Pub 12 2022-2023 Issue 6

D INSURING CALM BEFORE THE NEXT STORM NATURAL DISASTERS INCREASE COMMUNITY BANKERS’ INTEREST IN CAPTIVE INSURANCE COMPANIES By David Guerino, The KeyState Companies Devastating hurricanes in Florida, catastrophic flooding in Kentucky, and crippling heat waves and forest fires in the Western and Northeast regions of the U.S. — all in all, the U.S. experienced 18 catastrophic disasters in 2022 according to a recent report from the National Oceanic and Atmospheric Administration (NOAA). Damage from each disaster exceeded $1 billion and totaled a staggering $165 billion last year. Over the past decade, many community banks have formed wholly owned captive insurance companies (captives) to help them pre-fund and prepare for future natural disasters and to cover risks that their commercial insurers will no longer fully insure. What Is a Captive and How Can It Benefit Community Banks? A captive is a wholly owned subsidiary of a bank’s holding company, operating as a licensed insurance company. The bank pays annual premiums to its captive for coverages not included in their regular commercial policies. A captive structure is not meant to replace a bank’s current commercial policies, but to strategically augment them. Captives can cover insurance deductibles and exclusions, as well as emerging risks such as increasing climate catastrophes. With enhanced risk management and a meaningful federal incentive, banks in the KeyState Bank Captive Program can reduce the annual “total cost of insurance” by 20–30% and increase their average annual EPS by 1–2%. Insurance premiums do not leave your bank’s economic family unless you have to pay claims. What Banks Can Form a Captive? S and C Corp banks with $750 million to $15 billion in assets are well-suited for KeyState’s Bank Captive Program. Over 100 community banks have joined the Program since it was launched in 2012, including numerous banks in Mountain West and a large number of banks in the Midwest. Considering its compelling benefits and ease of use, KeyState added six new banks in 2022 and expects the Program to grow by over 10% in 2023. Captives and Climate Catastrophes Severe weather events aren’t new, but experts have noted a disturbing trend of increased frequency and severity of catastrophic natural disasters in the U.S. and around the world. Many companies in regions that are more prone to natural disasters have been utilizing captives as a risk management and funding mechanism for many years. Ten years ago, in the wake of Hurricane Sandy in 2012, one of KeyState’s bank clients in New Jersey with numerous coastal branches experienced significant changes to their commercial “named storm” coverage. Their commercial carrier raised their perbranch deductible to $250,000. The bank has five branches concentrated in a small stretch of the east coast which could all be impacted by a single future hurricane due to their proximity. The bank evaluated its options and ultimately decided to form a captive to help pre-fund for these potential future losses. Colorado Banker 10

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