Insurance and Risk Management

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Risk Management and Insurance

Comptroller’s Handbook
Narrative and Procedures - March 1990

Comptroller of the Currency Administrator of National Banks

Risk Management and Insurance (Section 406)
Introduction Fidelity Bond Other Specialized Forms of Bank Insurance Other Types of Insurance Examination Procedures Internal Control Questionnaire Appendix

Table of Contents
1 3 8 9 13 16

Summary of Bankers Blanket Bond Coverage by Asset Size


Comptroller’s Handbook


Risk Management and Insurance (Section 406)

Risk Management and Insurance (Section 406)


Rising insurance premiums and the occasional inability to obtain coverage at any cost have changed the traditional role of insurance. Obtaining coverage for every insurable risk is being replaced by the risk management concept. Risk management, which includes insurance coverage, is intended to minimize the costs associated with assuming certain types of risk and providing prudent protection. It deals with pure risks that are characterized by chance occurrence and that may only result in a financial loss. Risk management does not address speculative risks that afford the opportunity for either financial gain or loss. Pure risks can be separated into three major categories: property, liability, and personnel. The most commonly known property risk relates to loss of real property from fire or other natural causes. This category also includes the loss of any bank asset, including currency, securities, or records. Property risk also includes indirect expenses that result from property loss, such as relocating to temporary facilities or loss of business while repairing facilities. These indirect costs often are as significant as the actual loss of property. Liability risk includes suits resulting from injury or death of both employees and the public, suits alleging official misconduct, and individual or class action suits alleging mistreatment or violation of law or regulation. All phases of a bank’s operation are susceptible to liability risks. The third category, personnel risk, concerns those risks associated with the loss of key personnel. This risk is often more pronounced in small and medium-sized banks that lack plans for management continuity. There are three stages in risk management: risk identification and analysis, risk control, and risk treatment. Although the degree of sophistication in each of those stages will vary from bank to bank, the thought and decision making processes that characterize each stage should be present in every bank if costs, and losses are to be minimized. In establishing a sound risk management and insurance program, bank management first must recognize where it is exposed to loss. This is the most important of the three steps. It requires a review of all aspects of the bank’s present and prospective operations. As new products are marketed or fixed assets acquired, they must be evaluated to determine what risks they present.

Comptroller’s Handbook


Risk Management and Insurance (Section 406)

Identified risks should then be analyzed to estimate their potential loss exposure. One method is to examine the bank’s historical loss records. This information should be available from the bank’s internal records. An analysis of industry loss experience can also be valuable. Statistical summaries of the industry’s loss experience can be obtained from publications of the Insurance and Protection Division of the American Bankers Association and The Surety Association of America. The importance of risk control is readily apparent when an uninsurable risk is involved. But the significance of minimizing premium costs through risk control cannot be overlooked. A bank’s primary defenses against loss are its policies, procedures, and internal controls. These systems and guidelines are integral parts of the risk and insurance management program. They must be communicated to, and understood by, all...
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