Ways to Lower your Bond and D&O Premium
How to get the most “BANG” for your buck!
The largest part of any bank’s insurance costs is the premiums of its Financial institution Bond and its Directors and Officers’ liability policies. While determining the best coverage should always be management’s primary goal, making sure the cost for these insurance policies is as competitive as possible is also very important, especially to the bank’s shareholders! Here are 5 ways to accomplish that task:
1. Choose Your Limits Carefully
The premium in both the Financial Institution Bond and the Directors & Officers Liability policy relies heavily on the limit chosen for each of its coverages. This is as it should be, as the more coverage i.e. limits you buy, the higher your premium will be. While asking the question “How much limit is enough?” is dangerous ground, there are practical “probable” limits to losses. If the largest loan a bank has is $2,000,000, it doesn’t make much sense to have a $5,000,000 Forgery limit, Fraudulent signature limit on the Bond, or the same limit on the D&O lenders liability coverage. Yes, you could possibly have a loss of this magnitude in these areas but it is highly unlikely.
2. Consider Three Year Prepaid Options
Most insurance companies will offer a discount of around 10%, if you will pay the premium for 3 years upfront. That is 10% on the THREE YEAR premium! Be careful with this option. Many bankers believe that if they pay the three-year premium up front, they are locked into their Bond and D&O for three years. No more worrying about the coverage each year. The company can’t cancel because they have already been paid for the policy for the three-year period. This is NOT necessarily true. There is usually a “financial deterioration” clause in such policies, that states if the Bank should fall below certain financial criteria, the insurance company can either raise the rate on the policy or cancel it altogether.
3. Market Your Insurance Program
Yes, it is a lot of trouble, but getting bids on your insurance program on a 3 or 4-year rotation can save you a lot of premium dollars. While getting at least two insurance agents bidding against each other is ideal, just going through your current insurance agent should get you two or three insurance companies interested in offering insurance quotes.
4. Use Higher Deductibles
Using higher deductibles obviously lowers the insurance company’s risk, and thereby lowers the premium charged. Unfortunately, the premium savings received is not proportionate to the higher risk taken on the deductible itself. For example, raising a deductible on a Financial Institution Bond from $25,000 to $50,000 may only save around $1500 in premium. On the surface, this is not a good deal. However, the Bond and D&O policies are “experience” rated policies. This means, the more losses you have, the higher your premium. Bond and D&O policies should be used for losses that severely affect the financials of the company not just its cash flow.
5. Keep The Number Of Locations And Employees You Have To A Minimum
While I am not advocating closing branches and firing employees to lower your Bond and D&O premiums, you should weigh the number of both against the productivity received. There is a reason why every Bond insurance company asks for the number of employees and the number of branches you have. It is a significant factor in the premium rate for your bank.
With a little forethought and an eye on the suggestions above, a bank can significantly lower its Bond and D&O premium costs.