There’s capacity—for the right risk. Just be prepared to show and tell

 

Despite the scourge of subprime and a gloomy, damp economy, banks can still pick up directors and officers insurance and liability coverage of other types—although struggling banks, even banks with a hint of “dry rot” in the portfolio, will pay a higher price to get covered.

 

Those who can demonstrate overall financial fitness will be able to be choosier, getting  better value for the dollar even as the recession infiltrates.

Even so, strong performers will need to demonstrate vitality by explaining themselves and making a case for their business plans. Few companies on either side of the insurance contract will offer the benefit of the doubt without documentation.

As part of this, a given bank’s financials and risk management systems data may well be scrutinized more by insurers than in the recent past—and vice versa. 

Daniel Baltz, senior vice-president of insurance risk with Atlanta-based SunTrust admits that when it comes to purchasing D&O coverage in particular, he and his cohorts “live in interesting times.”

“While we haven’t changed our purchasing strategy, we are paying attention to all the details,” says Baltz. “We have many carrier relationships and we want each underwriter to feel comfortable with our bank and understand our risk profile.”

 

SunTrust, for example, applied for a second infusion of “TARP” capital in early December, taking it to the maximum amount.  But as the Atlanta-based regional has in recent years, as a matter of routine, opened up its books—and its intentions—in the spirit of cooperation, so in current events its carriers will be kept in the loop.

As part of its work with insurers, the bank has hosted gatherings with underwriters and other insurance executives to share information and make the underwriting process “as clear and open as possible.” Information-rich collaboration of the sort SunTrust is practicing now will become more prevalent among banks of all sizes.

Walter Grote, senior vice-president, Financial Institutions, The Travelers Companies, Inc., St. Paul, Minn., agrees that more emphasis is being placed on relationships, and that “levels of underwriting have gone up exponentially as you’d expect.” But the infectiously upbeat insurance executive sees that such “bonding” between insurance provider and insured as only a good thing.

“We’re a big company,” says Grote, “but we have [local] presence throughout the country.” He pointed out that Travelers has always believed in the act-locally operational model. “I’m always telling my people to get in front of the customer.”

 

Think of it as the insurance purchase being handled more like a standard business process outsourcing contract: more data sharing and frank talk will be part of the process.

Asking now, not waiting till later
“Everyone is asking more questions about the balance sheets of companies,” says Jeffrey Vernor, global risk manager, Russell Investments, Washington, D.C. “The good news is that the insurance system has ample capacity. Those who can differentiate themselves should have no trouble.”

More than one executive referred to the ability to stand out under tough economic conditions. “Differentiation,” or the ability to show that you are more than solvent, you are thriving, seemed to be what’s required at a time when many fear that a weak economy will spread like a bad case of the flu in a poorly ventilated office space.

Simply put, as nonperforming loans go up (and even the optimists seem to think they will), costs associated with insurance will likewise increase. To stay covered, community banks will be interested in obtaining excess liability coverage, notes Bob Gerry, president of Risk Management Insurance based in Fort Myers, Fla.

Ronald Summerville, managing director RCS Consulting Group, Chevy Chase, Md., says that some of these dynamics are more a big bank thing than something he’s seeing with community banks, many of whom he says still rely on local agents to craft policies—and forge relationships with carriers.

“But sharing information and collaborating more is not a bad idea,” says Summerville. “There’s a lot of specialty insurance that goes into underwriting a bank.”

Shocked into being careful
In many ways, of course, smart risk taking—conducted with a shrewd mix of scrutiny and observation of the client’s concerns, business practices, and goals—is the standard mentality of the insurance purchase. Actually, it’s quite similar to risk taking in lending where nobody wants to be stuck with something that deep due diligence might have spotted.

But in another sense, the care that experts declare to be de rigueur is the result of a chastened mindset regarding a marketplace still shaken, stirred, and spilt by the nearly cataclysmic events of the late summer and fall.

“In the property area, for example, more banks are dealing with repossessed property, even property that’s half developed,” Summerville says. “Insurance carriers don’t like nonoperational businesses or vacant, half-built properties for the obvious reasons, from vandalism to frozen pipes. My point is, the risks in banking are going up, so it makes sense to really see what they’re getting into.”

“The subprime situation reminded everyone that balance sheets are intertwined,” says Russell Investment’s Vernor. “So relationships between carriers and the insured will be even more critical to a successful policy being written. That’s how it should be,” adds Vernor, who is also the vice-chair for the Enterprise Risk Management Development Committee of the Risk and Insurance Management Society.

“There are still many unknowns around AIG,” says Vernor. Basically, if one carrier could be laid low by bad risk decisions, others could reveal themselves to be weaker than appearances would suggest. “Concerns should subside once AIG announces its assets sale in the first quarter.”

Firmed-up prices, shorter contracts
Although most community banks have managed to avoid sketchy mortgage deals, they will likely experience some performance lag resulting from the weakening economy, or, at very least, be branded as “risky” on the basis of being a financial institution—a very large bucket these days, encompassing commercial and retail banks, investment firms, credit card companies and insurers, notes Vernor.

So far, insurance premiums for most types of coverage have been minimally hit, although a few carriers that spoke with ABA BJ indicated that prices would be “firming up.”

Roger Claypool president and chairman of $200 million assets Shelby County State Bank, Harlan, Iowa, notes that when it comes to many types of property/casualty lines, “prices are holding steady.” D&O coverage and OREO-related coverage, he agrees, are definitely a tale of two banking markets: those implicated in subprime directly and everyone else.

Still, he adds, “if you’re putting out fires daily, I doubt the ten percent increase on your insurance coverage is at the top of the list of your concerns.” And yet, when it comes to D&O, many still-healthy banks have already been penalized by recent events in that they have seen three-year contracts cancelled and shortened to a single year.

“The carriers want to be careful and see how events play out,” says Claypool, who points out that economic performance, even the performance of real estate, looks very much like a patchwork quilt rather than a single, dominant pattern.

“My wife is a real estate broker and she had a terrific year,” he says. “We never had a boom in Iowa, compared to other, rapidly rising markets, but we never had a bust either.” While Claypool notes that it will take time for property values in troubled areas to reset, he believes steps taken in recent weeks are moves in the right direction.

Meanwhile, when it comes to policy terms, events around subprime add a patina of complication around an already difficult underwriting discipline. “Underwriting banks is a specialty. Many agents just don’t touch it,” says Risk Management Insurance’s Bob Gerry, who is among the minority who truly know banking. “I like working with bankers. They are smart, honest and skilled business people, I never met a jerky banker yet,” he says. BJ

 
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