Banks have made dramatic changes to risk management in the past decade—and the pace of change shows no signs of slowing. Providing strategic direction for a bank entails understanding what drives the creation of value – and what destroys it. The corporation needs to understand which risks it can take and which risks it should avoid.
Not all bank risks can be addressed by commercial insurance coverages. Often banks must self-insure key risks – whether deliberately, as a process of professional risk management – or by default, through lack of planning.
Serious emerging risks such as cyber security, data privacy and brand rehabilitation can create significant exposures for financial institutions of all sizes. At the same time, commercial insurance carriers often impose higher deductibles, and more restrictive endorsements. Significant gaps in coverage and exclusions remain in most commercial insurance policies. This creates unfunded risks, which must be evaluated as a part of any bank’s enterprise risk management process.
A growing number of banks are forming private insurance companies to cover these types of unfunded risks.
What happens to my premium payments?
Your institution can cover a wide variety of legitimate risks. An actuary will develop premiums and apply actuarial formulas that dictate minimum cash reserves, what the internal costs of reinsurance should be, and what risks you can legitimately insure against. The list of unfunded risks you may insure is long and comprehensive. You can also move some of the costs of commercial risk into your captive by taking higher deductibles on workers comp, general liability and other outside coverages.
With Private Insurance, bank owners can:
- Develop a formal internal risk management process
- Fund selected unfunded business risks
- Identify and close gaps in existing coverage
- Reduce high commercial expense and loss ratios
- Transfer high risks to traditional insurers