Bankers are beefing up insurance coverage to protect against electronic-fraud losses, which is now considered a much greater risk than physical storage of cash or documents, according to recently published research.
The Bank Insurance Survey Report, released last week by the American Bankers Association, found that more than 90% of medium-to to large-sized banks and two-thirds of community banks surveyed carry policies covering computer systems and electronic funds transfer fraud.
A total of 376 banks responded to the survey, conducted by the ABA's Security and Risk Management Division.
"While electronic-payment systems offer speed, cost efficiency, and convenience, they have replaced the bank vault as a target for criminal violations," stated the report.
Higher Fraud Losses
"The number of bank robberies far exceeds the number of wire transfer crimes. But if you are hit with a wire transfer fraud, chances are your losses are going to much higher," said Dennis W. Kleiner, vice chairman of the ABA'S Security and Risk Management Division, which conducted the report.
Mr. Kleiner also is a vice president and assistant secretary of Mercantile -- Safe Deposit and Trust Co., a $2.2 billion-asset institution in Baltimore.
Computer system, or EFF, coverage is generally carried as a rider to a bank's financial institution bond, which covers risk associated with criminal activity. Internal fraud would be covered by a bank's fidelity rider.
Separate Coverage Used
However, 8% of the banks surveyed carry separate coverage for electronics or computer crime. That figure rises to more than 20% in banks with more than $1 billion in assets.
"These banks tend to be large institutions,. moving large amounts of money, that would like to create their own policies. They also have enough clout in terms of premium dollars to negotiate separate coverage in the international market," said Mr. Kreiner.
Electronic funds transfer activities covered under the typical policy include transactions over the Fed Wire, Swift, and Chips networks. Policy riders cover wire transfers as well as the gamut of technology-related activity within the bank, from proprietary software to computer viruses and telephone toll fraud.
Outlays at $1.6 Billion
Overall, insurance expenditures in banks totaled $1.6 billion in 1992, roughly the same as in 1991.
The financial institution bond typically accounts for 25% of an institution's insurance budget. It was the most prevalent form of insurance in the survey, purchased by 99% of the banks responding.
Other popular types of insurance include workers compensation, building and contents insurance, general liability, safe deposit, and directors/officers liability.
Insurance expense took the biggest relative bite out of community banks. Insurance premiums ate up between 2.37% and 2.82% of community bank operating expenses, or $56,000. In large banks, the average total was $4 million, or 1.05% of overall operating expenses.