INSURANCE MARKETPLACE SOLUTIONS
Banks
We need them!!!
Large, medium, and small banks are vital to almost every aspect of our personal and business lives. Every community knows that a thriving bank enhances its economic security.
The insurance industry plays an important role in keeping banks healthy. They have many exposures that can and should be insured. However, like many insureds, they need help to effectively identify hazards and manage risk appropriately.
Are you ready to help?
GROWTH POTENTIAL
This graph includes many types of financial institutions. The largest percentage is banks with 61%, credit unions at 30%, and savings and loans with 9% of the total. Over 60% of these institutions are considered small commercial enterprises with between one and 49 employees. There are 365 national banks and 5,379 middle market banks but over 29,000 smaller banks. The anticipated growth rate for all banks is 4.4%, but the smallest banks are expected to grow almost 8% over the next two years.
For more information:
MarketStance website: www.marketstance.com
Email: info@marketstance.com
STATING THE OBVIOUS
Banks are commercial enterprises and need most standard types of commercial insurance. However, because of the role they play in the economy, they have some unique exposures that can be covered only by products specifically designed for them.
THE HEART OF THE MATTER
Here is a possible scenario:
James and Karen purchase their first home. They obtain a mortgage through Good News Bank. They meet at the bank to sign the papers and take possession of the property. Everything goes well, but as they leave, Karen slips on the wet floor in the lobby. She breaks her arm and makes a claim against Good News that its insurance carrier settles.
Karen’s injury causes her to miss too many days at work and she loses her job. She cannot find another job, and soon she and James have problems paying their bills. Their homeowners insurance is one casualty. Good News Bank force places coverage on their behalf and adds its cost to their monthly mortgage payment. A fire occurs when James leaves a pot on the stove too long, and the forced place policy responds to the loss.
The fire loss adds even more stress to Karen and James’s situation. They are underwater on the house, cannot handle their bills, and decide to declare bankruptcy and walk away from the property.
Good News Bank forecloses on the house and takes it over. It cancels the force placed coverage and adds the vacant property to its owned real estate commercial insurance coverage. The bank’s coverage responds when a neighbor child is injured on the property.
Karen is furious! She applied for a job and had a good chance of getting it until personal information Good News Bank had in its computer system was somehow passed on to her potential employer. She sues the bank for breach of privacy. Good News Bank’s cyber liability policy provides a vigorous defense.
THE MARKETPLACE RESPONDS
Most standard insurance carriers can provide the traditional property and casualty coverages that banks need: commercial property, general liability, commercial auto, equipment breakdown, computer-related inland marine coverages, accounts receivable, valuable papers, and workers compensation.
Anthony Davis, president of Anthony R. Davis Agency, lists some of the specialty coverages that banks may need:
- Mortgage Impairment Insurance (Mortgage Errors & Omissions)
- Mortgage Servicing Force Placed Fire and Flood Coverage
- Bankers REO Coverage
- Flood Determination Services
- Bankers Blanket Bond
- Bankers D&O Liability Coverage - Including Entity Coverage
- Bankers Specialized Property and Liability Coverage
- Employment Practices Liability
- Voluntary Optional Mortgage Coverage - Life, A&H, AD&D
- Credit-Related Coverages - Fixed and Revolving
- Blanket Fire (First and Second Mortgages)
- Environmental Impairment Liability Coverage
- Lender Liability
Some of these coverages are optional, but many (such as the bankers blanket bond) are required by government regulations.
This Cybercast focuses on two bank-specific coverages needed to round out an account.
Oliver Brew, vice president of Miscellaneous Professional Liability and Technology E&O at Liberty International Underwriters, provides information on cyber liability. Lisa Cooper, John Watt and Greg Shimkus at Innovative Risk Solutions provide information on forced place and bank-owned property coverages.
Cyber liability
The need for cyber liability coverage is increasing in response to the growing body of laws that are designed to protect customer privacy. Mr. Brew explains: “Community banks and other financial institutions face exposures relating to data privacy. A wide range of rules and regulations require certain security data measures to be in place, and an incident response plan is recommended in order to respond to notification obligations.”
Mr. Brew continues: “We see frequency in data breach-related claims where banks incur costs to investigate breaches and notify customers. There is the potential for severity in class action litigation. These suits are rare but are growing in number, and their defense costs are increasing accordingly.”
Evaluating management is a key to writing cyber liability coverage, Mr. Brew says. “We look at a broad range of risk management criteria, including:
- Quality of management and staff and leadership in privacy protection
- Processes such as employee awareness training
- The use of technologies such as encryption and intrusion detection systems
“One example of a red flag is lack of effective response to a previous incident or lack of an incident response plan. With regard to technology, not using encryption on mobile devices makes it much more likely that there will be serious consequences from a data breach or lost laptop.”
At present, only a few carriers offer cyber liability coverage for banks. As a result, many banks currently self-insure their cyber liability and data breach exposure.
According to Mr. Brew: “There is competition among carriers. However, products vary to fulfill different needs among clients. Pricing declined over the last few years as more carriers entered the market. However, as claims have begun to increase, pricing is now stable and some renewals are seeing an increase.”
Because many banks currently self-insure this exposure, selling cyber liability coverage will require extra effort on the part of the agent, Mr. Brew explains. “It will involve working with the client on developing effective risk management strategies and technologies that must be in place to protect privacy and security.” The agent can play a valuable role in helping the bank identify its exposures, understand its responsibilities, and choose appropriate coverages. The agent also can help the bank access the risk management services offered by the carrier.
Force placed coverage
Force placed coverage is unique to banking. According to Ms. Cooper: “Banks purchase force placed coverage on a property when the owner fails to maintain homeowners and/or hazard coverage as the terms of the mortgage require and/or when the property is in foreclosure.”
Once a property is out of foreclosure, it becomes bank-owned-property that often becomes distressed. Mr. Watt explains: “Since most bank-owned properties are vacant, there is a frequency problem due to vandalism and theft. Key targets are copper wiring and plumbing. Furnaces and central air conditioning units are also very popular with thieves. Severity is an issue, especially where arson is concerned. There is a catastrophic exposure in areas where there is a concentration of properties.”
Mr. Shimkus says: “In the past, the bank’s commercial package policy may have included these coverages. In the current market, it makes sense to insure these exposures in a separate program so that the exposures will not affect the client’s other coverages.”
In underwriting force placed coverage, Mr. Watt says, “Key factors are active property management, location of exposures, and prior loss history. Prior losses and lack of good property management and loss mitigation efforts are the biggest red flags. Geographic location significantly affects both capacity and rates for force placed insurance in terms of both real estate market conditions and exposure to natural perils like floods, hurricanes, tornados, etc.”
Mr. Shimkus adds: “Current capacity is adequate for the force placed coverage we arrange. The outlook for the remainder of 2012 is stable with regard to capacity. Pricing should continue rising to meet the growing exposure.”
According to Ms. Cooper, an issue that may have a significant impact on the market for force placed insurance is the recent announcement (March 14, 2012) by Fannie Mae of changes in its policies with respect to lender-placed insurance. “In compliance with a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Fannie Mae and other lenders adopted policies to protect consumers who are delinquent on their mortgage loans and whose lenders have insured their homes with force placed coverage,” Ms. Cooper explains.
Under a section of its Servicing Guide Announcement titled Acceptable Lender-Placed Insurance Carriers, Fannie Mae states:
“Servicers must ensure that the lender-placed insurance carriers they use are filed and admitted in every state in which they service loans for Fannie Mae. For carriers and lender-placed programs that do not meet this requirement, Fannie Mae will allow the use of excess and surplus lines coverage during the filing period, up to a maximum of 180 days from the date of this Announcement.”
Because much force placed insurance is written in the non-admitted market where rates are not filed, this requirement has serious implications for excess and surplus and specialty markets and is likely to be challenged in court.
Writing community banks can be challenging and also extremely rewarding. A number of experts are ready to help you address the many coverage issues that confront your local banks. Helping them manage their risks will not only benefit the bank but also help you and your community.
WHO WRITES BANKS?
MANAGING GENERAL AGENTS
Contributing to this article:
Anthony R. Davis Agency
200 E. Grove St.
P.O. Box P
Westfield, NJ 07091-0914
Contact: Anthony Davis, President
Email: td@ardavisagency.com
Phone: (908) 233-8040
Fax: (908) 233-6414
Website: www.ardavisagency.com
Innovative Risk Solutions, Inc.
P.O. Box 530210
DeBary, FL 32753
Contacts: Lisa Cooper, President
John Watt, Vice President
Greg Shimkus, Vice President
Email: jwatt@irs-incorporated.com
Phone: (954) 931-4795
Fax: (866) 847-5565
Website: www.irs-incorporated.com
INSURANCE COMPANY
Contributing to this article:
Liberty International Underwriters
55 Water St., 18th Floor
New York, NY 10041
Contact: Oliver Brew, Vice President of Miscellaneous Professional Liability and
Technology E&O
Email oliver.brew@libertyiu.com
Phone: (212) 208-4246
Fax: (212) 208-4112
Website: www.libertyiu.com
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