Insuring community banks

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

Iowa Bankers Insurance and Services Inc. is a wholly owned subsidiary of the Iowa Bankers Association, a state affiliate of the American Bankers Association. While the association first owned an insurance agency in the 1920s, Iowa Bankers Insurance and Services Inc. itself was started in 1972 and recently observed its 35th anniversary. Originally, our agency concentrated on three basic coverages: the financial institution bond, D&O liability insurance and a health-insurance program, the self-funded Iowa Bankers Benefit Plan. Today the agency offers a complete line of coverages for financial institutions. It has more than $100 million in premium volume, a big chunk of which is still attributable to the health-insurance program.
Iowa is a rural state. So our typical client is a community bank with $150 million or less in assets. We also insure some savings and loans. The IBA has about 390 members, which is 93% of the banks in the state. As you would expect, we have good penetration within the market, but by no means have it to ourselves or can take it for granted. Nor do we write all coverages for each of our clients. At last count, we had written about 277 financial institution bonds for our clients, 252 D&O policies and 226 package policies. That includes a number of policies we write for perhaps a few dozen banks 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 the insurance agencies also creates an exposure, for which we recommend the agencies purchase coverage from the Independent Insurance Agents & Brokers of America's agent E&O program. Some banks also have financial consultants working out of in-house investment centers, an exposure we cover with bankers professional liability insurance.
Many community banks like to keep at least part of the account with a local independent agent. Such agents often are valued bank clients; occasionally they even serve on the bank's board of directors or may know bank executives from their common involvement in a church or local business organization. We respect these relationships. After introducing ourselves to a bank and earning its trust, we may, if it desires, write some or all its coverage through a local agent. In these cases, the agent keeps the bulk of the commissions, so it's a win-win for both of us. The bank, of course, also wins since we generally can provide greater expertise in regard to such products as the financial institution bond and the D&O insurance, coverages which most independent agents, particularly in rural areas, don't write in enough volume to obtain in-depth knowledge of them.
Indeed, coverage for financial institution insurance is a specialty. Here are some of the bank-specific products they typically require.
Financial institution bond: In talking to banks about their financial institution bonds, we ask if the bank has reviewed the adequacy of the limits lately and considered whether they have all the coverages they require. Financial institution bonds have numerous coverage parts, some of which are optional. One major issue we've been addressing lately is coverage for loan participation fraud.
In a loan participation loss, a bank that has, say, a $2 million lending limit may be approached by a scam artist posing as a real-estate developer who wants to borrow $10 million for a project. The bank may be persuaded the venture is legitimate because of the presentation of fraudulent financial statements or tax returns, or counterfeit stock certi-ficates or other bogus collateral. The bank lends the scam artist the full $10 million and then sells off the obligation in excess of its $2 million legal lending limit to other lenders. The participants buy these loans on a non-recourse basis. If the loan goes bad, they cannot recover from the originating bank, which does not guarantee the loan.
The financial institution bond provides coverage for some loan participation frauds. It is important to note, however, that this coverage is not credit guaranty insurance. It is intended to provide first-party coverage to the financial institution for losses associated with forged or counterfeit documents or collateral used to secure the credit. Banks are well-advised to turn to their insurance companies' claims department for an explanation of just what their financial institution bond covers in this area.
The seriousness of the loan participation exposure was dramatically highlighted earlier this year by the arrest of music impresario Louis Pearlman, who was accused of running a Ponzi scheme masquerading as a savings program offered by a company he owned. By the time regulators took it over, investors had lost more than $500 million-including $20 million by North Dakota banks.
First- and third-party Internet liability coverage: Banks also are increasingly opting for coverage for Internet liability, which can be obtained under the financial institution bond's coverage for computer systems fraud. This coverage addresses a bank's first-party losses arising from such things as hacker attacks or damage caused by computer viruses.
Third-party liability coverage for such things as identity theft is available as a separate Internet banking policy or as an endorsement to the D&O policy. I've seen increasing interest in this product, although it can be expensive. Some insurers also offer “privacy coverage,” which is similar but covers such risks as theft of data by means other than the Internet. For instance, a thief might simply take files from a banker's desk or steal a laptop loaded with Social Security numbers from an employee's home or auto. Banks are showing increasing interest in this coverage because regulators are paying much more attention to the security of customer data.
Directors and officers liability insurance: Banks seem to be purchasing “Side A” coverage for individual directors more often these days. Such coverage provides a separate, dedicated limit that protects individual directors and officers if for some reason the bank's D&O coverage is exhausted, rescinded or otherwise unavailable to cover them. When writing D&O, we recommend separate per-claim and aggregate limits for all coverages provided by the D&O policy.
We do not attempt to recommend limits for D&O and other liability policies. For banks that ask us for guidance, we refer them 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 now offering an interesting coverage that in essence enables banks to attract and serve wealthy individuals, municipalities or other parties 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). One of our markets, Progressive, will insure deposits as large as $15 million.
Commercial package policy: This product includes the typical coverages any business may require, including commercial property, commercial general liability, commercial auto, workers compensation and umbrella. With Chubb, we offer a safety-group program covering such exposures that pays participants a dividend for good loss experience.
When reviewing a bank's insurance program, we use comprehensive risk management guidelines to gather information for submissions. We have one guideline for the financial institution bond, another for D&O and all professional liability exposures, and a third one that covers our commercial package program. For each coverage on each checklist, we note whether the bank currently has it, whether they would like a quote on it if they don't, or whether they wish to decline coverage or a quote. The checklists are quite detailed. For instance, under the bankers professional liability section, it asks if the bank has, or wants, coverage for such activities as appraisal services, real-estate sales or management, tax planning or tax preparation services, bookkeeping services and data processing for others.
In addition to our completed checklists and information about desired limits and coverages, we provide insurers with supporting underwriting information, including current claims data, lists of directors and officers, and current financial statements. Much information about banks, including financials and the results of bank audits, is available to underwriters online. If they see anything of particular concern, they ask for a copy of the bank's response letter to the audit.
The market for financial institution insurance is extremely competitive today. Therefore we attempt to write three-year policies, which can provide a discount for clients and alleviate a bit of the competitive pressure. We work primarily with five insurers. Besides Progressive and Chubb, they include Travelers, OneBeacon and Zurich. Given how competitive the market is today, we may approach all five with a given submission.
On renewals, we always quote the incumbent, and the most competitive market offering “like-for-like” coverages. If Company A is the incumbent, and their proposal is $15,000 higher than a competitor's, we will inform the incumbent of the difference. Our rule, in all fairness to the incumbent, is to give them the last look. If they decline to match the competitor, we then look at what the next two most competitive markets will offer.
After we receive quotes back from our markets, we prepare our proposal for presentation for the chief financial officer and the CEO. As a service, we also offer to meet annually with the bank's board of directors to review all the coverages we write for the financial institution. We are not certified risk managers, but when we come across good articles germane to financial-institution insurance, such as from the FC&S Bulletins or the International Risk Management Institute, we pass them on to bank clients after obtaining permission from the publishers.
Our parent, the Iowa Bankers Association, also has an excellent compliance department. Its compliance manager and staff are well-versed on all federal regulatory requirements, and can be used as a resource by all IBA-member banks. Sometimes we also receive referrals from the auditors.
To better serve clients, we encourage professional development. Everyone in our agency working on the property-casualty side of the business has a designation or is working toward one. Most of the people on our marketing staff have, or are in the processing of obtaining, the Certified Insurance Counselor (CIC), the Chartered Property Casualty Underwriter (CPCU), the Certified Risk Manager (CRM) or other relevant designations.
To thrive in a highly competitive business, community banks stress responsive, personal customer service. We do no less in meeting their needs. Lawrence Gille is senior vice president and property-casualty manager of Iowa Bankers Insurance and Services Inc. The agency is owned by the Iowa Bankers Association and is a member of the Independent Insurance Agents & Brokers of America. Mr. Gille began his working career with two banks in Minnesota. In 1972, he joined North Central Life Insurance Co., for which he sold credit life insurance. Mr. Gille joined Iowa Bankers Insurance and Services in 1978, working on the property-casualty side. He became manager of the property-casualty department in 1997. He holds the CPCU and CIC designations.