Pub. 7 2017-2018 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S July • August 2017 15 Banks Using Captives for Enterprise Risk Management in Increasing Numbers T here is no avoiding it. Cyber security and reputation protection are among today’s significant, emerging risks, thus creating exposures for banks of all sizes. At the same time, commercial insurance carriers are pushing banks to higher deductibles, so there remain significant gaps in coverage and exclusions in commercial insurance policies. This creates unfunded risks, which must be evaluated as a part of any bank’s enterprise risk management process. It’s evident that bankersknownot all enterprise risk is addressedwith their commercial insurance package. Toaddress the concerns, banks throughout the country are forming captive insurance companies – known as captives – to cover these unfunded risks. A captive is a legally licensed, limited pur- pose, property and casualty insurance company, which can write customized policies for related entities. While larger institutions (typically $10bn in assets and larger) with specific organizational structures (i.e., lots of charters) have beenutilizing these types of captives since 2006, captives really did not take hold for mid-size community banks ($500mm- $10bn) until anupdated structurewas designed and vetted with regulators in 2012. “Since late 2012, we have seen the number of banks with captives explode. The majority of our banks that are good candidates for owning a captive either have one in place or are in process of putting one in place,” said CEO of Indiana Bank- ers Association, Amber VanTil. “We have been discussing bank captives with other state banking associations throughout the country and there’s been tremendous interest.” It is important to recognize that the captive structure does not typically replace a bank’s pri- mary commercial insurance program. However, it does allow a bank to more formally self-insure risks that are currently unfunded or that the bank has considered retaining (i.e., increaseddeductible layers). Typically, thecaptiveaugmentscommercial policies in the following ways: • Covers the bank’s commercial deduct- ible layers, including significant “named storm” deductibles for banks with coastal branches • Provides “difference in conditions” cover- age for existingcommercial policies,which primarilyrelate tosublimitsandexclusions on the commercial policy form • Increases coverage levels on existing poli- cies (excess layers) • Identifies other currently unfunded risks to insure where commercial insurance is not available to the bank.   continued on page 16 FEATURE ARTICLE JOSH MILLER, CEO, KEYSTATE CAPTIVE MANAGEMENT Financial institutions with larger baskets of unfunded risks will be able to continue to grow their captive over time as the institution grows organically or with acquisitions and the small business incentive will also grow.