How are insurers differentiating between public and private banks?
In the past, publicly traded companies paid a premium over their privately-held peers on the D&O coverage that they purchased. This took into account the additional exposure to claims created by shareholder actions. This is not necessarily the case in the current banking environment. With the FDIC filing claims against the directors and officers of failed banks directly with the insurance carrier, there is now exposure to claims on any type of bank. When a bank fails and is closed, the FDIC must decide which claims against the bank can move forward. The claims of the shareholders are subordinated to the FDIC’s own claims against any available funds that it can access to cover its own losses. That ability to be first in line for funds makes the FDIC — not shareholders — the most likely source of a claim for severely impaired banks.
What are the key issues that banks need to consider in today’s D&O environment?
Coverage is the most important issue. Every buyer is conscious of price. Banks are facing financial pressure from every possible angle and don’t want to spend unnecessarily, but buying coverage that won’t respond to your most likely claims scenarios is worse than buying no coverage at all.
The majority of the banking industry is being painted with the same brush right now, so it is up to each institution to differentiate itself to insurers. Take the time to meet your underwriters to tell them what makes your bank unique and a better-than-average risk.
How often should banks review their coverage?
A thorough coverage review should be performed annually, at a minimum. Any banks still operating with a three-year policy that was purchased before the market changed must be especially cautious.
Many of those policies were written in a way that greatly benefited the insurance company and could leave the insured bank exposed to uncovered losses in the current environment. A bank with a policy that contains these deficiencies would be well served to seek a competent professional who is familiar with the liability issues facing community banks and discuss the ways that these coverage gaps could be closed. While the directors and officers liability market has been improving for almost every other class of business, financial institutions are still seeing prices escalate. Based on market volatility, banks should have a thorough coverage analysis performed in conjunction with renewal. They should also seek benchmarking information so they can be confident that their limit, pricing and deductible decisions are made in consideration of what peer institutions are experiencing.
Finally, rubber stamp renewals are not acceptable. Coverage is evolving constantly, and buyers need to work with their risk management services provider to be sure they have state-of-the-art coverage every year. Nobody wants to tell board members after the fact that the coverage they purchased to protect their personal assets is inadequate.
John George is vice president, business development, Aon Risk Services Central, Inc. Reach him at (248) 936-5264 or [email protected].
