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July 9, 2009
By Cliff Rudolph, Account Executive
The FDIC expects more bank failures as the financial crisis continues. On May 27th the FDIC released the Quarterly Banking Profile that represents a report card on the industry status and performance. It concluded that FDIC insured institutions reported a net income of $7.6 Billion in the first quarter of 2009, representing a significant recovery from the $32.1 Billion loss in the fourth quarter of 2008. However, this is 60.8% lower than the first quarter of 2008, a year in which we saw a decline of $32.7 Billion. The fourth quarter of 2008 represented the first quarterly loss since 1990. One-third of all insured institutions were not profitable in the fourth quarter of 2008, and overall earnings were outweighed by sizeable losses at a number of large banks. Furthermore, during the first quarter of 2009, twenty-one financial institutions failed; the highest quarterly total since 1992.
In addition to the financial hardships Financial Institutions are experiencing, several other factors are impacting the insurance market:
These factors when taken in concert have driven the insurance market for financial institutions resulting in stricter terms and conditions and higher premiums.
As a reaction to tougher corporate governance, organizations have taken swift Risk Management steps. For example, shareholders at Bank of America approved a motion to remove CEO Ken Lewis as the company’s chairman. And, as reported by the Wall Street Journal, separation of these two roles is increasing. Currently, approximately 37% of firms in the S&P 500 have separate chairmen and CEOs, up from just 22% in 2002.
The current challenging environment is characterized by a crisis of faith and confidence, extreme scrutiny of corporate affairs, increased regulation, a push for accountability and reform, and heightened exposure to litigation. Understandably then, financial institutions and their intermediaries and insurers find themselves in a whole new paradigm in the D&O marketplace.
As organizations look to better manage corporate governance risk and exposure, insurance, in the form of D&O (Directors & Officers Insurance) remains a key component. A comprehensive D&O policy will protect directors and officers of corporations against damages from liability claims arising out of negligence, alleged errors in judgment, breaches of duty, and wrongful acts related to their organizational activities. The policy also covers the corporation for expenses incurred in defending lawsuits arising from alleged wrongful acts.
“The very reason for D&O insurance is that directors and officers of companies can be sued for everything they’ve got,” says Robert Hartwig, chief economist for the New York-based Insurance Information Institute, an industry organization based in New York.
It all adds up to a brutal environment when looking to increase the effectiveness of your corporate governance Risk Management and Insurance. To cope with these new realities, here’s some advice:
Directors and Officers insurance is a critical piece of your overall risk management platform, both for your directors and officers, and the organizations they serve. Remember, when you have the right blend of a knowledgeable broker and a client that is taking the necessary precautions to “weather the storm”, underwriters will look at the strengths of your program instead of assuming the worst. In the end, choosing the right broker will increase the effectiveness of your risk management solution while lowering overall insurance costs.
The views and opinions expressed within are those of the author(s) and do not necessarily reflect the official policy or position of Parker, Smith & Feek. While every effort has been taken in compiling this information to ensure that its contents are totally accurate, neither the publisher nor the author can accept liability for any inaccuracies or changed circumstances of any information herein or for the consequences of any reliance placed upon it.