The Management of Operational Risk Through Appropriate Insurance Schemes

Type of Coverage Although globally over fifty different types of insurance coverages are available specifically for banks, six types are of primary concern. The Bankers Blanket Bond/Financial Institution Bond (BBB/FIB)- This coverage generally consists of six basic insuring agreements: employee dishonesty, loss of property on premises, loss of property in transit, forgery, forged securities, and counterfeit money. The BBB/FIB has traditionally provided the cornerstone for any bank insurance program. Although, most banks world-wide purchase this coverage, which is mostly a function of management's perception of operational risk exposures as well as generally accepted business customs. Further, there are no rules either formal or informal for establishing bond limits. Only in some jurisdicticus there are legal or regulatory requirements that a financial institution purchase a BBB/FIB Electronic and Computes Crime (ECC) Coverage -The ECC may either be a separate or stand-alone policy or appended to the BBB/FIB. It is designed to respond to financial loss from third-party fraud or mysterious and unexplained disappearance relating to the insured computer or telecommunications systems. It is for this reason that ECC coverage may not be written without a BBB/FIB being present. The ECC (in its London form) currently consists of eleven insuring agreements i.e Computer Systems, Insured Service Bureau Operations, Electronic Computer Instructions, Electronic Data and Media, Computer Virus, Electronic Communications, Electronic Transmissions, Electronic Securities, Forged Tele facsimile, and Voice Initiated Transfers. Generally, the ECC is purchased in the same limit as the BBB/FIB since it is truly a companion piece to the BBB/FIB. Directors and Officers (D&O) Coverage - D&O coverage indemnifies directors and officers of the bank against liability claims arising from alleged negligence, wrongful acts, errors and omissions. The wording and insuring agreements of directors and officers policies are specific to the jurisdiction in which the coverage is being written. On a global basis, D&O coverage is rapidly overtaking the BBB/FIB as a institution's most important and expensive form of transferring operational risk through insurance. Professional Indemnity (PI) Coverage - Unlike Directors and Officers liability insurance, banks professional indemnity coverage is intended to provide insurance to the bank itself against claims arising from alleged errors or omissions committed by bank's employees and officers in the performance of their professional duties(fiduciary and operations), investment advisory activities, private banking, etc. This is driven by the shift in emphasis away from lending income into income streams generated by fee for service. Payment Card Coverage - Coverage for losses incurred by banks as the result of counterfeit, forged and or altered payment cards is currently available through most international payment card organizations such as VISA and MASTERCARD. This coverage is designed to address counterfeiting, forgery and or alteration of both the embossed plastic as well as magnetic encoding on the card. In addition, specialised coverage for merchants, banks, processors, and independent service organizations against fraudulent and/or excessive charge baclcs by participating merchants has recently been introduced. Underwriters view the loss, theft, or misuse of cards as a completely uninsurable risk. Therefore, no coverage for this exposure is available in the market. Given the potential profitability of payment card operations, growing consumer demand for these services, and the potential for enhanced sharing of credit data between Saudi banks, it is inevitable that the number of payment cards in circulation within the Kingdom will increase dramatically in the near term. It is also inevitable that given global trends in payment card, fraud losses to banks will increase substantially. To address this growing operational ri