Most Banks Don’t Have Rogue Trader Insurance

February 11, 2002

The recent revelations that the Allied Irish Bank has lost an estimated $750 million from the unauthorized operations of a “rogue trader” in its Baltimore-based foreign exchange office, has raised questions about possible insurance coverage for the losses involved.

The answer is both “yes,” coverage is available, and “no,” most banks don’t have it. According to a report by Reuters News Agency, although policies became available following the collapse of Barings Bank caused by the activities of rogue currency trader Nick Leeson, very few financial institutions have have availed themselves of the coverage.

Most banks believe that their internal controls are sufficient to prevent the possibility, and they’re reluctant to pay for the relatively high cost of such protection against what they see as an unlikely event.

Reuters quoted Rupert Villers, chairman of Lloyd’s agency BVB Holdings, as likening the coverage to earthquake insurance, with most banks refusing to admit they may be at risk. BVB has placed around 20 policies Villers indicated, but said there were some 250 banks who should actually have the coverage.

While surety bonds and similar policies cover risks involving an employee’s fraud or theft, they require that the employee profit in some way from his activities. In the “rogue trader” situation the employee doesn’t directly steal from his employer. In fact no evidence shows that either Barings’ Nick Leeson or AIB’s John Rusnak ever profited directly from their unauthorized activities.

Villers told Reuters that BVB’s policy typically provided up to $500 million per occurrence, with a $10 to $50 million deductible, but declined to place a figure on the actual premium. He did say, however, that there had been increased interest in the policy in the days following the revelations concerning Rusnak’s activities at AIB.

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