Manage Uninsurable Risk: Four Steps
Proactive risk management can help CUs mitigate or avoid this type of risk.
Your vice president of lending unintentionally violates your credit union’s loan policies when granting some member business loans.
After many of the loans default, your credit union pursues collection activity—only to discover the members aren’t creditworthy and the loan officer was negligent.
What do you do?
This falls into the category of uninsurable risk, which isn’t covered by fidelity insurance.
Managing risk is extremely important for all credit unions, and insurance is just one way a credit union can protect itself. But not every exposure is insurable.
Therefore, a fidelity bond policy, which credit unions rely upon to cover losses from many risks, doesn’t cover all exposures. The good news is these risks can be mitigated or avoided entirely with proactive risk management policies and actions.
There are two risk types that can determine insurability under a fidelity bond: Pure risk and uninsurable risk.
Pure risk is unexpected and includes fraud and theft perpetrated against the credit union by another party. Pure risk may also include losses caused by employee theft.
These losses are generally insurable under a fidelity bond, as one of the core principles of insurable risk is that losses must be accidental, fortuitous, or outside the credit union's control.
Example: A credit union employee withdraws funds from a relative’s account and creates fictitious statements reflecting a balance that should be in the account. Fidelity bond insurance would cover this loss under “employee dishonesty” coverage.
Conversely, uninsurable risk encompasses speculative risks, losses caused by vendors, indirect losses, and the losses of others. More specifically, this risk type can involve investment and loan risks, credit risk, deposit risk, and losses that credit unions create themselves.
Simply put, these are everyday business risks which are generally not covered by fidelity bond insurance.
It’s equally important to understand that fidelity bond insurance covers first-party losses (losses to the credit union), but does not always cover losses incurred by other parties. It’s also not intended to cover liability claims the credit union may face.
Here are four ways to manage uninsurable risks:
1. Identify the uninsured risk. Take a regular inventory of uninsurable risks and exposures your credit union faces and design a risk management plan addressing each risk. Use a process flowchart or functional analysis to map out hidden exposures.
2. Measure the uninsured risk. Determine the amount of risk in any given product or service by measuring loss frequency (number of overall losses) and loss severity (amount of each loss).
3. Implement loss controls. Build and implement loss controls based on identified risks and the measurements of each exposure. This will help you manage or, in some cases, eliminate these threats altogether. Tailor your risk management strategy by using a combination of tactics.
4. Manage the risk. Tracking your credit union’s losses to identify new trends will enable you to respond quickly and appropriately to new and unexpected losses. A comprehensive internal audit plan is an effective technique to identify and manage risk.
Insurance is only one method of risk control, and it’s unrealistic to expect it will cover all exposures. For additional risk management information to help avoid, reduce, prevent, and transfer risk, CUNA Mutual Bond policyholders can consult the Protection Resource Center.