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Evolution of Deposit Insurance in America – ASI Overview and History

This is the fourth in a series of articles that look at the evolution of deposit insurance in America. Last month looked at private deposit insurance, this article presents an overview of deposit insurance in America, with an emphasis on American Share Insurance (ASI).

American Share Insurance is in a class by itself. The company, which insures deposits for credit unions, has been in business more than 40 years. That alone makes them unique. While at one time they faced competition, they outlasted them all. They are the only company providing this coverage. Their philosophy from the beginning was simple, credit unions should be able to meet the needs of their members without undue outside interference in daily operations. ASI emphasizes that it is an insurer and not a regulator. They aren’t keen on meddling, that’s a job for individual state credit union authorities.

What else makes ASI stand out? It is a credit-owned share insurance fund with a board of directors and advisory council that is made up of president and CEOs of its member credit unions. The thinking behind that is to ensure that membership has a voice in ASI. It is also licensed by the Ohio Department of Insurance and regulated by the Ohio Departments of Insurance and Commerce, as well as supervised by credit union regulators in the states where it operates. While other private deposit insurers have failed, ASI touts its history of low loss ratios and high equity levels. No member has ever lost money in an American Share-insured credit union account. This is especially noteworthy since ASI has no government backing.

The background

So how did ASI get started? Thanks, goes to credit union pioneer Louise McCarren Herring. The company had another name. It was founded as the Ohio Credit Union Shareholder Guaranty Association (OCUSGA) in 1974, by McCarren Herring and a handful of other credit union enthusiasts. According to ASI company history, it was set up as a "credit union-owned, private sector alternative to federal share insurance, which was first enabled under federal law in 1971. Nationwide, the idea of an alternative to federal share insurance was taking hold.”

But there were a lot of naysayers. For one thing, just by the nature of how the private sector functioned, it was plagued with a lack of diversity, which is a deadly sin in all things financial. Lack of diversity of course increased risks. No wonder so many private insurers eventually failed.

the NCUA noted, “A significant problem inherent with private deposit insurance programs is the inability to achieve sufficient diversification"

In 2007 the National Credit Union Association submitted to Congress, “Study of Further Possible Changed to the Deposit Insurance System,” the NCUA noted, “A significant problem inherent with private deposit insurance programs is the inability to achieve sufficient diversification. The consolidation within the financial services industry makes achieving sufficient diversification difficult. This leads to geographic and concentration risk."

Critics also claimed that private insurers did not satisfy the public policy goal of maintaining confidence and stability in the financial system and economy. According to the report, “history shows when private insurers fail, depositors at other privately insured institutions, even if those institutions are healthy, lose confidence in their institutions as news of the failures spread. This risk of contagion increases withdrawal rates at all privately-insured institutions, contributing to liquidity crises, and can have broad ramifications for the economy.”

The 80s were an interesting time for private insurers. There was deregulation of banking services, and deposit insurance coverage limits increased from $40,000 to $100,000. There was also much re-regulation, and double digit inflation in the early part of the decade was its own monster. The early years were important to OCUSGA. It changed its name to the National Deposit Guaranty Corporation (NDGC) to reflect it was broadening its geographic reach, which would prove to be a key strategy. A year later, it first introduced excess share insurance for credit unions. This covered credit union members exceed the $100,000 federal insurance limits.

The 80s were marked by financial turmoil. The S&L crisis blew a hole in the FSLIC, the thrift deposit insurance fund. Credit unions didn’t escape the decade unscathed. In fact, the financial stress on credit units lead to the closure of lesser-capitalized private share insurers. By the end of the 80s there were a mere 10 funds still in business operating nationally. NDGC was one of only two funds operating in more than one state. When state-level and federal legislation in the late 80s upped regulations, NDGC changed its name to the National Deposit Insurance Corporation (NDIC) to reflect the change that it was now being governed not only by the insurance laws of Ohio.

The more things changed, the more there would be a need for a new name. In 1991 NDIC became ASI. The big news that year though, was the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). For the first time, private share insurance got some respect. According to ASI company history, “private share insurance was recognized for the first time in federal banking statutes, encouraging the continuation of the private share insurance option so long as consumer disclosures explained the private coverage sufficiently.”

Another important year during that decade was 1993. The company created and incorporated Excess Share Insurance (ESI) as a wholly-owned subsidiary of America Share to allow it to serve almost 225 credit unions in 33 state, instead of the 16 it served prior to ESI. By the 1990s, ASI was the sole private depositor insurer for the nation.

Next week’s article will focus on more details about ASI since the 2000s and look at their business model that’s proven to be a winning strategy.

Editor's Note: For details of the current state of deposit insurance coverage, please refer to the article, “Safety of Your Money - Deposit Insurance Coverage Limits.”

Anonymous   |     |   Comment #1
This is the problem with ASI, should few small CUs fold, they can handle it properly and pay the insurance money to the depositors, however, should few bigger credit unions default or there was fraud involved, the customers may not get their money in the full amounts.
There is a disclosure filed several years ago with SEC that addresses that issue and they got waiver from the Government not to pay the full amount if there are no money in the fund.
Do not believe ASI saying we are 100% solvent, yes that is true because there was not a huge payment done yet, few millions here, few millions there does not gives a full picture of ASI. I personally will avoid CUs with ASI insurance.
Anonymous   |     |   Comment #2
Where is a financial analysis, reserves, contingent plans, etc.?
jennifer   |     |   Comment #3
Thanks for the lovely article. It required a lot of research and it is appreciate. I simply adore insurance.
Bozo   |     |   Comment #4
Anonymous   |     |   Comment #5
I'd never put a dime in anything not federally insured. Doesn't it give anyone pause that this is the last private insurer that exists?

And, someone brought-up annuities. I looked into them a few years ago. No state or federal entity insures them. It's "backed" by a consortium of insurance companies in each state. In California, the "guarantee association" only covers up to 80% of 100K for each policy with a total limit of 300K. What a joke! Here's the disclaimer from their website.

"The California Life and Health Insurance Guarantee Association is a statutorily created association, with its membership made up of all the life and health insurers licensed in the state (in fact, insurers which are licensed to do business in the state are required to be members of the association). The Guarantee Association was created by the legislature to serve as a safety net for residents should their life or health insurer fail. By creating the association, the legislature was able to ensure continued coverage to residents affected by their insurer’s failure. The association does work in cooperation with the Insurance Department in fulfilling its role of protecting residents whose insurance company is being liquidated."
Anonymous   |     |   Comment #9
#5, Life insurance companies that issue annuities are not allowed to liquidate, they are bought or taken over by other insurance companies. Nobody in history of the annuities ever lost a dime.
State insurances for annuities are grandfathered in and must be paid first in full to the limit allowed. If you buy several different annuities at several different companies in any state, there is no limit if you stay under the state limits.
(the limit applies to a single life insurance company, but you can aggregate millions worth of polices investing in other insurance companies by buying separate polices in different companies.)
Bozo   |     |   Comment #15
To: Anonymous (Comment #9). I am puzzled by your comment that insurance companies are not allowed to liquidate. Of course they are. The only reason nobody with an annuity underwritten by AIG lost a penny is because AIG was bailed out. States don't insure annuities, trade groups have, in essence, a risk-retention-group, or RRG. Limits on trade group "protection" (yes, "protection" is the word of choice) vary from state-to-state. I suggest you read up on the "protection" (or lack thereof) offered state-by-state to purchasers of annuities. The "protection" is not offered by the Federal Government, or the respective state governments, but by the RRG of insurance entities.
Anonymous   |     |   Comment #10
With a little self-discipline you can create your own income stream while preserving much of your initial capital. Annuities (not pensions) simply take your money, pay the broker a high commission and then return remaining principal to you on a monthly basis. Yes, I know they invest, etc. but the fact is that for many years you're simply getting YOUR money paid back to you in small increments. After many years you may be one of the lucky few who actually do better with the annuity than without. Annuities are best suited to those who cannot manage their own money in a wise and prudent manner. The downside risk of losing control of a large sum of cash is anathema to many on this site.
Bozo   |     |   Comment #12
To: Anonymous (Comment # 10). Exactly. Annuities, as a general rule, are merely vehicles for insurance companies to capture your dollars "now" in exchange for a contract to dole them out in perpetuity. Payouts are determined by prevailing interest rates (currently at near historic lows) and mortality tables. Over-shadowing the entire industry is the drag on returns exacted by commissions. For the most part, annuities aren't "bought by", they're "sold to", consumers who have little clue.
Anonymous   |     |   Comment #13
SPIAs for Medicaid/Medi-Cal qualification
Bozo   |     |   Comment #14
To: Anonymous (Comment #13). That "loophole" was closed some time ago with the five year "look-back". Am I incorrect?
Anonymous   |     |   Comment #16
No...assets transferred for value...a SPIA is for value and is exempt from qualification/clawback IF it conforms to the Regis. Problem is everyone wants to sell long term care ins...which is too expensive, etc
Anonymous   |     |   Comment #17
Typo...yes, you are incorrect and meant to type regulations for"Regis"
Anonymous   |     |   Comment #18
Bozo, look at "Why $1 Million May Not Be Your Magic Number for Retirement", on the DA site...starting at comment #34
Anonymous   |     |   Comment #6
After that post in 2009, Velocity's board decided not to convert to ASI insurance. There is no such thing as a free lunch.

"In a policy reversal, the $481 million Velocity Credit Union of Austin, Texas, said that although its members had approved a coverage switch, management had second thoughts about signing on with Ohio-based ASI and instead would remain with the NCUA.

In a statement, Velocity said its board decided to opt for federally backed insurance based on ASI's year-end announcement that it was forced for the first time to start assessing member credit unions following losses in 2009 with possibly more to come in 2010.

"One of our primary reasons for considering a conversion to ASI was because they had not charged a premium in their 35-year history," said Velocity President/CEO Debbie Mitchell. "However, on the final day of Velocity's member vote to convert, ASI announced an assessment of its credit unions for the exact amount of the NCUA assessment: 0.15% of each credit union's deposits."
Bozo   |     |   Comment #11
To: Anonymous (Comment #6). It's probably a fact of life that most members of ASI-insured credit unions don't know (or appreciate) the difference between ASI and NCUA insurance. We here at DA might be in the "bubble" of those who know and appreciate, but I suspect most folks just see the word "insured" and leave it at that. Personally, I was very happy when Patelco CU switched back to NCUA some years back. But, seriously, do I think the change even registered with the vast majority of Patelco members? I suspect you know my response: "no".
Anonymous   |     |   Comment #7
The article says: "By the 1990s, ASI was the sole private depositor insurer for the nation."
Looked at the website for a big ASI-insured CU that currently offers good rates and noticed that they say: "Deposits insured up to $500,000 per account by American Share Insurance, the nation's largest private share insurer." Well, I guess being the only one does make them the largest.
Anonymous   |     |   Comment #8
ASI. The "I've got a Bridge in Brooklyn to sell ya!" version of insurance. If people want to be suckers, go ahead. No one in their right mind would EVER join a CU that wasn't NCUA insured. Two points: (1) Private insurance companies, and private companies in general, go bankrupt. All the time. The US Government doesn't. It's just that simple. It's your money. This is such a no-brainer, it's not even worth a topic. If in 2005, you were to predict many banks and CUs would fail in the upcoming years, you'd be laughed at. Then 2008 happened, and see what was left in its wake. I had money at two institutions that failed, but both were federally insured (FDIC & NCUA) and I didn't lose a penny. If ASI had insured multiple institutions that failed at once, they'd declare bankruptcy and you'd be out your money. What's so amazingly bizarre is that there is NO REASON to deal with private insurance. It's not like you get something extra or more for the (completely unnecessary) added risk. There's absolutely NO reason to join with a CU that brushes off the NCUA in favor of "private" insurance. None whatsoever. (2) Though one needs nothing more than Point #1 above, here's something else to consider: would you really feel an institution that shuns the FDIC instead of private insurance will make proper decisions on other matters? I certainly don't. To me, that's a red flag to avoid such an institution. And again, it's not as if there are only a few choices. Probably 99.9% of CUs nationally are NCUA insured. Why even consider going with the 0.1% that make the foolish choice of putting your money at risk for no reason? So yeah, besides the obvious reasons never to join up with an institution with private insurance instead of NCUA, there's the added fact that I wouldn't trust such an institution with my money in other matters if they made the unbelievably stupid decision to go the ASI route instead of FDIC (also makes you wonder what their books are REALLY like). I belong to multiple CUs and banks, and if any of them went the private route, I'd leave them so fast they wouldn't know what hit them.

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