Cyber security and reputation protection are among today’s significant, emerging risks, thus creating exposures for banks of all sizes.
By Josh Miller
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 significant gaps remain 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.
To address the concerns, banks throughout the country are forming captive insurance companies to cover these unfunded risks. A captive is a legally licensed, limited purpose property and casualty insurance company that can write customized policies for related entities.
“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 Amber VanTil, CEO of Indiana Bankers Association.
It is important to recognize that the captive structure does not typically replace a bank’s primary 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., increased deductible layers).
In 2015, Congress enhanced a small business incentive for mid-size companies that form their own insurance companies to insure these currently unfunded risks. This allows companies to pre-fund for potential future risks on a tax advantaged basis and formalize their current self-insurance program. The captive becomes a way to put reserves away, literally for a rainy day.