When making a decision about insurance vendors, a credit union should consider its own knowledge of insurance risks, the vendor’s qualifications, and the amount of resources the credit union is willing to spend to administer and service the insurance. Depending on the role of the vendor, its services can be extensive. The vendor’s role may also be critical to successful implementation and operation of insurance for an employee benefits plan, particularly when combined with split-dollar agreements.
While it is possible to purchase insurance directly from insurance carriers, many insurance purchases are made through vendors—either brokers, consultants, or agents. A vendor may design, negotiate, and administer the insurance policy. A credit union should ensure that it understands the product it is purchasing and that it selects a product that best meets its needs. In addition to the vendor, management should demonstrate a familiarity with the technical details of the credit union’s insurance investment assets and be able to explain the reasons for, and the risks associated with, the product design features they have selected. Simply retaining vendor marketing materials is not sufficient evidence to demonstrate the credit union understands an insurance product. Credit union staff should be able to explain and support the products they’ve acquired.
A credit union that uses a vendor should conduct due diligence to assess the vendor’s ability to honor its long-term commitments, particularly when the vendor will service the credit union’s insurance program over an extended period of time. The credit union’s review should consider factors such as the adequacy of the vendor’s services and its reputation, experience, financial soundness, and commitment to support the insurance product. Vendors typically rely on front-end sales commissions to generate much of their revenue but often provide long-term servicing responsibilities for their clients. A vendor’s commitment to its own operational infrastructure and customer support for the products it sells are important considerations when choosing a vendor.
It is important for the credit union to conduct adequate due diligence and make its own internal judgment regarding the appropriateness and safety of insurance products it may purchase. It is important to remember that in these business transactions, credit unions and vendors have different economic interests making it necessary for the credit union to satisfy itself it has enough information regarding the underlying risks to make an informed decision. Generally, this means the credit union will need to rely on more than a vendor’s promotional materials to make an independent assessment of the risks.
While it is understood that vendors make sales proposals, a credit union should not delegate its decisions about products and strategies to its vendors. It is an unsafe and unsound practice to purchase risky investments and/or insurance products the credit union doesn’t understand. A credit union that is unable to demonstrate an adequate understanding of insurance or other investment products it has purchased and the associated risks may be subject to supervisory action, including divestiture.
Last updated September 25, 2017
