On day three of our annual Acquire or Be Acquired event, a major snowstorm was hitting the mid-west and shutting down many airports leaving attendees either stranded or dashing off to catch a flight. The possibility of being stuck in Arizona didn’t concern the many remaining bankers who joined the breakout session on D&O insurance, led by Dennis Gustafson, SVP & Financial Institutions Practice Leader of AH&T Insurance, as he explored how changes at an institution can impact its risk profile as perceived by the underwriters.
While there are a variety of activities that will impact the underwriters’ risk assessment process, by understanding what they look for, directors and officers can better communicate their story to the insurance carrier. Gustafson shared the following key factors that today’s underwriter considers when identifying a financial institution’s risk profile:
Given the condition of the financial services industry, regulatory exposure is still the single largest risk to bank boards. With the increase in bank failures reflective of the increased number of lawsuits authorized by the FDIC, it’s become the government’s standard practice to contact the insurance carriers of a failed bank to recoup their losses and therefore gain access to the policy whether the board did their job or not.
However, as Gustafson pointed out to the audience, when a bank is considered a regulatory risk, the D&O carrier can file a regulatory exclusion which allows the insurance agency to deny claims filed by FDIC based on asset quality and capital.
Mergers & Acquisitions
Any director and/or officer of an institution in an acquisition is considered an increased risk as they are more likely to be sued. The insurance policy might need a mid-term acquisition’s threshold for acquirers, discovery provisions for sellers, change of control provisions, cancellation and M&A exclusion. Directors should conduct an in-depth conversation about the specific M&A goals of the institution with the carrier before renewing the policy.
Loan & Asset Quality
For many reasons, loan and asset quality directly affects the risk profile of any director or officer. AH&T utilizes an underwriting risk spreadsheet that includes benchmark figures and calculates the risk associated with each policy. For instance, a loan portfolio with 1-4 family mortgages carries less risk than an institution with a higher commercial real estate profile. Deposits, positive ROA and ROE, along with capital, give the underwriter a good sense of the overall risk profile.
By reviewing what a bank’s peers are doing, insurance carriers can help measure what type of policy a board member should be getting and how much they can expect to spend. As an industry, financial services saw the highest premium rate for $5 million in coverage during their last renewals
Securities Litigation filings by Industry
Another method carriers will use as consideration is the number of securities class action lawsuits filed in the financial industry as compared to the rest of the universe. In 2009, the financial industry had 38.2 percentage of market capitalization subject to new filings which made for a riskier profile.
Gustafson strongly recommends that before your next D&O renewal, you set up a meeting with all the bidding underwriters to accurately present the financial institution’s goals and objectives over the term of the policy. With a face-to-face conversation, the underwriters are able to ask and answer questions in order to get a better sense of the bank’s risks. By engaging in these conversations, insurance carriers can prepare the most appropriate language for a policy, therefore better protecting a director’s personal assets.