MADISON, Wis. — CUNA Mutual executives have been warning CUs for months that the costs of insuring their credit and debit card programs against fraud would eventually have to rise, and now that time has come.
The insurer confirmed that rate increases have started to be sent out to CUs whose insurance policies are up for renewal in the fall. CUNA would not discuss the terms of any individual CU's policy and stressed that each CU's situation would be different depending on their fraud history, but some credit unions have described increases of between 200% and 300% to their processors and associations. CUNA Mutual says that, so far, it has received only minimal feedback from credit unions about the increases, though they just started being sent out.
Mark Krasnick, a senior vice president with CUNA Mutual explained the insurer had to start charging more, given the dramatic and unprecedented increases in plastic card losses it has seen. Since late 2004, CUNA Mutual has paid out in excess of $2 in claims for every $1 in premiums collected, Krasnick said.
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"Our policyholders have asked us to maintain a viable plastic card insurance program, and a significant rate increase was necessary for us to do that," Krasnick said. "I can't comment on rate increases for individual credit unions or suggest and approximate the rate change for all credit unions. Individual rates are based on many factors, including the number of cards, type of cards, fraud prevention controls in place and the credit union's loss experience over the past few years."
Krasnick noted that credit unions must make business decisions that are in the best interests of their institution and their members and that none have said, so far, that they will leave the card business over the increase.
"The majority of our credit union policyholders have indicated they need and will continue to offer a comprehensive card program," he explained, adding that this is an especially good time to assess the profitability of these programs, which has traditionally been high. "Their future success will be incumbent on them investing in loss prevention tools, which will help maintain a profitable program over the long-term," he added.
The insurer noted that credit unions can typically maintain a profitable card program by also taking appropriate pricing actions pertaining to fees and interest rates and said that it remains committed to solving the plastic card fraud problem.
Bill Connors, CEO of the $449 million Purdue Employees FCU, said that his CU was among those which had seen their new bill, but that it hadn't come as too much of a shock.
"We have been working with CUNA Mutual for some time and we have the recommended fraud control measures in place," Connors said, explaining that there have been two parts to the insurance change that many CUs are seeing. First, there is a change to the actual premium the CU pays for the coverage, Connors said and, second, an increase to the deductible that the CU must meet before insurance coverage kicks in.
In Purdue's case, Connors explained, the premium actually dropped a bit because the deductible increased, moving from $125,000 previously to $200,000.
"We didn't hit the deductible last year, so the increase didn't really mean very much to us," Connors said. The 55,000-member credit union has a credit card portfolio of almost 22,000 cards worth $23.5 million in outstanding balances.
He thought that one thing that might have helped Purdue limit the increases was an attitude toward insurance, which says coverage was something that would kick in during a catastrophe, but which would not cover every loss incident. "We wouldn't expect insurance to stand in for the anti-fraud work we need to be doing day to day," Connors said.
Connors said the philosophy the credit union had adopted toward its cards called for the CU to be aggressive about card prevention, even when it hadn't had much incidence of fraud. "We have a lot of students and they are heavy card users," Connors said, "both credit and debit. We recognized that cards were going to play a big role in the credit union and so acted accordingly."
He said that even with the increased fraud protection measures, the card portfolios are the most profitable products the credit union offers by four or five times. "In everything there is going to be fraud," Connors said. "Heck, we're still expanding our protection against things like check fraud. Fraud protection is just part of the costs of doing business."
Ondine Irving, a card consultant who helps credit unions improve their card performance, said CUs like Purdue have the right attitude toward their card programs and the risks and costs of fraud. Credit unions that get an increase in premium should not assume their card programs won't be profitable, according to Ondine Irving.
"The first thing they need to do is take those additional card insurance premiums to a per card account and per active card account basis," Irving explained. "If a card account is making the credit union $25 per year and the higher premium adds a dollar in additional cost to that account, credit unions need to be able to put that cost impact into context."
She pointed out that it is the card account level that will really show the profitability of a card program and that is where a CU will have to make decisions about what course of action to take. Even if fraud costs are affecting the bottom line at the account level, there are still things the CU can do and put into place to mitigate those costs and bring them back to something more reasonable.
Irving urged CUs to not fear their fraud challenges and to tackle them, staying away from the myths that fraud is necessarily an insurmountable problem or too expensive to fight. "I really want to challenge the idea that credit unions cannot compete in cards," Irving says. "In too many cases that represents a cop-out."
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