Excess deposit insurer exits the business
By Laura Bruce • Bankrate.com

Editor's Note: On Oct. 3, 2008, Congress raised the FDIC insurance amount to $250,000. This change will be in effect until Dec. 31, 2009, unless it is renewed.

One of the major players in the excess deposit insurance business has left the field. Kansas Bankers Surety Co., based in Topeka, announced that it will no longer provide excess deposit insurance coverage to banks. The product insures deposits above the FDIC limits.

A senior official at the company, a subsidiary of Berkshire Hathaway, has been quoted as saying the company will cease writing policies because it can't find reinsurance for the product. The company provided coverage for the recently failed Columbian Bank and Trust Co., of Topeka, and industry sources say Kansas Bankers Surety had a sizable loss as a result of the failure.

Will other insurers follow?
There are approximately a half-dozen companies that provide this insurance product to banks. One of them, BancInsure of Oklahoma City, says it has no intention of following Kansas Bankers Surety and getting out of the business.

"This sector of the insurance marketplace is very competitive and it doesn't surprise me, given what's been going on, that some companies may re-evaluate the situation," says BancInsure CEO Rodney Sargent. "But we are committed to providing risk mitigation and risk management to the community banks of the country. We believe the vast majority of banks are run with diligence, discipline and integrity.

"Recognize that in the late 1980s and the early 1990s there were 1,500 banks on the FDIC's watch list, compared to 117 today. There have been 11 failures so far -- far less than what we saw back then. Banks, by and large, are very sound."

Relatively speaking, the number of bank customers who have more than $100,000 on deposit is small. Sargent says BancInsure provides coverage for 300 banks, and that equates to 1,400 individual customers who need excess deposit coverage. Clearly, the vast majority of bank customers are adequately covered by the standard FDIC insurance. Those who do have excess deposits have a variety of ways to expand their coverage under the FDIC umbrella.

James Chessen, chief economist for the American Bankers Association, says he doesn't believe that the action by Kansas Bankers Surety Co. will have a domino effect among private insurers, but notes that this highlights a key difference between private and government insurance.

"What's happening here is that just when the economy slows down and the risk to insurers rises, some private insurers end up exiting the market. That's the nature of a private insurance system."

Filling in the gap
Chessen singled out the CDARS network as being a viable insurance choice when it comes to deposits. Customers of banks within the CDARS network can opt to have excess deposits held as CDs in other banks within the network.

"Bankers are increasingly finding that to be a very good option to provide coverage for high net worth individuals. It's a way to distribute risk across the system and it's the FDIC that backs the depositor."

Promontory Interfinancial Network, the company that provides CDARS, is stepping in to fill the gap left by Kansas Bankers Surety. For the next 90 days, institutions that had deposit coverage through Kansas Bankers Surety will be able to join the CDARS network at a 40 percent discount and will waive bank transaction fees for one year.

Promontory president Mark Jacobsen says the CDARS network has been growing steadily since the collapse of IndyMac.

"We certainly saw a big uptick in interest, particularly in California. On July 11, we had 141 of the 314 banks headquartered in California as members of the network. Over the next 11 days, 30 more California banks asked to join."

The decision by Kansas Bankers Surety to exit the excess deposit insurance business, while definitely a sign of the times, should not leave customers unprotected, according to industry insiders. Other private insurers, along with companies such as Promontory, are likely to provide coverage to those institutions.