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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions

Establishment of Captive Insurance Company to Provide Directors Liability Insurance for Commercial Banking Industry


December 31, 1986

John C. Murphy, Jr., General Counsel

As you requested, members of the FDIC's staff have reviewed your letter of December 11, 1986 and the enclosed materials regarding the *** plan to establish a captive insurance company to provide financial institutions bond and directors and officers liability insurance for the commercial banking industry.

Our staff review has been from a supervisory perspective, focusing upon any regulatory requirements applicable to participation by state nonmember banks rather than upon the structure of the new company or the terms of its policies, as to which there was only limited information. Although the proposed captive is described as a mutual insurance company, we understand that a participating bank will not have any liability for activities or obligations of the captive except to the extent of the bank's Captive Reserve Premium Account (which is not likely to be large relative to an individual bank). Based on the materials reviewed by our staff and assuming compliance with applicable state law, purchases of policies from the captive would be permissible for state nonmember banks so far as the FDIC is concerned.

I also wanted to call several areas to your attention as the *** proceeds with the project. Based on our review, the nature of the Captive Reserve Premium Account was unclear in several respects. From an accounting standpoint, it is not clear whether the account would be a liability or treated in some other fashion under GAAP. From a deposit insurance standpoint, we could not determine whether the Account was intended as an insurable deposit or whether there would be an effort to create a trust or other relationship. You may wish to address these issues in the final documentation.

Finally, on the first page of the materials you sent us, the insurance industry's severe underwriting losses in 1984 were attributed to, among other things, "FDIC suits against directors of failed banks." The FDIC's recoveries on D&O policies and blanket bonds in 1984 were less than $25 million which, so far as we can determine, was not a particularly large source of losses for that year nor as significant as several causes of losses that are not listed. I would appreciate it if any promotional materials the *** uses could reflect these facts.

Please do not hesitate to call if we can be of further assistance as the *** project proceeds.

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