Florida Banking November 2021

BANCSERV ENDORSED PARTNER: KEYSTATE CAPTIVE MANAGEMENT

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RENEWED INTEREST IN BANK CAPTIVES IN 2021

BY BRIAN AMEND AND DAVID GUERINO

R ecent adverse trends in the commercial insurance markets are driving community banks to consider alternative risk financing solutions. A growing number of mid-size banks are forming captives and realizing meaningful benefits. Ransomware attacks typically begin with a targeted email message containing malicious software. Once introduced, the malware spreads throughout the network, encrypting documents or files and rendering them inaccessible until a ransom is paid by the victim. What is a captive insurance company?

• Commercial insurance carriers have pushed banks to assume higher deductibles while narrowing coverages. • Commercial carriers have almost universally denied claims for Covid-19 business interruption and extra expense coverage. KeyState managed captives covered over $4 million in Covid-19 related claims. • Captives can provide coverages that are not available commercially or are cost-prohibitive in the commercial marketplace.

• Representation and warranty insurance for merger and acquisition transactions. • Legal expense coverage for class action nuisance lawsuits. • Unknown liabilities related to PPP loan processing and administration. • Broad cyber coverage to supplement commercial policies with significant exclusions. Banks can structure a captive to address and respond to these risks, capture the underwriting profits (rather than just paying premiums to a commercial insurer), and control/ reduce a bank’s overall cost of insurance. It’s not uncommon for

“ IT’S NOT UNCOMMON FOR A BANK TO REDUCE ITS AVERAGE, ANNUAL “TOTAL COST OF INSURANCE” BY 20 TO 30 PERCENT BY FORMING A CAPTIVE. ”

A captive is a wholly-owned subsidiary of the bank’s holding company that operates as a legally licensed captive insurance company. The bank pays annual premiums to its captive for coverages not included in its commercial insurance program. The captive covers commercial deductibles, commercial policy exclusions, and emerging risks not covered under a bank’s commercial policies. With enhanced risk management and a meaningful federal incentive for middle-market companies, banks in KeyState’s Bank

Captive Program typically experience an average increase to annual earnings of 1 to 2 percent per year. Why should a bank evaluate a captive now? • Commercial insurance premiums have increased significantly. • Cyber risk: 25 to 50 percent increase. • Bankers Professional Liability: 10 to 30 percent increase. • FI / Crime Bond: over 10 percent increase.

a bank to reduce its average, annual “total cost of insurance” by 20 to 30 percent by forming a captive. Over 70 percent of Fortune 500 companies have utilized captives for many years. And now, due to current commercial market conditions, a significant number of middle market companies and community banks are forming captive insurance structures. What banks can form a captive? Generally, a bank must have a holding company to form a captive. Both “C” and “S” corporations

18 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING