Use them to maximize your protection and minimize your premium costs
How you answer those questions on that lengthy Financial Institution Bond Questionnaire can make a real difference in having great, competitively priced coverage under your Bond or poor, expensive coverage. While there are many factors that affect IF you will get a Bond quote, there are relatively few that determine how costly it will be. The following are FIVE of the more significant factors in determining your Bond costs.
The single most important factor in determining how costly your Bond premium will be is your Loss History. Significant credits are given to banks that have only a few or no losses in the previous 5 years before the renewal. Credits as high as 40% to 50% for good Loss History are not uncommon. In any competitive bid situation the insurance companies bidding will want to have the most current 5 years of “Loss Runs” from your current and past insurance carriers. While good loss history equals major premium credits, the reverse is also true. Have a major loss on your Bond and watch your premium jump the next year as you lose your Loss History Credit.
The second most important factor in determining how costly your Bond premium will be is the limits you choose for your coverage. OK, I agree. This seems a little obvious until you understand that you really get to choose your limits on most of your coverages here. The Basic Bond limit (the Employee Dishonesty Coverage) is usually determined by the Asset Size of the bank as listed in the Surety Association of America Bond table. This table is also used by the regulatory authorities, which gives it added weight. The Basic Bond limit usually applies to the first three insuring agreements of the Bond. All other clauses are subject to the particular bank’s needs for coverage. For example, too often a bank will have the same limit on the Forgery coverage clauses, D&E, as the amount of the Basic limit. The coverage in the Forgery area should reflect the largest loan the Bank. A bank with assets between $75 million and $100 million should have an Employee Dishonesty limit of $2,275,000 according to the Surety Tables. The largest loan for this bank may be $1,000,000. Thus a $2,275,000 limit is over insuring for this exposure. Oh, and did I mention that coverage D&E is expensive?!
The next most important factor in rating a Financial Institution Bond premium is the number of bank locations. Full service branches are rated higher than Data Centers or loan offices that don’t handle cash. There is some good news here. If you acquire a new branch in the middle of a term, the addition will not affect the premium until the policy renewal. The bad news is that if you sell a branch, you also won’t see the effect until renewal.
How many employees you have also affects your premium. Yes, part time employees are rated less than full time employees. Be as accurate as possible here. Again, new hires do not affect your premium until your renewal as well as layoffs.
The size of your Bond deductible will also influence your premium. The larger the Bond deductible the more credit you will receive. However, the reduction in the premium will not be in proportion to the difference in your deductible. For example, if you increase your deductible from $25,000 to $50,000 you will not receive a premium reduction equal to normal rule of thumb of ½ the difference. A 10% credit will be more likely. However, remember that your Loss History DOES influence your premium a great deal. The more small losses the bank absorbs, the better the loss history.
Finally, the actual coverages you choose on your Bond will affect your premium as well. Most Financial Institution Bond coverages are “elective”. Only the Employee Dishonesty coverage (A), Burglary and Robbery coverage (B), Transit coverage (C) and the Counterfeit Money coverage (F) are “mandatory”. Perhaps you are a bank that does not offer Safe Deposit Box services. Obviously, you would not need this coverage and could avoid its premium charge. But be careful. Be sure you do not have an exposure or you have decided to self fund the exposure before you
decide not to purchase a coverage.
Hopefully, this newsletter will help you be a better buyer of your Financial Institution Bond, and be better prepared for your next insurance renewal.