SR 19-12 Federal Reserve and D&O Insurance

As an insurance consultant to over five hundred banks around the US, I have fielded a fair number of questions and requests regarding the release of SR 19-12 in July. In this article, I will attempt to provide some clarity on my position and how your bank can understand the protections offered by your directors’ and officers’ insurance coverage.

First, my (somewhat cynical) take on the cause of the letter. My read is that a bank (probably with existing regulatory issues) had an insurance policy with exclusions added to their D&O policy by a nervous insurer. These exclusions are common for banks with regulatory issues, profitability concerns, or chronic claims issues. Frankly, no company wants to insure a house that is already on fire. My guess is that a policy was renewed and an exclusion was added. That change was either not communicated properly, or someone was not paying attention. Undoubtedly, a claim was submitted to and denied by the insurer. Directors’ personal funds were called upon, and regulators heard the screams.

Are there exclusions on your D&O policy? Of course. All insurance policies have exclusions. The real question is whether your insurance has exclusions outside the normal Bank D&O exclusions. Are claims resulting from regulatory actions excluded? Are claims brought by certain stockholders excluded? Those are the more important questions to ask. (Unmentioned by SR19-12 is the issue of limits of insurance. Do you have enough insurance?)

The only way to know if you have the right insurance program is to seek expert advice. Is your insurance agent active in the bank insurance market? How many banks does your agent insure? Is your insurance agent dependent on your insurance company for advice and direction? Where do new ideas come from? How many bank insurers does your agent work with?

Well over eighty percent of the banks I work with have a local insurance agent as their insurance adviser. Often that agent insures exactly one bank. This is quite common, especially among banks with under one billion dollars in assets. Community banks buy insurance from community insurance agents.

That is where I come in. I offer experienced, unbiased bank insurance information and advice. I never sell insurance, so I’m no threat to your current agent. I bring experience to the existing team. I never accept fees or commissions from the insurance agents or companies I work with. I don’t accept their gifts, meals, trips, or hockey tickets. I am unbiased.

If you want to be really sure you can answer the questions brought up by SR 19-12, give me a call to talk about a review of your bank’s insurance coverage.

Scott Simmonds, CPCU, ARM

Fee-Only Bank Insurance Assurance Consulting