Banking Rules for BOLI Implementation

OCC BANKING CIRCULAR 2004-56

An interagency statement on bank-owned life insurance (BOLI) issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. OCC 2004-56 provides general pre-purchase guidelines and post-purchase risk assessment for banks and savings associations (banks) to help ensure that bank purchases of life insurance are consistent with safe and sound banking practices. The bulletin states: “… BOLI can be a useful product to recover costs associated with providing employee benefits…” but there are strict Banking rules for BOLI Implementation.

The bulletin requires banks to perform a thorough pre-purchase risk-reward analysis that serves as a useful checklist and exercise for all BOLI purchases:

1. Determine the need for insurance by identifying the specific risk of loss or obligation to be insured against
2. Quantify the amount of insurance needed (for which an aggregate funding computation may be used and the cost of insurance and the time value of money may be included)
3. Select a vendor (Broker Consultant/Agent to act as the bank’s primary contact with the insurance carrier(s) and to work with the bank in selecting a carrier and in designing, negotiating, and administering/servicing the BOLI)
4. Review the characteristics of available insurance products
   1. Select one or more carriers to issue the BOLI coverage. The bank should review the product design, pricing and administrative services, as well as review the carrier’s ratings, general reputation, experience in the market place, past performance, and perform a credit analysis on the selected carrier(s) in a manner consistent with safe and sound banking practices for commercial lending

Determine the reasonableness of compensation provided to insured employees if the insurance results in additional compensation to them

1. Analyze the associated risks and the company’s ability to monitor and respond to those risks. These risks include: transaction, credit, reputation, interest rate, liquidity, compliance, and price. The bank should consider the: complexity of the transaction; size of the transaction relative to the bank’s capital; diversification of the credit risk; financial capacity of the bank; financial capacity of the insurance carrier(s); bank’s ability to identify, measure, monitor, and control the associated risks
2. Evaluate alternatives
   1. Document the bank’s informed decision consistent with safe and sound banking practices

OCC 2004-56 also requires ongoing monitoring of BOLI risks. An effective post-purchase risk assessment program should be reviewed at least annually by the bank’s board of directors and should include, at a minimum:

1. Comprehensive assessment of the specific risks
2. An identification of which employees are, or will be insured
3. Assessment of death benefits relative to employee salaries
4. Calculation of the percentage of insured persons still employed
5. Evaluation of material changes to BOLI risk management policies
6. Assessment of the effects of policy exchanges
7. Analysis of mortality performance and impact on income
8. Evaluation of material findings from internal and external audits
9. Analyze reason for and tax implications of policy surrenders
10. Peer analysis of BOLI holdings