Sent to the ABA Journal:
To The Editor:
For well over 100 years, the insurance industry in America has done an exceptional job of offering protection to America's community banks. As the banking industry changed, so did the insurance protection offered to financial institutions. As technology changed, bank insurance changed to meet the new exposures.
It's time for the banking insurance world to take the next step.
As an insurance consultant to community banks, the most frequent questions I'm asked is, “How much coverage should we buy?”
It is an unanswerable question. No bank can be totally confident that the amount of insurance they have purchased will be adequate to meet future claims. The risk of running out of insurance is an exposure often considered by bank executives. Is $1,000,000 enough? How about $5,000,000? Is it possible that we could be sued for $20,000,000? Is a bond limit of $5,000,000 adequate?
You may as well ask, "How high is up?"
Currently, all insurance policies for banks have limits. Each policy describes the maximum dollar amount that will be paid by the insurer for covered claims. Every bank in America could potentially run out of insurance.
Of course few, if any, will. However, there is a risk for every bank. More than a few bank CEOs and CROs stay up at night worrying about such risks.
Fortunately, this is a risk that can be easily borne by the insurance industry because of the law of large numbers. With many banks insured, few will have claims. Fewer still will have big claims. Few (if any) will run out of insurance.
I dare say that removing the risk of running out of insurance is a value that bankers will pay for. The time has come for insurance companies to offer insurance contracts without limits of coverage.
Certainly, some banks will continue to select an amount of insurance on their bond and their Directors’ & Officers’ insurance. Other banks, however, will recognize the value of an insurance policy where the threat of running out of insurance is zero.
Think of the benefit to your directors, officers, and stockholders of the bank knowing that they cannot run out of insurance protection. Would a bank pay an extra 20% for this feature? (I would recommend it.) Is it still valuable at 25%, or 30%, or 50% more? Individual banks would get to decide.
Insurers too can decide. Some will scoff at my idea. Some will offer it only to their very best clients. Ah, the wonders of a free market.
Those insurers who take my suggestion stand to gain in premium and client loyalty. Those who don't can continue on as they do now - hopefully losing market-share to the innovators.
May I be so bold as to suggest that you point your insurance agent to this letter. Ask your insurer to consider the idea. Perhaps this will start a discussion to the further improvement of the insurance protection purchased by community banks in America.
Scott Simmonds
Insurance Assurance Consulting
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Scott lives in Maine and runs a successful consulting firm. He has worked with over 1,500 businesses in his 30 year career.
