Unlocking business from financial institutions

Banks are complicated, highly regulated entities, and insuring them can be quite a challenge. It's a challenge I enjoy, however. Indeed, I've been helping such financial institutions manage their risks for 30 years, often in connection with their own associations. In the last three years, I've been catering to banks through my own agency, Independent Bankers Insurance Services. In this article, I'll explain how we go about unlocking business from banks.

I started my career in life insurance, with Security Mutual of Lincoln, Neb. Shortly after, however, I went to work for a person who sold credit insurance for banks and other risks. In time, we contracted with the Montana Bankers Association to provide their members not only credit insurance but also such products as D&O insurance and financial institution bonds.

Since then, I've continued to work closely with bank associations, often in agencies owned by them. The last one was owned by the California Bankers Association. I resigned from the agency in 2002, when it was sold to an investor group, and started Independent Bankers Insurance Services with my wife, the CBA agency's manager. We knew many of the executives at Western Independent Bankers Association, which represents banks in 12 states. Not long after we started our own agency, they endorsed us as their exclusive marketer of bank insurance products.

We've grown fairly rapidly. We have three employees here in Chandler, Ariz., and two producers in Cerritos, Calif., one in Las Vegas, one in Bozeman, Mont., and one in Wheatland, Wyo. About half our business comes from sales we make directly to financial institutions. The other half comes from local agents with whom we contract. We found that most local banks do business with agents for reasons other than to just obtain insurance. A local agent may have a big account at the bank, so it reciprocates by putting all its insurance with the agent. Over the years, however, insurance products for banks have become fairly complicated and are critical from a regulatory and legal standpoint. So now we often see local brokers looking for some expertise. That's where we come in. We also are contracted with five of the major suppliers of financial institution insurance, so the local agents have access to the markets through us.

We arrange insurance for about 50 financial institutions. They are located in the far West, from Seattle to Phoenix. Three-quarters of them are in California. We mainly work with community banks. Once a bank hits approximately $10 billion in assets, it usually hires an internal risk manager, who deals directly with an insurance company or national broker.

Our largest client, a metropolitan Los Angeles bank, has $2.5 billion in assets. Our smallest accounts are banks that are currently in organization, typically spin-offs from mergers and acquisitions. As banks are acquired–generally these are large local or regional banks that are bought by larger banking systems–some senior managers depart. They may see a need for a continued local banking presence and attempt to start a new bank. We hear about these startups through our connections in the industry, including associations, which receive notices about new bank formations from state and national regu- latory authorities. There are at least two-dozen banks in our territory being organized right now. After they open, their initial growth can be impressive. We've insured banks that grew as fast as $100 million in deposits in one year.

We're now working with about four or five of these startup community banks. They go through an application process that takes three to six months. Meanwhile, we start the insurance process, so they will be ready to go when and if they get approval.

The endorsement of the Western Independent Bankers Association is central to our marketing strategy. The association is proactive. They have people on the road who talk to banks about the association's endorsed providers, including us. Western Independent Bankers publishes a magazine every two months that goes out to about 3,500 banks, and they ask us to write articles for it. We're also featured at their conventions and take part in their trade fairs.

We're also members of the Association of Financial Insurance Brokers. It's a small organization consisting mainly of agents who sell credit and forced-place insurance. If they have an opportunity to sell directors and officers liability insurance, financial institution bonds or other products, which they often do, we function as a conduit to the markets for them.

We have banks that make contact with us online, primarily through the Web site of the Western Independent Bankers Association. We recently launched our own Web site as well. Periodically we send letters to banks. These usually are risk management advisories, and they help identify us as bank-insurance specialists.

Our contact at community banks is almost always the chief financial officer, although the board of directors generally has the final say on insurance purchases. One way I cultivate relationships with CFOs is by being on hand at the conventions they attend. I also speak about insurance at industry meetings. For instance, I recently spoke at a meeting of the National Association of Bank Directors.

It's not hard to obtain an appointment with a CFO. Insurance for banks is fairly expensive, and CFOs are always looking for a better price. We analyze the bank's current coverage, comparing it with the insurance typically held by other banks in their peer group, based on asset size. Among the coverages we examine are the following:

Financial institution bonds: A financial institution bond is a key product for a bank. It covers a number of employee dishonesty exposures, including forgery (e.g., of documents used to obtain loans) and embezzlement. These complicated products often provide numerous other crime-related coverages too. When we go through bonds that have been written by local agents, or sold directly to banks by insurance companies, we often find coverage gaps in them. Presenting our analysis of the deficiencies in the financial institution bond often is all it takes to get a bank on board with us.

Directors and officers liability insurance: Although it may also provide entity coverage, the bank's D&O policy really is designed for the board and senior officers. If a bank gets sued, there's a risk that their personal assets could be at stake, so they pay a lot of attention to those policies. D&O policies written for community banks, while similar to those issued to other privately held corporations, have some differences. A D&O policy's typical exclusion for losses arising from regulatory action normally is removed in policies written for banks. A financial institution D&O policy also may have a bankers professional liability endorsement, providing a number of coverages including lender's liability insurance.

Property and mortgage interest insurance: Banks' property insurance risks are a little different from those of other commercial accounts. The properties in their mortgage portfolios constitute a major exposure. We suggest that banks retain a professional tracking company to monitor the insurance on their mortgage loans. This is not necessarily a forced-place company, which would ensure that the borrowers maintain insurance on their properties, but rather one that monitors coverage on the portfolio, because community banks generally aren't sophisticated enough to do it.

To additionally protect itself from uninsured property risks, banks also should buy mortgate E&O/impairment insurance. It responds to claims alleging errors on a bank's part in maintaining insurance on the properties, keeping taxes current and filing liens. There is an interval between when a mortgage goes bad and when the bank takes possession of the property when it could be uninsured. The bank's property insurance policy can't respond to losses the property sustains during this interval, because the bank doesn't own it yet. The professional tracking company can pick up this coverage and maintain it until the property is actually repossessed or sold.

Once the bank forecloses on the property, we can schedule it on the bank's property insurance policy, but the property is subject to underwriting and in some cases an underwriter may not be willing to take it. For instance, it can be difficult to arrange coverage for an operating business or a motel with a pool. The property carrier might be obligated to insure such a risk for a short time but may ask us to find another market for it. One advantage of working with a professional mortgage-portfolio tracking company is that it generally has insurance outlets for difficult risks. The coverage is expensive, but it's essential–particularly for the liability exposures.

Internet banking liability insurance: Internet banking has become a serious exposure. Losses can arise from hackers' gaining unauthorized access to clients' account information (identity theft), denial of service and many other events. Some insurers have come out with excellent products to address these risks. Before coverage is issued, the carriers generally require an outside audit of the bank's computer “firewalls,” data encryption technology and Internet security procedures.

Workers compensation: California has had a problem with its workers compensation market for the last several years. Two years ago we helped establish a workers compensation self-insured group for bankers. It opened for business in March and is expected to reach $4 million in premium by the end of the year. Nine banks currently are participating. We think the program will really benefit the California banking community in the long run. Unfortunately, it's restricted to that state.

Besides us, the Western Independent Bankers and a program administrator called Compensation Risk Managers took part in creating the self-insured group. Compensation Risk Managers provides loss control and oversees aggressive claims management services in an effort to help financial institutions control worker compensation premium expenses.

Our primary markets are Chubb, St. Paul Travelers, Progressive and Zurich. We also use Scarborough/CNA for smaller banks, those with up to $500 million in assets. For banks with assets exceeding $1 billion, we generally turn to our larger carriers, which have the capacity to cover the higher limits they require.

Our submissions include a bank's annual report, which contains information from its auditors and a list of their directors. We also get their most recent call report, which is a financial statement submitted quarterly to the Federal Deposit Insurance Corp. The call report shows a bank's loan production, lending limits, and their interest and other income on an on-going basis. If we are writing employ- ment practices liability insurance for a bank, we also pick up its employee handbook.

In evaluating insurance submissions, underwriters look closely at a bank's loan quality, which is reflected in information about “classified” (i.e., nonperforming) loans. If the figure is high–say, 30% or more of the bank's capital–an insurer may increase the bank's insurance premium and its required retention. Underwriters also evaluate a bank's loss history, management experience, liquidity and regulatory status.

After banks become our clients, we continuously monitor the status of their property, asset size and lending limits. We call them quarterly to make sure they haven't switched cars or opened branches without informing us. We also ask whether they've picked up new EDP equipment, which seems to be a continuous process with most banks. We check their financial status annually and upgrade coverage when necessary.

We visit clients in person prior to renewals. When we call on them, we may find that rather than the two automatic teller machines they had last year, they now have five–and two of them are in convenience stores. We find that they may have gotten into a new sideline by opening an insurance agency or an investment subsidiary. All such developments create exposures that need to be addressed.

On these visits, we also address security and banking procedures. Insurers' renewal applications have a series of questions covering these matters. For instance, banks lately have incurred increased losses stemming from fraudulent loans, so insurers are interested in banks' lending procedures. In this regard, we stress to banks that they should not permit loan papers to leave the premises for signatures. The person who signs for a loan should do it in front of a loan officer and provide identification. That reduces the chance of any fraud or forgery in connection with the loan–which could turn it into a claim.

Banks also must check the status of collateral dilligently. One client recently incurred a claim in connection with a line of credit provided to a wholesale business. When the wholesaler needed to draw on the credit line, he presented receipts for items purchased for later sale to retailers. The loan officer, however, also was supposed to conduct a site inspection to ensure the purchased items–which functioned as collateral for the line of credit–actually existed. In this case, unfortunately, there was no inventory; the receipts were all forged. The loan officer failed to make the required inspections, and by the time the bank detected the fraud, its loss exceeded $1 million.

As I mentioned previously, banks want to do as much as possible to keep their insurance costs in check. Therefore, we put our banks' insurance programs out for bid every three years, which we think is a fair way to control premiums. It gives the banks a look at the markets–and vice versa.

After three decades of helping financial institutions identify and fill their insurance needs, I still find that the work fully engages me. Banks' exposures are changing all the time, particularly in the age of the Internet, which makes working with banks interesting–and challenging. The personal relationships I've built in this business also are very gratifying. All in all, this has been a great niche in which to build a career.

Pat Corey is the owner of Independent Bankers Insurance Services, an agency he started with his wife in 2002. Mr. Corey has specialized in selling insurance to financial institutions since 1975. Prior to starting his agency he worked under contract with a number of state banking associations, or in agencies they owned, including the Montana Bankers Association, the Ohio Bankers Association and the California Bankers Association.