New deposit insurance policy is both risky and expensive PERSONAL FINANCE

STAYING AHEAD

April 11, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

New York -- A private deposit insurance policy has just hit the market. It's being pitched to people or organizations who run at least $200,000 through a single bank, so they're not fully covered by the Federal Deposit Insurance Corp.

That might be small businesses, charitable or civic organizations, professionals with escrow accounts or individuals parking a payout from a company retirement account. Only the first $100,000 is federally insured. The government might also protect amounts over $100,000, especially when a large bank fails. But in smaller banks, you'd probably get back only a portion of your excess deposit.

The new insurance policy, called Depositsure, offers to pay what the government doesn't. When you look at the details, however, you find a serious risk at the core. This coverage could be canceled at the very time you need it most.

Depositsure is issued by General Star Indemnity, (a subsidiary of the giant General Reinsurance Corp.), managed by Centrex Underwriters in Memphis, Tenn., and sold through individual insurance agents. It's available in every state but seven (Alaska, California, Connecticut, Florida, Ohio, Wisconsin and New York; approval in Connecticut may come soon). Not everyone's application will be accepted. About three-quarters of the nation's banks are included in the program (all of them banks with consistently sound financial reports) and none of the nation's S&Ls. Furthermore, only $5 million of coverage is allotted to each institution. As soon as that much has been sold, new customers will be turned down.

Policies last for six months at a time. You pay $2.50 annually for every $1,000 you want to insure ($200,000 minimum), plus a $100 policy fee in most states ($50 on renewal), plus the state's premium tax, which runs from 1.75 percent to 6 percent.

Every time you come up for renewal, the insurer can choose whether to let the policy continue. General Star also has the right to cancel your coverage at any time, on 30 days notice.

There's the rub. If you buy the coverage and your bank's financial performance slips enough to concern the insurer, your policy may not be renewed. If it slips fast, you'll be given 30-day walking papers.

Centrex President Joseph Carlson expects very few nonrenewals, and says that "the circumstances have to be dramatic" for a policy to be canceled. But dramatic circumstances are what you buy insurance for.

Decisions about which banks to insure (and to dis-insure) are based on data provided by Veribanc of Wakefield, Mass., a company that rates the soundness of financial institutions. It also helped create Depositsure. Veribanc's research director, Warren Heller, says that seemingly safe banks do, on rare occasions, collapse within 30 days, usually because of fraud.

Of 9,798 banks with top Veribanc safety ratings, three failed in 1992, none in 1991 and four in 1990. Of 1,280 banks in Veribanc's second category, one failed in 1992, none in 1991 and three in 1990. That's a pretty minor risk.

Mr. Heller argues that it's valuable just to be told that your insurance will be canceled or not renewed. "You're getting a strong message that the underwriter is concerned about the bank," he says, so you might consider moving your accounts.

There's a much cheaper way to "get a strong message" about the soundness of your bank. Call Veribanc ([800] SAFETY-3) once every three months (its safety information is updated quarterly). You can learn your bank's current safety rating for just $10 charged to your credit card. The top rating, "green, three stars," covers banks with the very soundest fundamentals; it includes nearly 81 percent of the banks in the country.

Of those leading banks, around 2,500 have "blue-ribbon" status. In Veribanc's 11 years of operation, no blue-ribbon bank has ever failed. If you're with such a bank, Depositsure looks like a waste of money. With the other top-rated banks, you have to decide whether the tiny risk of failure is worth protecting yourself against. Most individuals can get protection free, just by limiting their deposits to $100,000 per bank.

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