When Bank One started what turned out to be a year-long quest to be the first bank to move into the private mortgage insurance market under a new method of risk sharing, the obstacles did not come from the Office of the Comptroller of the Currency, they came from the states. Now that Bank One’s Private Mortgage Insurance Co., Inc. has been in business for a month after 6 blessing from Maine’s insurance regulator, the focus has shifted to the growth potential for the unit.
The OCC had approved other banks’ applications for reinsuring mortgage risk using the excess of loss method. By that method, the reinsurer gets a percentage of the premium from the primary insurer, usually around 20%, and the reinsurer will pay claims above a certain percentage, called the claims frequency rate, which is around 8% now.
But the quota share method, applied for by Bank One’s insurance subsidiary, is exactly the opposite. It is a pro rata sharing of both the premium and all the expenses of an insurance policy. The percentage can be split between the reinsurer and the primary insurer any way, but Bank One Insurance Group wanted to have a 50%-50% arrangement with the original insurer, also known as the fronting company.
Chuck Bennett, Bank One Insurance Group’s chief financial officer, said after just one month, it’s impossible to pinpoint how well the venture is doing, but that it is expected to be profitable in the first year. Bank One National Bank has contributed $8 million in capital to the business and hopes to see $2 million in revenue at the end of this year. Bennett said in addition to a section of the 125-employee Bank One Insurance Group that is focused on reinsurance accounting and risk, the bank is utilizing the resources of the fronting companies, and has hired an outside management firm in Vermont, American Risk Management, to help with coordination with the Maine department of insurance, and to keep Bank One "aware of the environment," Bennett said.
"It’s starting out small," he said, explaining that the private mortgage insurance division probably will account for around 3% of the $150- million-asset insurance company’s total business this year, although that percentage is expected to rise.
With quota share, although the reinsurer gets a smaller targeted margin than using excess of loss, it also gets a higher percentage of the premiums, and losses are a little more predictable. Plus, most important to Bank One, "It’s more of a true risk share," Bennett said. "It puts you in the same position the initial underwriter is in." Otherwise, he said, "You’re not true partners with your fronting company. They’re only concerned up to their risk level, but not after."
Bennett said the bank aims to have the private mortgage insurance division become a true profit center for the bank. "It tends to add to our control of the insurance products that are sold to our customers," he said. "It allows us to reach better conclusions for our customers."
While the OCC approved the application, several states gave Bank One the cold shoulder, citing the bank’s inexperience in the area, the mere fact that it was a bank and not an insurer, and worries about safety and soundness. Bank One officials believe the refusals came after successful lobbying by various insurance trade groups fearful of competition from the banking giant.
Vermont approved the quota share scheme, but said Bank One could only take 25% of the risk. Vermont is home to many mortgage insurance companies, which Bank One believes lobbied successfully to limit the amount of risk the new PMI company could take.
But even Maine, eager to become the home of a new kind of business, was not going to write Bank One a blank check. It set restrictions Bank One must live with while enjoying a 50%-50% split, including a 20 to 1 ratio of risk, more stringent than the industry standard of 25 to 1, and a capital requirement of $6 million. Although most states only require annual reporting for operations relatively small in size, as Bank One’s is now, Maine called for quarterly reports.
Bennett said the limit from Maine seemed strict given Bank One’s history of reinsuring other products, including unemployment and various life insurance products. He said on most products Bank One takes more than 75% of the risk, and unemployment insurance, for example, the bank reinsures at 100%.
Bank One’s venture in Maine is a partnership with two major insurers: United Guaranty and PMI. In Bank One’s arrangement, the consumer pays the premium, the original insurer books and processes the policy, then Bank One enters the picture and buys 50% of the risk from the insurer. Bank One pays the original insurer a processing fee of about 20%, Bennett said. If a claim occurs, the two companies split it down the middle.
The Milwaukee-based Bank One Insurance Group in total generates between $1.5 billion and $2 billion in insurance sales with a pretax profit of around $325