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#2051883 - 12/01/15 07:29 PM Safety & Soundness - Insurance
Dog Lady Offline
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Joined: Dec 2015
Posts: 74
I am pretty new as an auditor at this bank and my experience is limited from another bank. I am currently planning a Loan Audit and looking for opinions on insurance. Specifically, what types of insurance do you require for what types of loans, and how do you require you are listed. (Not concerned about Flood insurance at this time as that is regulated.)

The easy one is a building loan - we obviously want a certificate of property insurance on the building with the bank listed as mortgagee.
- Do you also require liability insurance?
- What do you require for other collateral such as business assets? What about receivables? What do you require for intangible assets?
- What if a personal automobile is tacked on as collateral to a much larger business loan secured by other items? Our lien could not be a first lien, for example, so being listed as Lender Loss Payee can be difficult (the insurance companies may argue it). Would you or would you not require that to be insured?
- Do any of your rules vary between commercial and consumer?

Of course, I plan to audit whether or not we have the insurance we say we have, but I also want to audit whether or not our policy is sufficient (i.e. if it aligns with best practices).

In addition, from my somewhat narrow education of insurance, the official difference between "loss payee" and "lender loss payee" is that lender loss payee allows the bank to collect even in instances of fraud committed by the insured. But I also understand that different insurance companies refer to these things under different titles. Does anyone have any additional input for that? Another thing I learned was that liability insurance cannot list the bank and is just there to keep the borrower afloat in the event of issues so they can continue paying, but I am unsure of the validity of that.

Any guidance is appreciated.

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#2051885 - 12/01/15 07:42 PM Re: Safety & Soundness - Insurance Dog Lady
rlcarey Offline
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rlcarey
Joined: Jul 2001
Posts: 83,219
Galveston, TX
Outside of flood insurance other insurance requirements are a risk based policy and is individually bank specific. You need to first read your board approved loan policy to know what your bank's specific requirements might be on any sort of specific transaction. If you don't have a policy, then you recommend you have a policy. Recommending whether or not you should or should not have insurance on a specific type of transaction is not normally the function of the auditor, it should reside with the chief credit officer or chief risk officer.
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#2051891 - 12/01/15 07:49 PM Re: Safety & Soundness - Insurance rlcarey
Dog Lady Offline
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Joined: Dec 2015
Posts: 74
We do have a loan policy and I have read it - and like I said, I do plan to audit to it. We have a Credit Risk Officer who would be responsible for determining what the loan policy says.

That said, my boss, the Chief Risk Management Officer, wants me to compare what we require to best practices and determine whether they seem to make sense. I am aware this is VERY in depth for an audit in general, but that's how my audits go generally (and I fortunately do not have to perform any compliance audits, all of my audits are risk-based). She likes me to really consider risk in detail (I think she is trying to help me learn some of her craft), and I was just looking for any input others may have.

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#2051982 - 12/02/15 01:40 PM Re: Safety & Soundness - Insurance Dog Lady
osucpa Offline
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Joined: May 2011
Posts: 1,406
Does your bank have a loan review function and do they cover this area in their loan review function?

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#2051985 - 12/02/15 01:56 PM Re: Safety & Soundness - Insurance Dog Lady
Dog Lady Offline
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Joined: Dec 2015
Posts: 74
There is a loan review function that is relatively new department (never audited) so I still plan to test a chunk of their work rather than just confirm their process. But regardless - they only compare to policy. They don't evaluate policy for adequacy.

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#2052025 - 12/02/15 04:39 PM Re: Safety & Soundness - Insurance Dog Lady
Cornfed Turtle Offline
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Joined: Mar 2006
Posts: 1,323
"...Somewhere in Middle Americ...
Welcome, April!

Have to agree with orig responses here in that this is very risk-based. What is the risk appetite for your board? What is your volume? What have your uninsured losses been? What are your peers requiring? So many questions....

As an auditor, I audit insurance coverage to the policy and the requirements that I see in loan memos (as commercial customers often have varied requirements that loan committee may want.)

Advising on best practices may be difficult unless you are auditing that your loan mgmt. has considered insurance on large segments of the portfolio. And I'm sure that they have. If your CRMO thinks otherwise, maybe it's time for her to have a conversation with the CLO and determine if some policy changes should be considered. Just a conversation...not an audit, I would think.

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#2052042 - 12/02/15 05:19 PM Re: Safety & Soundness - Insurance Cornfed Turtle
Dog Lady Offline
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Joined: Dec 2015
Posts: 74
Thank you for your input! I appreciate it! It makes sense that there are too many variables to really compare effectively to other's practices, unless they are truly peers - overall asset size, risk appetite, concentrations, loan types, collateral, etc...

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#2053280 - 12/09/15 03:58 PM Re: Safety & Soundness - Insurance Dog Lady
Rocky P Offline
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Joined: Jun 2003
Posts: 7,650
Florida
April, like the above mentioned, audits have several purposes.
One would be that the policies and procedures meet regulatory (state and federal) mandates.
Once that is accomplished, the purpose of an audit is to ensure that the policies and procedures are being adhered to. What another bank does is irrelevant to what you might be auditing for. The state (or federal) regulations might be different, or the bank's appetite for risk might be. The audit might be trying to piggyback on external or loan review, maybe not.

The head auditor or audit committee should also be providing some guidance on what they want you to do.
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