When selecting insurance coverage to meet all a bank’s needs, it’s smart to consider a holistic strategy that accounts for the interdependency of each policy.
An insurance strategy should also include enterprise risk management, so insurance is treated as a strategic asset, not just a cost.
According to Mike Parduhn, assistant vice president and national underwriting officer for banks, bond and specialty insurance at Travelers Insurance in New York City, when a community bank works with its insurance agent or broker to place policies with insurance carriers, it should move beyond a siloed, manual approach and build unified visibility across all risks.
“The goal is centralized oversight where risk data from cyber, governance and operations informs coverage decisions together,” Parduhn says.
A major challenge is that banks often view insurance renewals as procurement tasks rather than strategic decisions, he adds. CFOs and risk officers should try reframing each renewal as a coherent risk-transfer question tied to the bank’s overall risk.
“Fragmented programs—patched-together tools and policies managed by separate departments—create coverage gaps and make it hard to monitor evolving risks or enforce controls,” Parduhn says. He adds that community banks and their agents or brokers should start with a risk inventory that maps all management liability, property and casualty risks holistically before renewal dates arrive, so coverage decisions are driven by strategy, not the calendar.
Banks should also incorporate the insurance strategy into their broader strategic planning process, conduct regular program reviews involving all stakeholders and hold leadership accountable for identifying gaps.
Finding the right carrier
Community banks should seek carriers that have long track records with financial institutions and strong claims-paying ability. Parduhn says industry-specific expertise can mean the difference between a covered claim and an uncovered one.
“A strong carrier relationship goes beyond coverage,” he says. “Look for a carrier that brings value-added services like claims support, risk-mitigation resources and risk-control expertise to help protect your bottom line.”
If a bank reviews one type of policy in isolation, it might not realize that some of the coverage it needs could actually fall under another type, says Curt Smallbrock, president and CEO of Community Bankers Financial Services (CBFS), an independent insurance agency that is a wholly owned subsidiary of BankIn Minnesota.
For example, a bank might assume that a cyberinsurance policy covers all aspects of cybercrime, but the financial losses from such a crime might be covered by the bank’s financial institution (FI) bond, he says.
An FI bond might have a retention limit—a deductible—of $10,000 or higher that a bank would need to cover before the policy pays the claim. In some cases, an agent or broker can get a carrier to add an enhancement to the cyberinsurance policy that includes cybercrime, where the retention limit might only be $5,000 or $10,000.
“Every claim has its own set of circumstances, and they would need to line up very specifically with each other [per the policy language] to interact with each other,” Smallbrock says. “If a bank has an identifiable claim with each policy, it may be able to get a smaller limit for the bank.”
It’s also wise for a bank’s agent to help review all policies together, particularly when the bank is considering insurance from multiple carriers. That will help the bank’s leaders understand coverage and identify potential gaps or overlapping coverages, as policies might change annually with the changing market and the carriers’ claim expenses, Smallbrock says. When a broker or an agent goes to market for policy renewals, some carriers might add exclusions to policies based on a bank’s annual claims, while some who might not have seen large claims could add enhancements.
“We educate our bank clients on what coverages and limits they are comfortable with to position them to take as minimal losses as possible—and hopefully with the best premium possible,” Smallbrock says.
Outside of the renewal period, CBFS holds educational events to keep clients up to date on the latest types of claims in the banking industry, he adds. That way, banks can better manage risks and prevent losses—an essential part of a holistic insurance and risk management strategy.
Understanding interdependency
Having a unified insurance strategy also helps banks better understand the interdependency between some coverages, says Scott Eckerty, president of HUB Financial Services, an Irving, Texas-based program administrator and specialty broker for financial institutions.
Take mortgage impairment insurance, which covers losses on loan portfolios tied to servicing, documentation or administrative mistakes as opposed to borrower default. Eckerty says this is often included in the stack of policies that address a bank’s overall enterprise risk. However, there is a critical interdependency with another type of coverage: lender-placed insurance, which would have to be placed by a bank’s lending department if a borrower were to let their own insurance policy lapse on their property. The forced-place insurance would protect the bank’s collateral on the loan.
Mortgage impairment insurance would cover the gap for 90 days to protect the collateral, but not afterward, Eckerty says. So, the lending department must take that time to force place insurance and notify the borrower that the premium will be added to their monthly loan payment.
“The overall insurance package with all of the coverages can be placed with a variety of carriers, so banks need to evaluate all of them together and how they interact,” Eckerty says. “Different carriers don’t talk to one another, so the risk manager needs to know what’s happening in each vertical—in this instance, enterprise risk and lender risk.”
Eckerty likes to tell bank clients the answer to every problem is not to buy more insurance, but it’s also not to buy the cheapest coverage. The quality of coverage is commensurate with how much it costs, and a more expensive policy will also be much more robust when it comes to claims.
“Treating insurance as a strategic asset is all about getting the biggest ROI and most protection at the most effective cost,” he says. “It depends on [the bank’s management and] the board’s risk appetite, so it’s not a ‘right or wrong’ answer. Bankers need to ask themselves, ‘Are we packaging the right coverage with the right limits and with the right carriers?’ It’s not just buying more or buying at the cheapest prices.”