Interagency Supervisory Guidance · December 2004
OCC Banking Circular 2004-56
The banking rules for BOLI implementation: what your regulators expect before your bank buys bank-owned life insurance, and how the board must monitor it after.
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.
“… BOLI can be a useful product to recover costs associated with providing employee benefits …”OCC Bulletin 2004-56
But there are strict banking rules for BOLI implementation. Here is what the bulletin requires.
Before the purchase
The Pre-Purchase Risk-Reward Analysis
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.
- Determine the needIdentify the specific risk of loss or obligation to be insured against.
- Quantify the amountQuantify 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).
- Select a vendorA 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.
- Review the productsReview the characteristics of available insurance products.
- Select one or more carriersSelect 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.
- Test compensation for reasonablenessDetermine the reasonableness of compensation provided to insured employees if the insurance results in additional compensation to them.
- Analyze the associated risksAnalyze the associated risks and the company’s ability to monitor and respond to those risks. 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); and the bank’s ability to identify, measure, monitor, and control the associated risks.
TransactionCreditReputationInterest RateLiquidityCompliancePrice
- Evaluate alternativesCompare BOLI with the other ways the bank could fund or recover the same obligation.
- Document the decisionDocument the bank’s informed decision consistent with safe and sound banking practices.
Need this analysis built and documented for your board?
After the purchase
Ongoing Monitoring of BOLI Risks
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:
- Comprehensive assessment of the specific risks
- An identification of which employees are, or will be insured
- Assessment of death benefits relative to employee salaries
- Calculation of the percentage of insured persons still employed
- Evaluation of material changes to BOLI risk management policies
- Assessment of the effects of policy exchanges
- Analysis of mortality performance and impact on income
- Evaluation of material findings from internal and external audits
- Analyze reason for and tax implications of policy surrenders
- Peer analysis of BOLI holdings
For bank CFOs, CEOs & boards
Get a BOLI-Forma for Your Bank
A BOLI-Forma is a bank-specific pro forma that shows what a BOLI purchase could look like on your balance sheet, organized around the analysis OCC 2004-56 asks your board to document.
- Projected tax-equivalent yield compared with your bank’s alternative investments
- Purchase size tested against your capital and the interagency concentration guidelines
- Modeling of the employee benefit costs the BOLI is intended to offset
- Carrier and product comparison, including ratings and credit review
- A pre-purchase documentation outline that follows the OCC 2004-56 checklist
Illustrations are hypothetical, based on assumptions that may not be realized, and are not a guarantee of future results.