Florida Banking February 2023

BANCSERV ENDORSED PARTNER: THE KEYSTATE COMPANIES

INSURING CALM BEFORE THE NEXT STORM NATURAL DISASTERS INCREASE COMMUNITY BANKERS’ INTEREST IN CAPTIVE INSURANCE COMPANIES

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BY DAVID GUERINO, THE KEYSTATE COMPANIES

A s Hurricane Ian ripped through the Caribbean, Florida and the Carolinas this past September causing billions of dollars in losses, community banks that formed captive insurance companies (captives) were able to fund for some of the uncovered losses. Now other banks are starting to evaluate how captives could help mitigate and manage some of the uninsured losses by their commercial carriers. What Is a Captive and How Can It Benefit Community Banks?

billion in assets are well-suited for KeyState’s Captive Management program. Launched in 2012, the program now encompasses more than 85 banks including 41 active Midwestern banks from Illinois and its neighboring states of Ohio, Indiana, Illinois, Michigan and Wisconsin. In light of its wide benefits and ease of use, KeyState expects the Captive Management program to grow by more than 10 percent in 2023. Captives and Climate Catastrophes According to the National Oceanic and Atmospheric Administration (NOAA), Hurricane Ian was the 15th billion-dollar weather disaster last year (to date), ranging from severe storms and tropical cyclones to floods and wildfires. “Total losses due to property and infrastructure damage is up to $29.3 billion in 2022 so far,” noted NOAA, but this does not yet include costs for Hurricane Ian, western wildfires and Hurricane Fiona, “which may push the 2022 total closer to $100 billion — a total reached in four of the last five years.” Severe weather events aren’t new, and neither are captives as a loss prevention solution. Ten years ago, in the wake of Hurricane Sandy in 2012, one of KeyState’s bank clients in New Jersey with coastal branches experienced significant changes to their named storm coverage. Their commercial carrier raised the per-branch deductible to $250,000. This was significant since at least five of their coastal city

“CAPTIVES CAN COVER INSURANCE DEDUCTIBLES AND EXCLUSIONS, AS WELL AS EMERGING RISKS SUCH AS INCREASING CLIMATE CATASTROPHES.”

A captive is a wholly owned subsidiary of a bank’s holding company operating as a licensed insurance company. The bank pays annual premiums to its captive for coverages not included in their regular commercial pol icies. A captive structure is not meant to replace a bank’s current commercial policies, but to strategically augment them. Cap t i v e s c an c ov e r i n s u r anc e deduc t i b l e s

and exclusions, as well as emerging risks such as increasing climate catastrophes. With enhanced risk management and a meaningful federal incentive, banks in The KeyState Companies’ program can reduce the annual “total cost of insurance” by 20 to 30 percent and increase their average annual EPS by 1 to 2 percent. Insurance premiums do not leave your bank’s economic family unless you have to pay claims. What Banks Can Form a Captive? S and C Corp banks with $750 million to $15

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