life and product insurance products

8/7/2019 Life and Product Insurance Products

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Life and Product Insurance Products

Type of Life Insurance Products

y Term Assurancey Whole of Life Assurancey Endowment Assurancey Annuities

- Fixed Annuities- Variable Annuities

y Non Traditional Covers

Types Of Life Insurance Products(Term Assurance)Based on the benefit patterns the traditional Life Insurance products can be categorise

into the following types:

y Term Insurancey Whole Life Insurancey Endowment Insurancey Annuities

Term Insurance provides for life insurance protection for the selected term (period o

years) only. In case the person (whose life is insured) dies during the term, the benefits

are payable under the policy and in case ofhis survival till the end of the selected term

the policy normally expires without any benefit becoming payable. Term insurance may

be regarded as temporary insurance and is more nearly comparable with

"PropertyCasualty insurance" contracts than the other forms of Life insurance contracts.

Whole of Life Assurance

As the name suggests, the whole life insurance policies are intended to provide LifInsurance protection over one's lifetime. The essence of whole life insurance is that it

provides for payment of the assured amount upon the insured's death regardless of whenit occurs. Under these policies, the payment of the assured sum is a certainty in contrast

to the term insurance contracts. Only the time of payment of the assured sum is an

uncertainty.Whole life policies can be either participating type or non-participating type.

Participating type policies are those which are entitled to a share in the distributabl

surplus (profits) of the Life Insurance company, whereby the cash value of the policy

can go up, with the announcement of bonus / dividend. Non-participating policies have

the same benefit throughout the life of the policy.

There can be the following types of whole life policies: 1. Ordinary Whole Life Insurance

2. Limited Payment Whole Life Insurance


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3. Convertible Whole Life Insurance

Endowment Assurance

These are the most commonly sold policies. These policies assure that the benefits under

the policy will be paid on the death of the life insured during the selected term or on his

survival to the end of the term. Hence the assured benefits are payable either on the date

of maturity or on death of the life insured, if earlier.

Endowment policies assist in providing for the payment of a lump sum amount for a

specific purpose, say, provision for retirement, meeting the needs of the child etc. Th money required for the purpose will be built up whether the person is alive till that date

or not. Like whole life insurance policies, endowment policies can also be oparticipating and non-participating types.

Annuities

An annuity is a series of periodic payments. An annuity contract is an insurance policy,

under which the annuity provider (insurer) agrees to pay the purchaser of annuity

(annuitant)a series of regular periodical payments for a fixed period or during someone's

life time.

Classification of Annuities: Annuities can be classified on the basis of

y The number of lives coveredo Singleo Joint

y The beginning of the payment of annuityo Immediate annuityo Deferred annuity

y Method of premium paymento Single premiumo Regular instalment

Non Traditional Covers

Universal Life Insurance (ULI) is another non-traditional type of Life Insurance

introduced in the United States in the year 1979, which had an adjustable face valu

(insurance coverage), floating interest rates based on market conditions and unbundling

of savings and protection elements of Life Insurance. After paying an initial minimu

premium, policy owners may thereafter pay whatever amount and at whatever times they


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wish, or even skip premium payments, provided the cash value will cover policycharges. Similarly they had the option to raise or reduce the face value of the Insurance

policy. For increasing the insurance coverage proof of continued insurability wasinsisted.

Under this type of policy (ULI), the policyholder pays an initial premium, which should

not be less than a minimum for the given face value and the attained age of the Life to beInsured. From this premium payment, the mortality charge for the first period and the

expenses charges will be deducted and the balance will be the policy's cash value. To

this cash value a certain interest (depending upon the rate of interest prevailing in th

market) will be credited at the end of the period.

Risk Management and Insurance

Comptrollers Handbook

Narrative and Procedures - March 1990

Comptroller of the Currency Administrator of National Banks


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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

18


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Introduction

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 fromproperty 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 banks 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 banks present and prospective operations. As new

products are marketed or fixed assets acquired, they must be evaluated to determine what risks

they present.


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Identified risks should then be analyzed to estimate their potential loss exposure. One method is to

examine the banks historical loss records. This information should be available from the banks

internal records. An analysis of industry loss experience can also be valuable. Statistical summaries

of the industrys 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 ofminimizing premium costs through risk control cannot be overlooked. A banks 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 bank personnel. The bank must also provide audit coverage to insure that these

controls are followed. Additionally, the controls required by the Bank Protection Act of 1968 (12 CFR

21) (see Cash Accounts examination procedures) directly relate to the risk management program.

Emergency preparedness, contingency planning, and records management also play significant roles

in the risk control function. Once risks have been identified and risk controls implemented,

management must decide the most appropriate method for treating a particular risk. Management

can treat risk in two ways, retaining or transferring it. Although many factors influence this decision,

the purpose of risk management is to minimize the costs associated with pure risks. Cost is broadlydefined to include: The direct and consequential costs of loss prevention measures, plus

Insurance premiums, plus Losses sustained, including consequential effects and expenses to

reduce such losses, plus Pertinent administrative expenses, minus Recoveries from third parties

and indemnities from insurers on account of losses sustained. Although exact dollar amounts can

seldom be inserted into the formula, all of these costs are pertinent in determining risk treatment.


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A bank has many options in treating a particular risk. It can implement additional controls to

minimize that risk, yet still retain it. It may also transfer the risk to another party through insurance

or contractual transfer, self-insure the risk, or any combination of these options. A basic tenet of risk

management is that those risks that carry the potential for catastrophic or significant loss should not

be retained. Conversely, it typically is not cost justified to insure losses which are relatively

predictable and not severe. Teller shortages are an example. It would be less costly to improvecontrols or training procedures intended to reduce those shortages than to pay additionalinsurance

premiums to cover the losses. The board of directors must determine the maximum loss the bank is

able and willing to assume. It should at least perform an annual review of the banks risk

management and insurance program. Because of the processing costs associated with relatively

small claims, the trend in the insurance industry is to require larger deductible clauses. This has

resulted in many bank managers self-insuring against certain risks. The risk manager may also opt for

a larger deductible as another method of minimizing costs. However, the decision to self-insure or

assume a larger deductible should be made by the board of directors after receiving the

recommendations of operating management. The responsibility for identifying risks and

implementing appropriate control procedures rests with the board of directors and management.

Once the decision is made to insure a particular risk, a knowledgeable, professional insurance agentcan assist in the selection of an underwriter. The financial capacity of the insurance underwriter

should be analyzed to determine that the company has the ability to make payment should a

significant loss occur. This is important when insurance is required on collateral taken to protect an

extension of credit. The standard Errors and Omissions policy does not include coverage if the initial

underwriter is insolvent. Following is a list of the major types of insurance coverage available to

banks and a brief discussion of them. The coverages described may be found under different names

in different banks. Accordingly, the examiner should concentrate on the coverage provided rather

than on the general description.

Fidelity Bond


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Typically, fidelity insurance includes reimbursement for loss, not only from employee dishonesty, but

also from robbery, burglary, theft, forgery, mysterious disappearance, and, in specified instances,

damage to offices or fixtures of the insured. Fidelity bond coverage applies to all banking locations

except automated teller machines, for which coverage must be specifically added by rider. It is

standard procedure for insurance companies to write fidelity bonds on a discovery basis. Under

this method, the insurance company is liable up to the full amount of the policy for losses coveredby the terms of the bond and discovered while the bond is in force, regardless of the date on which

the loss was actually sustained by the bank. This applies even though lower coverage amounts or

more restrictive terms might have been in effect on the date the loss was sustained. All fidelity

bonds require that a loss be reported to the bonding company within a specified time after a

reportable item comes to the attention of management. Management should diligently report all

potential claims to the banks insurance company because failure to file a timely report may

jeopardize coverage for that loss. Financial institutions use a form of fidelity bond called a Financial

Institution Bond, Standard Form No. 24. This form was revised in January 1986 by the Surety

Association of America to replace the traditional Bankers Blanket Bond. The Financial Institution

Bond limits the liability of the underwriter over the term of the bond to a predetermined dollar

amount. All claims paid by the underwriter during the bonds term are applied against the aggregatelimit. Upon the limits exhaustion, the bond is canceled automatically. The consideration clause also

was amended in the January 1986 bond to reference that the bond was issued in reliance on

statements and information supplied by the insured in the bond application, and that the policy can

be declared void by the underwriter if any of that information is found later to be inaccurate or

misrepresented by the insured. Unless specifically deleted by rider, Standard Form No. 24 includes

the following clauses (the most commonly purchased coverages are marked with asterisks): A

Fidelity*Loss as a result of dishonest or fraudulent acts by the banks officers and employees,

attorneys retained by the bank, and nonemployee data processors while performing services for the

insured. It is common for


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this clause to specifically define the type of acts covered. The language in the 1986 form was

amended to include the following definition: Loss resulting directly from dishonest or fraudulent

acts committed by an employee acting alone or in collusion with others. Such dishonest or

fraudulent acts must be committed by the employee with manifest intent: (a) to cause the insured

to sustain such loss, and (b) to obtain financial benefit for the employee or other person or entity. If

any of the loss results directly or indirectly from loans, that portion of the loss is not covered unlessthe employee was in collusion with one or more parties and received a financial benefit of at least

$2,500. BPremises*Loss of property (as defined in the bond) through robbery, burglary,

larceny, misplacement, theft, or mysterious and unexplained disappearance. The property must not

have been in transit at the time of loss. Although damages to offices and equipment under specified

conditions are covered under this clause, on-premises coverage should not be confused with

standard fire or other types of property insurance. CIn Transit*Identical to that provided

under B, except that the property is covered while in transit. The property must be in the custody of

a natural person acting as a messenger of the insured; or a transportation company and being

transported in an armored motor vehicle or in a conveyance other than an armored motor vehicle

for certain specifically defined records. DForgery or Alteration*Loss resulting from forged or

altered negotiable instruments (except as evidence of debt), acceptances, withdrawal orders,certificates of deposit or letters of credit and other instruments, as defined, which are received by

the bank either over-the-counter or through clearings. Items received through an electronic funds

transfer system are not covered. A mechanically produced facsimile signature is treated the same as

a handwritten signature. ESecurities*Loss from forgery or alteration of securities, documents,

or written instruments, except those covered under Clause D. Actual physical possession of the

securities by the bank or its representative is necessary for coverage to exist.


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FCounterfeit CurrencyLoss resulting from acceptance of any counterfeit money of the United

States of America, Canada, or of any other country in which the insured maintains a branch office.

Many banks also obtain an excess coverage policy. The coverage extends the basic protection

provided under the blanket bond in areas where the dollar volume of assets or exposure is

particularly high. Excess coverage usually is written in multiples of $1 million and either carries a

deductible clause equal to the amount of the blanket bond or states that coverage will be providedfor the full amount of the excess policy when loss exceeds a specified amount. The most common

form of this coverage is the Excess Bank Employee Dishonesty Blanket Bond, Standard Form No. 28.

Fidelity bond protection can also be extended by purchasing the following common optional riders:

Automated Teller Machine RiderLoss involving automated teller machines that are not situated

within banking offices or not permanently staffed with a bank teller. Electronic Funds Transfer

System RiderLoss through fraudulent transmissions by or through an electronic funds transfer

system. Extortion Threats to Persons and Extortion Threats to Property RidersLoss of property

(cash, securities) surrendered from a banking office as the result of a threat to do bodily harm to a

director, trustee, employee, or relative, or threats to do damage to banking premises or property.

Additionally, riders that restrict coverage for losses related to credit card operations or check kiting

schemes can be added. Many banks obtain this coverage as a separate policy. Although InterpretiveRuling 7.5215 does not require national banks to obtain insurance, the language used in that

section (i.e., bonds with adequate sureties) contemplates insurance. In the mid-1980s, banks

began to experience difficulties obtaining fidelity insurance. Among other reasons, insurance

industry sources cited concern over


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the condition of banks in light of the increase in bank failures. Based on an agency review of the

problem, it was determined that self-insurance, in the form of reserve or trust funds, as proposed by

some banks, was not a viable alternative to fidelity insurance since there was no transfer of risk. If a

bank discontinues efforts to obtain insurance after it lapses or is canceled, examiners should ensure

that the board of directors is aware that: 1. The failure of directors to require bonds with adequate

sureties and in sufficient amounts may make them personally liable for any losses the bank sustainsbecause of the absence of such bonds. Common law standards have held directors liable in their

personal and individual capacity for negligently failing to require an indemnity bond to cover

employees with access to cash, notes, and securities. 2. Management should determine the

reason(s) for any denial of insurance or unreasonable terms; ensure that action is taken to correct

any deficiencies and, when beneficial, provide additional information; and obtain insurance when

feasible. 3. Although the establishment of a fund to cover losses is not a viable alternative to

insurance, it may be used while attempting to obtain insurance (to be applied to premiums or to

offset losses), or it may be used in addition to insurance to offset a high deductible. The

establishment of such a fund does not mean that an insurance cost or liability has been incurred.

Therefore, estimated losses should not be reported as an expense in the Report of Income until they

actually occur. This information should assist management in its efforts to control risks, and togetherwith difficulties in obtaining insurance, highlights the necessity of procedures that deter and expose

losses associated with officer and employee misconduct. Fidelity bond coverage is appropriate for all

banks because it insures risks that contain the potential for significant loss. The examiner should

determine that management has attempted to identify the risks that might result in a significant loss

and that those risks are not retained. To help the examiner assess the adequacy of the banks fidelity

bond coverage, the Appendix to this Handbook contains a schedule, compiled by the American

Bankers Association, which


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shows the range of fidelity bond coverage carried by banks grouped by size. However, a banks level

of risk exposure is influenced by many variables, only one of which is size. Therefore, the examiner

must assess the overall soundness of the banks risk and insurance management program rather

than suggesting an average coverage that may be inappropriate for the particular bank. Examiners

should record in SMS if a bank is operating without fidelity coverage. SMS should document how

long the bank has been without coverage, its efforts to obtain adequate coverage, and any otherpertinent information. Examiners should consider the banks fidelity overage, risk management, and

insurance when developing its supervisory strategy. When the bank under examination is a member

of a bank holding company, and the holding company has purchased one fidelity bond to cover all

affiliated banks, care should be exercised in determining that the policy is sufficient to cover the

exposures of the member bank being examined.

Other Specialized Forms of Bank Insurance

This is not intended to be a comprehensive list of coverages available but rather those that are

frequently purchased. Combination Safe Depository, Coverage ACovers losses when the bank islegally obligated to pay for loss (including damage or destruction) of a customers property held in

safe deposit boxes. Coverage BGenerally covers loss, damage, or destruction of property in

customers safe deposit boxes, whether or not the bank is legally liable, when such loss results from

other than employee dishonesty. This policy commonly provides for reimbursement of legal fees in

conjunction with defending suits involving alleged loss of property from safe deposit boxes.

Directors and Officers LiabilityProtects, under two insuring clauses, against the expense of

defending suits alleging director or officer misconduct and against damages that may be awarded.

One clause reimburses the bank for any payments made to directors or officers under an

indemnification agreement with them. The other clause reimburses the directors or officers for

expenses that the bank is unable to indemnify. Generally, the insuring company requires a

deductible on this type of coverage. This insurance does not cover criminal or dishonest acts,

situations when the involved persons obtained personal gain, or


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when a conflict of interest was apparent. Also, the OCC may review the threat to bank safety and

soundness posed by indemnification and may direct its modification through administrative action.

The banks articles of association may provide for paying premiums for this insurance. However, the

articles must also specifically exclude insurance coverage for a formal order assessing civil money

penalties against a director or officer. Mortgage Errors and OmissionsProtects the bank, as

mortgagee, from loss when fire or all-risk insurance on real property held as collateral inadvertentlyhas not been obtained. Generally, this insurance is not intended to overcome errors in judgment,

such as inadequate coverage or insolvency of an original insurer. Fraudulent Accounts Receivable

and Fraudulent Warehouse ReceiptsCovers losses resulting from the pledging of fraudulent or

nonexistent accounts receivable and warehouse receipts, or from situations in which the pledger

does not have title. In addition, this insurance offers protection against loss arising from diversion of

proceeds through acts of dishonesty. Single InterestCovers losses for uninsured vehicles that are

pledged as collateral for an extension of credit. Transit Cash Letter InsuranceCovers loss of cash

letter items in transit for collection or to a clearinghouse of which the insured bank is a member. It

also includes costs for reproducing cash letter items. Generally, such policies do not cover items sent

by registered mail or air express, or losses due to dishonest acts of employees. First Class, Certified,

and Registered Mail InsuranceProvides protection on shipment of property sent by various typesof mail, and during transit by messenger or carrier to and from the Post Office. It is principally used

to cover registered mail in excess of the maximum $25,000 insurance provided by the U.S. Postal

Service.

Other Types of Insurance

Banks may also need other specialized forms of insurance for which the fidelity


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bond, along with the related policies, endorsements, and specific coverages previously noted,

provide insufficient protection. The following are brief descriptions of some of those types of

insurance: AutomobilePublic Liability and Property DamageProtects against property and

liability losses arising from injury or death when a bank owned, rented, or repossessed vehicle is

involved. Nonownership liability insurance should be considered if officers or employees use their

own cars for bank business. Boiler and MachineryProvides coverage for loss due to explosion orother forms of destruction of boilers, heating and/or cooling systems, and similar types of

equipment. Extra ExpenseProvides funds for the additional costs of reestablishing the banks

operations after fire or other catastrophe. Fine ArtsProvides coverage for works of art on display

at a bank, whether owned by the bank or on consignment. Protection typically is all risk and requires

that appraisals of the object(s) be made regularly to establish the insurable value. FireCovers all

loss directly attributed to fire, including damage from smoke or water and chemicals used to

extinguish the fire. Additional fire damage for the building contents may be included but often is

written in combination with the policy on the building and permanent fixtures. Most fire insurance

policies contain co-insurance clauses, meaning that insurance coverage must be maintained at a

fixed proportion of the replacement value of the building. If a bank fails to maintain the required

relationship of protection, all losses will be reimbursed at the lower ratio of the amount of theinsurance carried to the amount required, applied to the value of the building at the time of the loss.

When determining insurable value for fire insurance purposes, the base typically is the cost of

replacing the property with a similar kind or quality at the time of loss. Different types of values,

however, may be included in policies, and care should be taken to ensure that the bank is calculating

the correct value. General LiabilityCovers the bank from possible losses arising from a variety of

occurrences. Typically, general liability insurance provides coverage against


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specified hazards, such as personal injury, medical payments, landlords or garage owners liability,

or other specific risks that may result in or create exposure to a suit for damages against the bank.

Comprehensive general liability insurance covers all risks, except specific exclusions. Keyman

InsuranceInsures the bank on the life of an officer when the death of such officer, or keyman,

would be of such consequence as to give the bank an insurable interest. Banks are not authorized to

purchase life insurance policies as investment. Trust Operations Errors and OmissionsIndemnifiesagainst claims for damages arising from alleged acts resulting from error or omissions while acting as

administrator under a trust agreement. Umbrella LiabilityProvides excess coverage over existing

liability policies, as well as basic coverage for most known risks not covered by existing insurance.

Valuable Papers and Destruction of Records PolicyCovers cost of reproducing records damaged or

destroyed. It also provides the cost of research needed to develop the facts required to replace

books of accounts and records.

Recordkeeping

The breadth of available insurance policies and differences in the coverage emphasize theimportance of maintaining a concise, easily referenced schedule of insurance coverage. These

records should include, at a minimum: The coverage provided, detailing major

exclusions. The underwriter. The deductible amount. The upper limit. The term of the policy. The

date premium(s) are due. The premium amount.

Records of losses should also be maintained, regardless of whether or not the bank was reimbursed.

This information indicates areas where internal controls may need to be improved and is useful in

measuring the level of risk exposure in a particular area.


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Bonding Claims

Losses resulting from fraudulent activity have reduced capital to critically low levels in some banks.

Although banks obtain fidelity bond coverage to guard against these losses, delays and uncertainties

in settling bonding claims can result in capital impairment and even book insolvency while claims are

being resolved. Under generally accepted accounting principles (GAAP), banks record such losses

upon discovery. However, GAAP precludes a bank from recording a receivable for a claim filed under

its fidelity bond until it has determined that collection is highly probable and it can estimate the

amount of recovery with considerable accuracy. Typically, this determination is made when a

settlement offer is received from the insurer. However, there may be other limited circumstances

that support recording a receivable under GAAP. In certain cases, ultimate settlement of an

unrecorded bonding claim may be sufficient to correct a capital deficiency and prevent closure of

the bank. In these instances, the OCC must evaluate the banks operating condition and merits of its

claim to determine whether the bank should be allowed to continue operating with inadequate

capital until the claim is recorded or settled. The OCC may exercise discretion in enforcing capital

guidelines on banks experiencing a significant capital deficiency because of fraud where fidelity bond

coverage is present. The decision to exercise discretion will be based on a case-by-case review.Accounting for losses resulting from fraud and accounting for bonding claims remain consistent with

GAAP whether or not the OCC exercises discretion in enforcing capital guidelines. The appropriate

supervisory office must monitor the bank closely while the claim is pending. During this time the

bank may be required to file frequent reports so its progress can be monitored. If adequate progress

is not made or new information alters the original assumptions, the OCC may rescind or amend its

decision.


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1. 2.

Examination Procedures

Complete or update the Risk Management and Insurance section of the Internal Control

Questionnaire. Select from among the following examination procedures those steps necessary to

evaluate the risk management and insurance practices of the bank. Test for compliance with

policies, practices, procedures, and internal controls in conjunction with performing the selected

examination procedures. Also, obtain a listing of any deficiencies noted in the latest review done by

internal/external auditors from the examiner assigned Internal and External Audits, and determine

if appropriate corrections have been made. Determine if the bank has a designated risk manager

who is responsible for loss control. If not, determine which officer handles the risk management and

insurance function. Determine if written policies exist. If not, discuss informal policies with the

appropriate officer(s) to determine: a. Procedures used to identify and analyze risks. b. Methods

used to control and treat risks.

3.

4.

5. 6.

Determine if the board of directors has established appropriate maximum guidelines for risk

retention. Obtain the banks schedule of insurance policies in force. If the bank does not maintain a

schedule, request management to complete or update the schedule of existing insurance coverage.

Using the insurance coverage summary prepared by the bank, determine that coverage conforms to

the guidelines for maximum loss exposure established by the board of directors. Determine whether

insurance coverage provides adequate protection for

7.

8.


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protection for the bank. The quality of internal controls and the audit function must be considered

when making this assessment. The statistical summary published by the American Bankers

Association (see Appendix) may be helpful in your evaluation. 9. Examiners should analyze any

significant capital shortfall resulting from fraud to determine whether the pending bonding claim has

merit and whether the banks condition supports exercising discretion in enforcing capital

guidelines. Analysis of the merits of the claim should include: The banks documentationdemonstrating fraud. The terms of the banks bonding coverage. Bank counsels opinion on the

legality, collectability, and amount of the claim. Internal/external auditors opinions concerning the

proper accounting of the claim (if available). The banks compliance with the insurance companys

filing requirements. Communications from the insurance company. 10. If a claim has merit,

determine whether the banks condition supports exercising discretion in the enforcement of capital

guidelines by reviewing: The banks ability to operate in a safe and sound manner until capital is

restored. The possibility that the bank will not be restored to a healthy condition even if the

bonding claim is paid. Corrective action taken by management and the board to prevent further

losses and improve internal controls. The banks contingency plans to recapitalize through

alternative methods in case the claim is not paid or is delayed significantly. Potential financial

impact on the bank (and FDIC if the bank is liquidated) from lawsuits initiated against it by partiesaffected by the fraud. 11. If the banks fidelity insurance has lapsed, the supervising office should be

notified of the banks name, how long it has been without coverage,

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its efforts to obtain adequate coverage, and any other pertinent information. 12. Determine that the

bank has adequate procedures to assure that: a. Reports of losses are filed with the bonding

company pursuant to policy provisions. b. Premiums are paid before expiration dates. If procedures

are deficient in either way, verify that reports have been filed as required and premiums have been

paid. 13. Report to the Examiner-in-Charge, and discuss with appropriate officers: a. Recommended

correction action when policies, practices, procedures or practices, procedures or internal controlsare deficient. b. Important areas where insurance coverage is either nonexistent or inadequate in

view of current circumstances. c. Any other deficiencies noted. 14. Update the work program with

any information that will facilitate future supervisory activities.


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Internal Control Questionnaire

Review the banks internal controls, policies, practices, and procedures for the banks own insurance

coverage. The banks systems should be documented in a complete and concise manner and should

include, where appropriate, narrative description, flowcharts, copies of forms used, and other

pertinent information. Bank Risk Management and Insurance 1. Does the bank have established

insurance guidelines which provide for: a. A reasonably frequent, at least annual, determination of

risks the bank should assume or transfer? b. Periodic appraisals of major fixed assets to be insured?

c. A credit or financial analysis of the insurance companies who have issued policies to the bank? 2.

Has management established operating procedures for filing fidelity bonding claims that include: a.

Taking prompt action when fraudulent activity is suspected to avoid further losses after what may

later be regarded by the insurer as the date of discovery? b. Considering obtaining the advice andassistance of legal counsel, consultants, or accountants in filing claims? c. Ensuring adherence with

insurance policy filing and notification requirements? d. Allocating human and monetary resources

as warranted by the significance of the claim?


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e. Ensuring adequate monitoring and follow-up after the claim is filed? 3. 4. Does the bank have a

risk manager who is responsible for risk control? Does the bank use the services of a professionally

knowledgeable insurance agent or broker to assist in selecting and providing advice on alternative

means of providing insurance coverage? Does the banks security officer coordinate his or her

activities with the person responsible for handling the risk management function? Does the bank

maintain a concise, easily referenced schedule of existing insurance coverage? Does the bankmaintain records, by type of risk, to facilitate an analysis of the banks experience in costs, claims,

losses, and settlements under the various insurance policies in force? Is a complete schedule of

insurance coverage presented to the board of directors, at least annually, for their review?

5. 6. 7.

8.

Conclusion 9. Is the foregoing information an adequate basis for evaluating internal control in that

there are no significant additional internal auditing procedures, accounting controls, administrative

controls, or other circumstances that impair any controls or mitigate any weaknesses indicated

above (explain negative answers briefly, and indicate conclusions as to their effect on specific

examination procedures)? Based on a composite evaluation, as evidenced by answers to the

foregoing questions, internal control is considered ____________ (good, medium, or bad).

10.


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Summary of Bankers Blanket Bond Coverage by Asset Size

Appendix

(This is not a listing of recommended amounts of coverage.*)

Favored Range of % of Banks Assets Coverage (thousands) w/Coverage in (millions) Favored Range 1

to 9 250 to 1,000 83% 10 to 24 375 to 1,000 80% 25 to 49 525 to 1,500 81% 50 to 99 825 to 2,000

83% 100 to 249 1,275 to 5,000 84% 250 to 499 2,500 to 5,000 82% 500 to 999 10,000 to 25,000 81%

1,000 to 1,999 10,000 to 20,000 79% 2,000 to 4,999 10,000 to 30,000 79% 5,000 and over 35,000 to

85,000 83% Median Most Frequent Coverage Coverage (thousands) (thousands) 250 250 450 450

825 675 1,050 1,050 2,500 2,500 4,750 5,000 10,000 10,000 10,000 10,000 25,000 25,000 55,000

50,000 % of Banks w/Most Frequent Coverage 41% 23% 32% 27% 19% 36% 50% 50% 36% 30%

Reprinted by permission of the American Bankers Association. SOURCE: 1987 Bank Insurance Survey,

a book published by the Security and Risk Management Division, American Bankers Association. *

Information contained in this table and the book is the result of a survey. The 1987 bank insurance

survey was conducted with a probability sample selected by asset size, from the 13,600 commercial

banks operating in the United States at yearend 1987. Six hundred and seventy-eight bankers

participated in the survey. In addition to the information on bankers blanket bond coverage, the

book contains information on premiums, deductibles, losses, violations of applicable laws,

underwriting statistics, etc.


18



24/27

Source: Max New York Life InsuranceTuesday, January 18, 2011 01:30 PM IST (08:00 AM GMT)

Editors: General: Consumer interest; Business: Advertising, PR & marketing, Banking & financial services, Business services, Financial

Analyst

Max New York Life Launches FLEXI FortuneA highly flexible and customizable ULIP to forhigh money growth

New Delhi, Delhi, India, Tuesday, January 18, 2011 -- (Business Wire India)

Max New York Life Insurance today, launched FLEXI Fortune, a unit-linked insurance

plan that offers consumers the flexibility to customise the plan as per their needs throughchoice of policy tenure, life cover multiple and fund options. The customer value proposition

of FLEXI Fortune is further strengthened by its unique features of systematic transfer planto benefit from market volatility, extended tenure to maximize returns by timing the exit and

Progressive Auto CoverEnhancement PACE to meet growing protection need.

Announcing the launch, Mr. RajeshSud, CEO& Managing Director, Max New York Life

Insurance said, We are excited to offer life insurance products that respond realistically to

consumers needs. Max New York Life has designed FLEXI Fortune keeping in mind the

varied needs of different people. The product offers the flexibility to choose policy tenure and

protection multiple to the consumers which is best suited for their planned goal be it

savings, retirement or family security. At the same time it also offers tools to manage good

returns without taking undue risk through 7 different fund options. With the growing need for

adequate financial planning to meet requirements at different life stages it is important that

people invest in instruments that are bundled with features whichhelp in maximizing theirreturns.

Launching FLEXI Fortune is a natural progression in our journey to offer the consumer acomplete choice of growth oriented savings to suit their various needs, he further added.

FLEXIBILITY

Wide Coverage- FLEXI Fortune caters to a wide customer segment with flexibility to

choose from a range of payment terms and sum assured limits. Depending on the customers

ease of payment he may choose either a 5 pay 10 year term, 10 pay 15 year term or 15 pay 20

year term. He may also choose a protection multiple starting from 10 times to 30 times his

annual premium amount making it ideal for all categories of investors.

GROWTH EFFICIENCY

Systematic Transfer of Funds - The systematic fund transfer feature ensures that theconsumers investment hits the market in 12 equal installments. It works on the concept of

Rupee Cost Averaging and thus makes the volatile market work to ones advantage. Thisensures the purchase of more units for same amount at lowered prices thus lowering average

purchase price.

Settlement Option The customer may choose to deferhis maturity in adverse market


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condition by increasing his policy term to a maximum of 5 years with out paying any furtherpremium. This also allows him to maximize his returns as it operates like a pure investment

tool in the extended period. The percentage of the payout will then be equally divided in thenumber of years opted by the customer.

PROTECTION

PACE- A first of its kind offering by a life insurer which works towards progressiveincrease in life cover to beat inflation ensures a 10% enhancement of life cover each year

with no increase in premium. This benefit is inbuilt in the product and is guaranteed over the

policy term, subject to timely payment of all due premiums.

About Max New York Life Insurance Co. Ltd. (www.maxnewyorklife.com)

Max New York Life Insurance Company Ltd. is a joint venture between Max India Ltd., one

of Indias leading multi-business corporations and New York Life International, the

international arm ofNew York Life, a Fortune 100 company. Max New York Life Insurance,

incorporated in 2000, is one of Indias leading private life insurance companies. Thecompany offers both individual and group life insurance solutions. It has established a wide

distribution network across India. Through its wide network ofhighly competent lifeinsurance agent advisors and flexible product solutions, Max New York life Insurance is

creating a partnership for life with its customers in India to facilitate them to achieve more.

For press backgrounder on Max New York Life Insurance click here

Media contact details

Arpan Basu,

Max New York Life Insurance,

+91 9818083556,

[email protected]

Ajith Henry,

IPAN Hill & Knowlton,

+91 9540011399,

[email protected]

Incited by life insurance companies, financial planners are pushing NAV-guaranteed

insurance products over fixed maturity plans because these make more money for

agents

My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are

regular investors in mutual funds. He has an insurance distribution business, but does not sell

insurance investment products. His customers are being poached by insurance agents. The

clients used to regularly invest money in fixed maturity plans (FMPs) of mutual funds. Now,

a few of them have used the money meant for that, to invest in a single premium insurance

(investment) product, whichhas a guaranteed net asset value (NAV). The effective returns

may work out to around 6%-7% per annum! My friend tries to explain this to the clients, but


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in vain. The client has been bamboozled into a five-year insurance cover. The client has alsonot been told that there is a very high probability that any returns he gets from a single-

premium product would be subject to income tax.

Apparently, these single-premium products are being sold by certified financial planners

masquerading as independent financial advisors (IFAs). Old insurance agents do not push

this product since traditional unit-linked insurance plans (ULIPs) give them heftiercommissions. Insurance companies have been pushing their case with the IFAs in the

following manner:

If you put the money in mutual fund FMPs, your earnings are going to be not more than

0.40% per annum on the amount invested. And, each year, you will have to live with the

vagaries of the market and customers preferences at different points. Assuming you are able

to convince the customer each year, you will make a total of 2% over five years. In other

words, from a Rs50-lakh customer, you will make a lakh of rupees over five years. You have

to live with the fund house performance, follow up each year and the other routine headaches.

Instead, you sell our single-premium product. Your first effort is in convincing t he client.

Once you do that, look at what you make. You get a first-year commission of around 2%-3%and an annual commission of 2%. So, you make a total of at least 12%! In other words, you

will make six lakh rupees! And, once you have taken the cheque out of the customer, you canforget him. No servicing, no worrying about NAV, no after-sales service. In fact, once he has

given you the cheque, you do not even have to take his calls, unless he has more money toinvest. So now, you decide which you want to push.

This argument is solid. The agent sees the light of the day. Where is a lakh of rupees

compared to Rs10 lakh-Rs12 lakh?Single-premium products and guaranteed-NAV products

are useless.

In the past, I rememberhaving put money in products like Bima Nivesh of LIC (Life

Insurance Corporation of India) simply because it gave a 9%-10% post-tax return. Now,

unless the premium is not over 20% of amount insured, the taxman is going to chase you.

And no one gives this out as a risk. All the agent says is tax benefits as per the law. This is

highly ambiguous and will easily fool someone. And insurance agents, being what they are,

will shove in their body if you give them an inch.

If an IFA or a financial planner is ethical, he will sell only one insurance producttermpolicy. All other products are investment products which pick the pockets of an investor. And

for term policies, you get a fantastic price, if you go online and take it directly, without anagent.

Of course, the agent will scare you. He will say t

hat in case of a claim, t

here will be no one to

help you. Well, often, after a few years, the agent vanishes and you have to run to make thepayment yourself. I complained to Metlife that I am unhappy with the agent and to stop

paying his commission. No use. For them, the agent is God. In no other profession (maybe

some government jobs) can you earn without doing anything for it. What a shame!

More of the Same

The sun shone, having no alternative, on the nothing new Samuel Beckett, Murphy


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By the time you read this, you may have read umpteen articles on where to invest in 2011.Each one would be a forward-looking piece and range from saying that equity markets could

promise a modest 15% return for the year (which is the long-term average) to usual homilieslike equities are best for the long term. None of us bothers to re-read what we read last year

around this time. I am guilty of indulging in star-gazing tooit is fun to carve out a slice in

time and predict what the markets will do. There is a 50% probability that we are right. Of

course, we can all go horribly wrong in picking the right stocks, sectors, etc. The best way isnot to look at the change in the calendar as anything spectacular. In the life of a company,

dates come and go. If a company is doing well, its earnings grow and shareholders remain

happy.

The economy is doing well, but will rising prices impact demand?Supply bottlenecks will

take time to get resolved. Investments in infrastructure are happening, but at a snails pace.

The government is using capital receipts (sale of shares, sale of licences, etc) to plug revenue

deficits which is disastrous. The current account deficit (imports minus exports) is running at

nearly six billion dollars every month! This gap is getting narrowed by capital market

inflows. Again, a weak filler.

Domestic inflation, driven by high demand and slow catch up of supply is driving the rupeedown. If the global economy recovers in 2011, India will face a problem ofhigh prices in

crude and commodities. This will weaken our rupee further. Global protectionism will alsocontract the margins of export-oriented service industries. So, the investment theme does not

change at all, as far as I am concerned. Let us continue to do what we do, with more focus.Look out for value to preserve our wealth and look for growth to place our bets on higher

return opportunities.

If the global economy recovers, I will perhaps make one big change in my investment

strategy. I will look for some multinationals that have made a base in India for global

products. And another thing to evaluate is whether one should invest in equities overseas. Of

course, most of the global markets are at two-yearhighs; but then the pump-priming, which

the world has done, has resulted in almost all the money coming to the equity markets.

Entities like Citibankhave used the hiatus to revamp business, write off sins and are planning

a return to old times. So, global stocks may actually head muchhigher if the world recovers.

Global interest rates are still soft and until consumer confidence (which is abysmally low

worldwide and pump-primed by monopoly money) is back, we cannot call it a recovery.

We will be closer to another election. Politics is getting murkier day by day and, with allparties being of the same shade, there is unlikely to be any difference no matter which one is

in power. What is sad is that each political party is busy throwing apparent freebies at thepopulace and, in the process, destroying fiscal discipline for good. The combined fiscal

deficit of the states and the Centre is in double digits. And it is very likely that we may see

one more state added to the Indian map. Last year also drove

home t

he fact t

hat our country isamongst the most corrupt nations in the world. All this will shift focus from growth and

development. If 2010 was the year of scandals, 2011 will be spent in cursing politicians and

fixers. In all this hue and cry, good companies will continue to make money. Inflation will be

a constant worry. Hopefully, business will not be hobbled by overzealous regulation.

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