Pub. 4 2016 Issue 3

www.uba.org 16 Banks Using Captives for Enterprise Risk Management in Increasing Numbers By Josh Miller 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 bankers know not all enterprise risk is ad- dressed with their commercial insurance package. To address 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 purpose, property and casualty insurance company, which can write customized policies for related entities. While larger institutions (typically $5bn in assets and larger) with specific organizational structures (i.e., lots of charters) have been utilizing these types of captives since 2006, cap- tives really did not take hold for mid-size community banks ($250mm - $5bn) until an updated structure was 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 Bankers Association, Joe Dehaven. “We have been discussing bank captives with other state banking associations through- out the country and there’s been tremendous interest.” It is important to recognize that the captive structure does not typically replace a bank’s primary commercial in- surance 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). Typically, the captive augments commercial policies in the following ways: - Covers the bank’s commercial deductible layers - Provides “difference in conditions” coverage for existing commercial policies, which primarily relate to sublimits and exclusions on the commercial policy form - Increases coverage levels on existing policies (excess layers) - Identifies other currently unfunded risks to insure where commercial insurance is not available to the bank. Along with benefits received from enhancing a bank’s risk management process, Congress approved a small business incentive for mid-size companies that form their own