Banks In Trouble Find It Hard to Get Sound Insurance

A bank client shared some info that the FDIC is looking to warn banks that there are exclusions in some bank directors’ and officers’ insurance for regulatory issues. My experience is that these exclusions are almost always only on banks with regulatory issues. In general, insurers are not looking to sell insurance when the chances of a claim are high. Here is my comment to the banker…

(This might sound like I’m an apologist. I’m not. I find the explanation below gets people thinking in a different way.)

I have long looked at the underwriting decision on insurance as similar to the underwriting decision in bank loans.

As information builds that a loan customer is having troubles, bankers certainly start to look at how they protect the bank from losses.

Insurers do the same thing. Bank failures are usually not an overnight event. There are many signals – just as there are with loans going bad. It’s one reason I push for three-year policies – though it is not a foolproof strategy.

When a bank insurance program renews while regulator action is ramping up, the insurer will try to limit the exposure to regulatory claims by adding an exclusion.

At times we can use market pressures to get those pulled back – getting multiple insurers to quote.

Banks in trouble will have problems buying insurance.

Drivers with bad driving records will have trouble buying car insurance.

Owners of poorly maintained buildings have trouble buying property insurance.

Just like businesses that are poorly run have trouble getting loans.

By the way, the FDIC has already warned bank of exclusions. Last Fall’s notice on civil money penalties insurance included a few comments on regulatory exclusions. In my work I see regulatory exclusions in a very small number of bank insurance programs.  Almost always there is a current MOU or other regulatory issue pending. I don’t recall the last time I saw a regulatory exclusion on a strong bank’s insurance program.