Banks start looking at Web site insurance

The recent online banking explosion has offered banks new revenue streams, but those streams can bring new risks. Insurance companies are finally beginning to look at the risks and offer coverage.

Several insurance companies have begun offering packages to banks that cover risks specifically associated with their online operations, according to Richard Roby, an insurance analyst at TowerGroup.

About 17 percent of U.S. households now use Internet banking sites, according to Richard Bell, a banking analyst at TowerGroup. "That represents a relatively important part of some institutions' business," he said. "Protecting that business process makes sense."

Problems that can plague online banking sites include denial-of-service attacks and Web site defacements, said Tom Bartolomeo, senior vice president of information security at First Union Corp.

Other problems include transmitting viruses and privacy violations, added Emily Q. Freeman, practice leader for e-business risk solutions at insurance broker Marsh Inc., which began offering insurance products for Web sites in late 1999. "Traditional insurance policies may not really adequately cover the type of risks that are associated with Internet technology," she said. "The financial bonds banks buy are geared at traditional types of embezzlement or traditional types of computer fraud."

Each of these Internet-related banking risks has two parts: the damage done to the bank itself through the loss of business or damage to reputation, and the damage done to customers, or partners, explained Gina Juhnke, product manager at Progressive Casualty Insurance Co. For instance, if a company can't access its funds and loses a business opportunity, it may hold the bank responsible.

Insurance prices depend on the size of the bank and the functionality of the Web site, said Juhnke. For example, additional liability insurance for a fully transactional Web site at a small community bank with US$250 million in assets could run $5,000 to $15,000 per year.

How much insurance does a bank need for its online service? It depends on the bank, said John Hall, a spokesman for the American Bankers Association in Washington. "There's a growing trend for this type of coverage," he said, but added that the usefulness varies from bank to bank.

First Union might be a good candidate for one of those new policies, Bartolomeo said. "But there's no history yet. How do you go about enforcing these contracts? If somebody's Web site is defaced, how do you prove what that's worth to your company?"

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