BOLI FOR DIRECTORS

Directors

As a bank director, you are responsible for the oversight of your bank’s BOLI program.  The Interagency Statement on the Purchase and Risk Management of Life1 Insurance defines four areas of required supervisory guidance:

  1. Effective senior management and board oversight;
  2. Comprehensive policies and procedures, including appropriate limits;
  3. A thorough pre-purchase analysis of BOLI products; and
  4. An effective ongoing system of risk assessment, management, monitoring, and internal control processes, including appropriate internal audit and compliance frameworks.

This section of the web site provides an overview of each of these four areas that Directors must consider.

Oversight

The safe and sound use of BOLI depends on effective senior management and board oversight. Regardless of an institution’s financial capacity and risk profile, the board must understand the complex risk characteristics of the institution’s insurance holdings and the role this asset is intended to play in the institution’s overall business strategy. Although the board may delegate decision-making authority related to purchases of BOLI to senior management, the board remains ultimately responsible for ensuring that the purchase and holding of BOLI is consistent with safe and sound banking practices.

Policies and Procedures

Consistent with prudent risk management practices, you should establish internal policies and procedures to govern your BOLI holdings.  These policies and procedures can be incorporated into a board approved “BOLI Investment Policy” which includes items such as pre-purchase analysis and risk management.

Pre-Purchase Analysis

The objective of the pre-purchase analysis is to help ensure that the institution understands the risks, rewards, and unique characteristics of BOLI. The nature and extent of this analysis should be commensurate with the size and complexity of the potential BOLI purchases and should also take into account existing BOLI holdings. A mark of a well-managed institution is the maintenance of adequate records concerning its pre-purchase analyses, usually including documentation of the purpose and amount of insurance needed.

An effective pre-purchase analysis involves the following management actions:

  1. Identify the Need for Insurance and Determine the Economic Benefits and Appropriate Insurance Type
  2. Quantify the Amount of Insurance Appropriate for the Institution’s Objectives
  3. Assess Vendor Qualifications
  4. Review the Characteristics of the Available Insurance Products
  5. Select Carrier
  6. Determine the Reasonableness of Compensation Provided to the Insured Employee if the Insurance Results in Additional Compensation
  7. Analyze the Associated Risks and the Ability to Monitor and Respond to those Risks
  8. Evaluate Alternatives
  9. Document Decision

Ongoing Risk Management

Management of an institution should review the performance of the institution’s insurance assets with its board of directors at least annually.  At a minimum the review should include:

  1. Comprehensive assessment of the specific risks discussed in this section.
  2. Identification of which employees are, or will be, insured (e.g., vice presidents and above, employees of a certain grade level). For example, an institution that acquires another institution that owns BOLI may acquire insurance on individuals that it would not insure under its own standards. While the acquiring institution need not correct such exceptions, it is important to know that such exceptions exist.
  3. Assessment of death benefit amounts relative to employee salaries. Such information helps management to assess the reputation and insurable interest risks associated with disproportionately large death benefits.
  4. Calculation of the percentage of insured persons still employed by the institution. Larger institutions often find that their policies insure more former employees than current employees. This information can help the institution assess reputation risk. Evaluation of the material changes to BOLI risk management policies.
  5. Assessment of the effects of policy exchanges. Exchanges typically are costly and it is a sound practice to review the costs and benefits of such actions.
  6. Analysis of mortality performance and impact on income. Material gains from death benefits can create reputation risks.
  7. Evaluation of material findings from internal and external audits and independent risk management reviews.
  8. Identification of the reason for, and tax implications of, any policy surrenders. In some cases, institutions have surrendered BOLI policies and incurred tax liabilities and penalties. Formal assessment of the costs and benefits of a surrender is a useful component of sound corporate governance.
  9. Peer analysis of BOLI holdings. To address reputation risk, an institution should compare its BOLI holdings relative to capital to the holdings of its peers to assess whether it is an outlier.

1 The Interagency Statement on the Purchase and Risk Management of Life Insurance may be found in OCC Bulletin 2004-56 for national banks, OTS Thrift Bulletin 84 for state and federally chartered thrifts, Supervisory Letter SR 04-19 for state-chartered, FRB-regulated commercial banks, and FIL-127-2004 for state-chartered, FDIC-regulated commercial banks and savings banks.

Meyer Chatfield’s Directors assisted the OCC by consulting extensively on the drafting of the applicable regulations in OCC 2004-56. We look forward to working with your bank to ensure that the Directors have taken appropriate steps in implementing the BOLI plan.