Risk/Reward: Can Insurtech Build Better Relationships With Your Bank Customers?

insurtech-5-8-18.pngThe rise of financial technology, or fintech, has not disrupted banks to the extent that many predicted it would. What it has done, however, is chip away at the number of services a given customer will seek from their bank. Instead of using their banking app to check balances and transfer funds, many use third party personal budgeting tools like Mint and peer-to-peer (P2P) payment apps like Venmo. Instead of seeking credit at their local branch, many consumers are turning to online lenders like SoFi. As customers spend less and less time engaging with their banks, brand loyalty is at risk, which is at a higher premium in today’s market.

So how can banks recapture engagement or retain loyalty? Adding an insurance offering could be an option for creating a new touchpoint with bank customers. To many bankers, this is not a new idea. The concept of bancassurance—where a bank serves as an insurance broker and directly offers products to its customers—has been around for a long time. But there is a wave of technological transformation taking place in the insurance space that could breathe new life into bank/insurance partnerships: insurtech.

Insurtech is very similar to fintech. At the core, these firms are about utilizing technology and data to shake up an incumbent industry. The end goal of insurtech is offering more targeted, consumer-centric insurance products and ways of accessing those products. Insurtech is still in the early stages of development but, according to customer experience technology firm, Quadient, most incumbent insurance firms now have a “strong plan or strategy for how they will deal with onboarding innovative technologies and channels” that they did not have just two or three years ago.

Banks utilize a few key models for incorporating insurance into their customer offerings:

Building a marketplace: The marketplace model is being pioneered by many digital-only challenger banks. For example, U.K.-based challenger banks Starling Bank and Monzo have rolled out in-app marketplaces that augment their basic checking accounts by linking customers to a bevy of outside partners, from insurance and pension providers to mortgage lenders. While it’s possible to generate referral fee income from this type of arrangement, this model has not proven to be a major revenue driver, as the banks have yet to see a month without losses.

The marketplace model does allow digital banks to offer services beyond their basic online consumer accounts without the stress of integrations and new partnerships, but that’s a challenge that most traditional banks do not face because they can typically offer payment transfers, loans, and more. While a marketplace would move incumbents closer to the Amazon-like platform model in vogue today, it doesn’t seem to offer a major value add for traditional banks.

Using white-label products: Taking the idea of an insurance marketplace a bit further, banks can also consider incorporating white-label products to help consumers access insurance or compare policies in the bank’s existing online platform. Fidor Bank, a digital institution out of Germany, created an online marketplace that allows customers to access curated fintech and insurtech products. The Fidor product, FinanceBay, is now available as a white-label product to other banks.

Many digital-first insurance providers offer ready-made affinity programs with white-label capability as well. With this increased connection between the bank and the third party insurance providers, though, liability becomes a much larger concern.

“Bancassurance,” or partnering to establish an insurance brokerage: A step even further than incorporating a white-label product to help customers find insurance would be to engage in a bancassurance model, where the bank would serve as an insurance broker actively selling insurance products to its banking clients. This form of partnership has been utilized heavily in countries such as France and Spain.

When Glass Steagal was repealed in 1999, those bank/nonbank commerce barriers were largely removed, but regulations, complicated corporate structuring questions and mixed results have largely kept the model out of the U.S. However, the recent partnership announced between Germany’s largest bank, Deutsche, and Berlin-based Friendsurance is bringing interest in this model back to the forefront.

By mid-2018, Deutsche plans to offer coverage from over 170 German insurers through its in-app insurance manager function, according to Insurance Journal. Friendsurance uses artificial intelligence to evaluate potential plans based not only on price but also on “the question of how financially stable the insurer is or how good its customer service is,” Friendsurance co-founder Tim Kunde told Handelsblatt Global in January. Deutsche will be establishing its own insurance brokerage firm run by Friendsurance as opposed to a simple referral program or marketplace tool. This differentiation, the bank hopes, will reinvigorate the bancassurance concept thanks to the added value the insurtech brings to the insurance buying experience.

However a bank/insurtech partnership takes shape, liability is a looming issue. The more deeply engrained a partnership is, the more complicated the liability analysis becomes. As with all major technology partnerships, banks should bring their regulators into the conversation early on if they’re considering a partnership with an insurtech provider.

Insurtech is a fast-growing sector, and the distribution of insurance products is becoming more prolific among retailers, utilities, lifestyle brands and more. If banks don’t begin to explore insurance partnership models, they may lose out on yet another opportunity to service their customers.

Key Trends in the BOLI Market in 2016

BOLI-market-6-22-16.pngIn 2015, the percentage of banks with bank-owned life insurance (BOLI) increased, the majority selected a General Account (GA) product and the cash surrender value of policies rose.

These are some of the conclusions drawn from the latest research from the Equias Alliance/Michael White Bank-Owned Life Insurance Holdings Report. Of the 6,182 banks in the U.S. operating at the end of last year, 60.5 percent now report holding BOLI assets. This percentage has consistently grown year after year. Further, the percentage of banks in each size category holding BOLI assets increased from the end of 2014 to the end of 2015 with banks in the $1 billion to $10 billion asset category having the highest percentage of BOLI at 82.5 percent.

BOLI assets reached $156.2 billion at the end of 2015, reflecting a 4.4 percent increase from $149.6 billion as of December 31, 2014. The growth in BOLI holdings is attributable to a variety of factors including an increase in the value of those holdings, first-time purchases of BOLI by banks, and additional purchases by banks already having BOLI on the books.

Holdings by Product Type
The highest dollar amount of BOLI assets continues to be held in Variable Separate Accounts (VSAs), where the investment risk is held by the policyholders and investment gains flow directly to them rather than the insurance carrier. VSA assets totaled $71.95 billion representing 46.1 percent of all BOLI assets as of December 31, 2015, down slightly from 47.6 percent at the end of 2014. At the same time, only 480 or 12.8 percent of all banks with BOLI reported holding VSA assets, down from 14.2 percent a year ago. Typically, only larger banks hold VSA assets because of the investment risk noted previously. The average amount of VSA assets held by these 480 banks is substantially larger than the average amount of General Account (GA) or Hybrid Separate Account (HSA) assets held by community banks due to the size differential between the banks.

The type of BOLI assets most widely held by banks in 2015 was GA. A GA’s cash surrender values are supported by the assets of the insurance company. Nearly 96 percent of banks with BOLI reported GA BOLI assets. In comparison to GA products, HSAs have not been available for purchase nearly as long. Since 2011, the number of banks using HSA products increased by 47 percent to 1,280. The above BOLI holding percentages exceed 100 percent since some banks have more than one type of BOLI product.

New Purchases of BOLI in 2015
According to a report from IBIS Associates, Inc., an independent market research firm, BOLI sales last year increased to $4.048 billion which were attributable to purchases by approximately 500 banks. This was 26 percent higher than the $3.214 billion reported in 2014 and was primarily due to a major increase in VSA premium which rose from $35.6 million in 2014 to $504.0 million in 2015. This was due, in part, to a few very large VSA purchases that may not be duplicated in future years.

Why BOLI Remains Popular
Feedback we have received from our clients suggests that the reasons BOLI remains appealing as an investment for banks has not changed in recent years:

  • It provides tax advantaged investment income not available with traditional bank investments, as well as attractive yields compared to alternative investments of a similar risk and duration
  • The growth in the cash value of the BOLI policies generates income for the bank and its shareholders
  • The bank receives the life insurance proceeds tax-free upon the death of an insured employee who elected to participate in the plan; and
  • The bank can use the income to pay for one or more non-qualified benefit plans to help attract and retain key executives, or use the income to help offset and recover employee benefit costs such as health care and retirement expenses.

Since BOLI currently offers a net yield ranging from approximately 2.25 percent to 3.75 percent, depending upon the carrier and product, BOLI remains a popular investment option for many financial institutions. For a bank in the 38 percent tax bracket, this translates into a tax equivalent yield of 3.62 percent to 6.05 percent.

Finally, based on our experience, banks owning BOLI policies remain very satisfied with their previous purchases and would consider making additional purchases in the future.

Captive Insurance Subsidiaries Proliferate Among Bank Holding Companies

captive-insurance-3-2-16.pngBanking is the business of managing risk. Be it credit risk, interest rate risk or technological risk, bankers are trying to control a highly leveraged earnings engine while avoiding risks that can result in sudden reversals of fortune.

Yet many of the biggest risks faced by bankers today are both uninsurable and unreserved for on the bank’s books, such as certain cyber risks and reputational risks. Even where third-party insurance policies may be available, they may provide coverage that bankers feel is cost-prohibitive. That’s where a captive insurance company may present a cost-effective, tax-efficient solution. A captive insurance company is the insurance company that you own. It allows you to insure the risks that your bank, holding company and the holding company’s other operating subsidiaries may face, writing real insurance policies against which you can make claims for losses.

While a variety of structures may be used to create captive insurance companies, so-called “small” captives provide a number of unique tax advantages for owners of small to mid-sized bank holding companies. They often are referred to as 831(b) captives, named after the Internal Revenue Code section that provides tax incentives for the creation and use of such entities.

Potential benefits of 831(b) captives are well-documented and will be enhanced in coming years by recent amendments made under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). These include:

  • Insurance for risks that you already have on your books and for which policies in the marketplace are either prohibitively expensive or nonexistent;
  • Up to $1.2 million ($2.2 million beginning in 2017) in deductible premium expenses for your bank or bank holding company; and
  • Up to $1.2 million ($2.2 million beginning in 2017) in tax-free premium income to the captive insurance company.

While the changes under the PATH Act are new, the legislation facilitating small captives has been in place since 1986, which begs the question, why aren’t more bankers using them? The short answer is that, until recently, implementation of captives was very expensive and the legal underpinnings for them were somewhat shaky.  

However, the number of captives across the county has increased rapidly in recent years according to examiners we’ve spoken with from the Federal Reserve. This increase has resulted in part from a proliferation of “turnkey” providers who have developed proven models and technical solutions to reduce the costs of creating and administering a captive insurance company.

At the same time, the legal underpinnings of captive insurance companies have matured. Once a business relegated to exotic, typically offshore jurisdictions, captive insurance companies now may be formed in any one of the many states that have adopted comprehensive captive insurance company legislation, such as Delaware, Vermont, Nevada and Tennessee.

Furthermore, changes implemented by the PATH Act provide much-needed clarity on the types of captive structures that will be permitted under the Internal Revenue Code and therefore eligible for the tax advantages conferred by Section 831(b). While the types of tax avoidance structures that were targeted by the PATH Act probably would never have been permissible in banking due to affiliate transaction restrictions, the legislation provided clarity as to the types of diversification and/or ownership criteria that must be met to pass muster under IRS rules.

Finally, bank holding companies are allowed to underwrite any type of insurance for affiliated or unaffiliated entities. In addition, some state banking regulators have signaled their willingness to permit the formation of captive insurance companies in light of the activities that have been authorized for national banks by the Office of the Comptroller of the Currency.

Turnkey captive insurance providers have designed solutions that capitalize on this guidance to create compliant captives that can be taken “off the shelf” and plugged into your bank holding company structure. Altogether, this means that forming a captive is now cheaper and less risky from a legal and regulatory perspective than it has been in the past.

So, is your bank holding company a good candidate for a captive? Historically, forming a captive required owners to engage and work extensively with a team of attorneys, actuaries, accountants and other professionals. This resulted in customized solutions that were tailor-made for the company’s overall objectives. As it has become easier to form a captive using turnkey solutions, the customization and optimization of the captive for the sponsor’s overall business can be lost.

That’s why we recommend working with a team of advisers who are familiar with captives and can assist your turnkey provider in integrating a captive as part of your overall business and risk-management goals.

Understanding Your Bank’s Cyber Liability Policy

4-22-15-AHT.pngPer a recent CyberEdge Group report, 70 percent of 800 cybersecurity decision makers reported their network had been breached, which is up from 62 percent the year before. Additionally, we have found that a vast majority of hacking incidents are financially motivated, making banks much more likely targets than utilities, for example.

When presenting this trend to bankers, I often hear: “We are a smaller bank, so we are less likely to get hacked,” when in actuality, the opposite can be true. Most cyberattacks are levied against smaller companies whose cybersecurity measures are not as sophisticated.

Regulatory Response
At the 2014 Cybersecurity Roundtable, Securities and Exchange Commission (SEC) Chairman Mary Jo White stressed how critical cybersecurity is to this country’s infrastructure. Included at that presentation was an SEC-issued 28 point document outlining sample lists of information the agency may request during a cyber breach investigation, including copies of security policies and business continuity plans, proof of cyber insurance, and procedures for verifying the authenticity of funds transfers.

Cyber Liability Insurance and Impact on D&O Liability
When it comes to utilizing insurance to address and respond to cyber risk, there are two areas a bank should be concerned about:

  • The expense and liability that can arise in the wake of a cyberattack. (Cyber insurance should cover this.)
  • The liability to the board related to the perceived mismanagement of the bank’s cybersecurity, which resulted in the attack. (Directors & officers liability insurance, or D&O, should cover this.)

With regards to cyber liability insurance, it is helpful to understand that there are many coverage components available and not all of them are necessary for every bank. Typical cyber components can include:

  • Network liability: Responds to a claim against the bank (including the legal costs and settlements) that results from a breach in network security.
  • Regulatory coverage: Responds to costs associated with a regulatory investigation.
  • Crisis management: Can include public relations response to mitigate reputational risk.
  • Security breach mediation: Can cover costs associated with notification, forensics in response to a breach and credit monitoring. This category generates the highest number of claims for cyber liability insurance.
  • E-business interruption and additional expense: Reimburses lost revenue and expenses in order to make the bank whole (i.e. hiring an additional network support team).
  • Network Extortion: Reimburses a company for amounts paid to a third party (e.g. the extortionist) or expenses to prevent the actual extortion event from occurring.

When a bank is considering the purchase of a cyber policy, it is important to contemplate all of the exposures to ensure that the bank is selecting the most appropriate coverage for the institution.

Your bank’s cyber risk may also factor into the underwriting of your D&O liability insurance. We are seeing an exponential increase in interest from D&O underwriters regarding the bank’s cyber controls. In a recent AHT Insurance survey, we asked 75 D&O underwriters their level of concern. All D&O underwriters said a company’s cyber risks will factor into D&O underwriting. Sixty percent say it’s a major concern.

We also asked what additional underwriting questions they may have regarding cyber liability. These are the typical questions underwriters ask:

  • Please discuss your internal controls and safeguards regarding cybersecurity and if you insure that on a separate tower.
  • Do you currently carry cyber insurance and how robust is your IT security?
  • What is the company doing to address cyber exposure?
  • What is the threshold for board level involvement and public disclosure for cyber events?
  • Who is responsible for updating the board on privacy/cybersecurity concerns and how often do they report to the board?

What Can a Bank Do?
Cybersecurity needs to be a discussion at the board level, and should no longer just be thought of as an IT function. This includes board minutes which should reflect that cybersecurity was a regular discussion point. Also, protecting the company’s network alone is not enough. Regulators are increasingly asking questions about how a bank monitors the cyber risk of its vendors.

In summary, cybersecurity needs to be a global risk strategy that permeates throughout the entire company. A proactive approach should be adopted, including fostering a culture of awareness at all levels of the bank.

Keeping Your Head Above Water: Four Tips for Managing Flood Insurance Law Changes

1-19-15-Dinsmore.pngAmong the various areas of regulatory compliance, one area—compliance with flood insurance regulations—seems to cause an out-sized level of anxiety, and for good reason. Over the past several years, field examiners have been diligent in identifying and citing violations of the flood regulations, and many of these violations have resulted in imposition of civil money penalties (CMPs) against the violating banks. During 2013 and 2014, nearly 100 flood-related CMPs were imposed on banks, ranging in amount from $1,000 to well over $100,000. Paying penalties is never enjoyable, but is even less so in this era of tight margins and strained profitability.

Last year, President Obama signed into law the Homeowner Flood Insurance Affordability Act (HFIAA) as a way to dial back some of the increased costs associated with 2012 Flood Insurance Reform Act. The HFIAA will bring about a number of new and modified obligations on banks, which will become effective at various times during 2015 and 2016. Changes are coming in the areas of forced placement of insurance, acceptance of private flood insurance, escrowing of premiums, and exemptions to the mandatory purchase of flood insurance.

The ultimate responsibility for ensuring compliance with consumer protection laws and regulations, including flood insurance laws and regulations, rests with the board and senior management. How do you keep your head above the changing waters?

  1. Policies and Procedures. Any change in law or regulation in a compliance area should trigger a review of the bank’s existing policies and procedures in the affected areas. The review should be done with an eye toward necessary or appropriate changes to the policies and procedures. Management also should use this review process to determine to whom the revised policies and procedures need to be communicated to ensure an effective flood insurance compliance program. Certain of the changes may affect personnel outside of the lending and compliance functions at the bank. Once identified, all appropriate personnel should be trained on the new policies and procedures.
  2. Education. The compliance officer’s and real estate loan origination staff’s knowledge and understanding of the changes in the law/regulations are critical to ensuring compliance. The board and senior management have to be willing to expend the necessary resources to educate these folks who are on the front lines of the flood insurance process. Additionally, directors and senior managers also should receive training on the basics of flood insurance regulations so that they can appropriately oversee the compliance function and manage the attendant risk. The regulatory agencies, industry trade associations, and FEMA (Federal Emergency Management Agency) are good sources of training materials.
  3. Customer Communication. Your bank already may be receiving inquiries from customers regarding the impending changes to the flood insurance rules. If not, expect that you will. The changes relating to escrowing premiums, exemptions from mandatory coverage, and private flood insurance are fertile ground for customer questions. Now is the time to review your existing customer communication procedures to be sure that appropriate personnel and/or departments are tasked with handling inquiries, and that all personnel, especially customer-facing personnel, know to whom they should direct customer inquiries regarding flood insurance.
  4. Monitoring and Audit. As previously mentioned, the board and management have ultimate responsibility for ensuring compliance with flood insurance regulations. An effective compliance monitoring/audit function is paramount in carrying out this responsibility. The coming changes in the regulations will require management and the board to revisit certain aspects, if not all, of the flood insurance compliance program. Despite your training and planning efforts to implement perfectly the changes to your flood insurance processes and procedures, mistakes will be made. The wise bank will test the new processes early and frequently to head off any systemic issues. Better you find any problems and fix them, than to have them discovered by the examiners at your next compliance exam.

Changes are coming, and it is safe to say these will not be the last. Getting out ahead of the changes and planning for them is the key to successfully navigating the changing flood waters.

Underwriters Focusing on Rising M&A Claims and BSA Enforcement

Serving on a bank board comes with a lot of liability. State courts have decided that even independent, part-time directors can be guilty of gross negligence when their banks fail, for example. Directors often get sued by shareholders following an acquisition. And regulatory authorities can levy their own fines against individuals who serve on bank boards for the bank’s violations of regulatory rules. Bank Director magazine talked to Dennis Gustafson of AHT Insurance about the trends of particular interest to the board, such as directors and officers (D&O) liability insurance and cyber policies.

What trends are you seeing in claims?
We are seeing a shift. Last year at this time, the number one D&O claim was from the Federal Deposit Insurance Corp. (FDIC) relating to failed banks. A lot of these banks failed three to six years ago, so we are starting to see a decrease in those claims and M&A claims are on the rise as M&A activity heats up and as attorneys find opportunities to sue. If you are a public company getting acquired and have a market cap of greater than $100 million, there is a 97 percent chance of a lawsuit. The allegations are you didn’t do enough due diligence, you didn’t get a high enough price or you didn’t notify [shareholders] in an appropriate manner. Typically, the only impact of the lawsuit is an updated proxy statement but $500,000 to $1 million could be spent, mostly on legal fees. For those banks with more than $1 billion in assets, if there is any likelihood of the bank being acquired, the underwriter may require a separate, and higher, deductible for M&A claims.

Another shift in claims trends is in the cyber liability arena. It used to be the most frequent cyber claim was for notification costs after a breach of cybersecurity, because state laws require you to notify your customers of a breach. However, since more states are allowing for e-mail notification, the notification costs are decreasing and as such, so is the claim severity related to those notifications. In lieu of notification costs, we are seeing more and more claims relating to forensics, where the bank has to investigate the breach, why it happened and how, and sometimes hiring consultants to do these investigations can get very expensive.

What coverages are afforded in a typical cyber insurance policy?
In addition to coverage for notification costs and forensics, the typical cyber liability policy reacts to a lawsuit or demand from a customer or group of customers arising from a breach in network security. From there, coverages can differ based on the policy form and options offered. Some additional extensions of coverage include:

  • when a hacker accesses your client information and requests a ‘consulting fee’ or they will release the information
  • loss of revenue stemming from a network breach
  • a breach of physical security (i.e. dumpster diving or a lost laptop)

What changes are you are seeing from underwriters?
In previous years, most underwriter questions related to asset or loan quality. Now, we are seeing more questions related to the Bank Secrecy Act, wire transfer policies, and anti-money laundering programs. Common questions include: For wire transfers, what policies are in place relating to call backs [to confirm the authenticity of the transfer]? What controls do you have in place to protect the bank against money laundering? Are there any new hires or new procedures relating to bank secrecy?

What question do you hear most from bank directors?
The question I get most is about the gap in coverage for civil money penalties. The civil money penalty is assessed by the FDIC against the bank or against individuals if the FDIC perceived that those individuals did not work in the best interest of the customer. The most common allegation is gross negligence and more often than not, it is related to a loan or to a bypass in procedures. The FDIC put out a letter last October explicitly clarifying that if bank directors or officers were assessed a civil money penalty, they cannot be covered by the bank’s insurance or be indemnified by the bank. With that said, it would not be out of compliance with the guidelines if the individual were to purchase a policy on his or her own dime just to cover civil money penalties. The average civil money penalty was $51,250 and the median was $25,000 since 2012. The FDIC assesses the vast majority of these penalties.

Why should directors be worried about civil money penalties?
Most people do not join a board of a community or regional bank for the little or no compensation they may earn. The last thing they want is to have any of their decisions or activities possibly cost them out of pocket.

Do You Need Cyber Insurance?

8-21-13-AHT.pngAHT Insurance often gets questions about cyber security and cyber insurance policies. It is very confusing to figure out if your bank even needs a cyber policy separate from a general liability policy, for example. What really is the risk and do you need coverage for it?

Dennis Gustafson, a senior vice president at national brokerage firm AHT Insurance who specializes in financial institutions, described in a previous article what cyber policies cover. Here, he answers some of the most commonly asked questions about cyber insurance policies.

Aren’t cyber exposures covered by other insurance products such as general liability or fidelity bond?

Unfortunately there is very little, if any, coverage overlap between the cyber liability policies and these other insurance policies. The general liability policies almost always include some type of data or network exclusion. And when it comes to a fidelity bonds, a good principal to always consider is that fidelity bond policies react to theft of tangible property (money/securities), while the cyber liability policy reacts to theft of intangible property (social security or credit card numbers).

We use a third party to handle our website or credit card processing. Does this remove the need for cyber insurance?

While utilizing a third party for those activities definitely mediates the risk, don’t forget that the client often doesn’t know about the third party, and as such, will bring the lawsuit against the bank. The bank would be responsible to defend itself against the lawsuit and hope to then subrogate against the third party. Also, if a third party is hacked, your bank would be one of many clients impacted, all of whom could be trying to collect from the vendor. Having an insurance carrier step in from the moment of the breach removes all of that leg work and financial risk.

Is the purchase of a cyber liability policy a cumbersome process, especially for a first time purchase?

Yes. Keep in mind, the carrier is underwriting based on the quality of the entire network’s security. The applications can be lengthy and there are often additional questions asked after the underwriter reviews the application. Our advice is to coordinate a conference call with the chief security officer or information technology director and the insurance carrier. A 30-minute discussion can save hours of research.


All signs point to the fact that in the not-too-distant future, banks will take on more losses from cyber crimes than they will from physical robberies. It is the responsibility of the board and the executive team to put the right people, processes, technology and insurance in place to mitigate new risk exposures.

Growing Your Lending Portfolio with Insurance

Slow loan demand continues to plague many community and regional banks across the country, as they continue to search for ways to grow their loan portfolios. Bob Newmarker of Zurich Insurance offers some insight into how banks can look toward an environmental insurance portfolio program as an alternative way to manage their risks and create a competitive advantage.

Eight Changes To Expect in 2013

The past year saw the banking industry recover significantly from the fallout of bad loans and poor asset quality. While profitability improved, the impact of new banking regulations began to take effect, including provisions that cut debit fee income for banks above $10 billion in assets. So what is in store for 2013? Bank Director asked industry experts to answer the question: What will be the biggest change in banking in 2013? Here are their responses:

How is Your Bank Perceived by the D&O Underwriter?

hockey-goalie.jpgWhether you are an executive preparing for the upcoming directors & officers (D&O) liability insurance renewal or a board member preparing for the D&O discussion at the next meeting, there is one person you should be trying to impress. That’s the underwriter who is analyzing your bank and determining the D&O renewal terms and conditions.

The perceptions of this individual are going to determine whether the insurance policy that protects the personal assets of the directors and officers and the corporate balance sheet is comprehensive enough to include the most up-to-date coverage enhancements, or is so restrictive as to include a regulatory exclusion. Now before getting into what steps you can take to improve that perception, it is important to understand the claims and litigation trends that these underwriters are talking about before they start to take a look at your bank.

The top two claims leaders in the banking D&O marketplace continue to be regulatory exposures and M&A. With regards to regulatory concerns, the data provides an interesting dichotomy. While we see a decrease in 2011 for both class action claims relating to the credit crisis and to the number of failed banks (figure 1), we continue to see a very large spike in the number of FDIC D&O defendants (figure 2).


This is consistent with the fact that the FDIC reports that “most investigations are completed within 18 months from the time the institution is closed” (www.fdic.gov). And it is not just failed banks that concerns underwriters. Most underwriters would categorize a bank as a regulatory risk if any of the following exist:

  • Any open regulatory agreement
  • Consent order
  • Cease and desist order
  • MOU (memorandum of understanding relating to asset quality, earnings, or capital, but not so much for safety and soundness or the Bank Secrecy Act)
  • Severe degradation of asset quality following a regulatory exam or audit where the expectation would be a regulatory restriction on the following exam (Texas ratio close to 100 percent or Tier 1 capital/total loan ratio of <2 percent)

And once a bank is perceived as a regulatory risk, there is a good chance that the D&O liability terms would include the very restrictive regulatory exclusion.

As mentioned, the second significant risk exposure is M&A (mergers and acquisitions), which also demonstrates compelling data points. In 2010, M&A filings represented the largest broken out category with 40 such filings representing out of 167 filings or 24 percent. That percentage jumps to 30 percent in the first half of 2011. So if your institution has any regulatory exposures or is anticipating some type of M&A, you can expect a lot of questions during the upcoming renewal process.

And while there are many ways to address those questions, we believe that coordinating some type of underwriter meeting or call is the best way to improve underwriter perceptions and generate the most comprehensive D&O renewal with regards to terms, conditions and pricing. The process usually entails coordinating a meeting with the management team, the incumbent underwriter and all competing underwriters either at the bank’s office or a centrally located site. In order to make the meeting as productive as possible, your broker should obtain any questions the underwriters would have and present that to the management team prior to the meeting. The benefits of such a meeting are four-fold:

1. Unlike insurance lines such as property/casualty or workers’ compensation, where actuaries are able to somewhat predict the likelihood of a claim based on past trends, there has been no reliable model to mathematically predict when the next securities class action or next suit against a director/officer will be. So when an underwriter has an opportunity to meet or listen to the management team, this provides a gut feeling as to the quality of the management.

2. Having all of the underwriters in a room or on a call at the same time goes a very long way in fostering the competitive influences in the marketplace. One comment I hear is that it is unfair to include the incumbent underwriter in the same meeting as all of his/her competitors What we recommend instead is to then have a one-on-one lunch or dinner meeting with the incumbent underwriter(s) to further develop that existing relationship.

3. By meeting with the underwriter, you have now developed more of a personal relationship with the underwriter, which can be helpful in the future is in the event of there is a claim or a service request.

4. One of the frustrations I hear a lot from bankers is that the process to finally bind up the renewal often incorporates a lot of last minute questions or requests. At this meeting with the underwriters, you are basically saying, “speak now or forever hold your peace.” We find that once the meeting is completed, the remainder of the renewal process becomes very streamlined.

So as you prepare for that D&O renewal or discussion, don’t forget to think about that underwriter and what you can do to improve the perception of the bank.