Western Independent Banker - March/April 2009 - (Page 33)

By Patrick R. Corey Dealing with a Hard Insurance Market protect itself from an avalanche of claims, the insurance industry will most certainly tighten underwriting parameters, restrict coverage, and enforce higher deductibles and retentions for the short term. The good news is that “hard markets” tend to be short in duration—usually two or three years as opposed to “soft markets” which can last seven or eight years. Certain banks are going to have a difficult time maintaining insurance coverage due to weakened financials or other factors negatively affecting their insurability. Following is a short list of conditions that raise red flags in the financial institution underwriting community: • Capital less than 7 percent • Regulatory orders of any kind • Loan to deposit ratio over 120 percent • Non-performing loans in excess of 30 percent of capital • Charge-offs higher than 10 percent of total loans • Construction loans more than 20 percent of total loans • Real estate-related loans more than 50 percent of total loans • Aggressive growth patterns over the past three years • Consecutive unprofitable quarters • Brokered deposits in excess of 30 percent of total deposits The existence of these conditions doesn’t mean that the bank’s insurance will be nonrenewed, but it does indicate that the renewal could be difficult from an underwriting standpoint and that premiums could elevate and coverage terms may be restricted. If your bank is experiencing any of these conditions, there are a number of measures that your management team can take to mitigate adverse renewal terms: 1. Take a bigger piece of the risk. For the short term, increase the deductibles on your financial institution bond and the HEADS UP! THE “hard insurance market” is coming, regardless of things like TARP, Obama, bail-outs, stimulus packages, Chicken Little, and the Tooth Fairy. The insurance industry has been making very healthy profits on its investment portfolio over the past seven or eight years, profits that were strong enough to relegate underwriting revenue to the back burner. Now the situation has changed dramatically— return on revenue in the insurance industry has dropped 92 percent and the industry’s combined loss ratio currently stands at more than 105 percent. Underwriting profit has quickly jumped to the front burner and that means only one thing: higher premiums. This condition is exacerbated in the banking industry because of the depressed real estate market and the resulting ripple effect of a general slowdown in the economy. Insurance claims related to banking are on the rise at a time when the overall financial condition of the banking industry has been weakened to historic proportions. Some banks have already failed and predictions of roughly another 100 failures are bouncing around the media. In an effort to Keeping the lines of communication open with your insurance underwriter during these unprecedented economic times are a critical component of your insurance renewal process, especially if your financial institution is subject to one of the underwriting red flags. Western Independent Banker March/April 2009 33

Table of Contents for the Digital Edition of Western Independent Banker - March/April 2009

Western Independent Banker - March/April 2009
Contents
A Message from the President & CEO
Profitable Liquidity: Yes, You Can
Non-Performing Assets: The Keep Versus Sell Decision
Is BOLI the Way to Go?
The Troubled Asset Relief Program and Its Eff ect on Executive Compensation
TARP Money or Not, Secondary Offerings Belong in Your Plan
52nd Annual Conference
Private Equity: Another Capital Option
Strengthening Your Bank’s Bottom Line by Adapting to Difficult Times
Managing Your Branch Network Capital
Dealing with a Hard Insurance Market
WIB Service Corporation Report
WIB Calendar
New Members
Index of Advertisers
Advertiser.com

Western Independent Banker - March/April 2009

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