to open at a moment's notice.Some tellers think, “It's busy between 2 p.m. and 4 p.m., so I'llleave the door to the vault ajar.” That's a big no-no.

We also ascertain whether employees have been trained how torespond to a robbery in a way that will best ensure their ownsafety. They also should be shown how to preserve evidence after arobbery and otherwise work with law enforcement and the media.

Armed robberies are dramatic and can cause large losses. Still,they account for a relatively small part of the losses that bankssuffer from criminal activity. Fraud and employee dishonesty aremuch larger exposures. Just recently, for example, one of my bankssuffered a $950,000 loss from check kiting. In such a scheme, theperpetrator deposits into one bank a large check drawn on anaccount he or she holds at another. After depositing the check, theperpetrator immediately draws on it. When the bank presents thecheck for payment to the other financial institution, it finds thatthe perpetrator's account there has little or no funds to coverit.

When these schemes are successful, it's usually because thevictimized bank failed to put a hold on a check until it clearedthe other bank, often in violation of its own procedures. Forinstance, banks may drop their guard and relax their standards whendealing with a familiar face. In the case of my client, theperpetrator had been a good customer for 30 years, so the bank madean exception to their usual check-clearing procedures.Unfortunately, the customer also owned a business that was failing,and he turned to check kiting out of desperation.

The potential for check kiting can be compounded by regulationsthat allow banks to put a hold on checks only for a certain numberof days. If a bank has a reason to be suspicious, however, it canhold a check longer and document why it is doing so. Certainly, myclient might have done so. Instead, they're going to call on theirfinancial institution bond to pay its limits. Then they'll have tosomehow try to recover the rest from their customer.

Banks also can be liable for losses arising from “pfishing”scams, in which perpetrators send victims phony e-mail messagespurporting to be from their banks and inducing the victims todivulge bank-account numbers and other sensitive information. Thenthe perpetrators transfer the victims' funds to accounts theycontrol, empty them and vanish.

Federal law protects those na?ve enough to respond to pfishingscams. As long as victims rely in good faith on their apparentlegitimacy (the scams often use actual bank logos and othergraphics to make them look authentic) and as long as they noticeand report the fraud within a certain number of days, banks arerequired to make their customers whole. The risk from this fraud isnot insurable, so we stress to banks the importance of educatingtheir customers. Among other things, banks can send letters toclients telling them they never will attempt to contact them bye-mail.

As previously mentioned, scam artists often open accounts intowhich they transfer funds from people they've defrauded. Banks canpurchase third-party software that will monitor activity in newaccounts and raise the alarm if large or frequent deposits aretransferred into them. By doing so, they can keep from being usedin the commission of a crime–and perform a valuable service toother banks and their customers. Think of it as “communal” riskmanagement.

–Debra R. McManigle