In early December 2004, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) issued an interagency statement on bank-owned life insurance (BOLI) to iterate to financial institutions that the purchase and risk management of BOLI must be consistent with sound banking practices. While BOLI can be “a useful product to recover costs associated with providing employee benefits,” the Agencies believe that many banks have been reporting their obligations to employees under these plans incorrectly and have urged banks to double-check their procedures to make sure obligations are being measured and reported accurately. The agencies are concerned that without an adequate understanding of the full array of risks BOLI poses, institutions can increase their exposure to liquidity, transaction, reputation, and compliance risks, which are often difficult to measure and control. (The entire bulletin can be found at http://www.occ.treas.gov/ftp/bulletin/2004-56a.pdf.)
The statement outlines supervisory expectations for a thorough pre-purchase analysis and a sound risk control framework used to address BOLI exposures on an ongoing basis. The statement also recommends that financial institutions develop and implement comprehensive BOLI policies that articulate an institution's tolerance for risk. The agencies suggest that institutions can control compliance and reputation risks by obtaining informed employee consent and limiting death benefit amounts to a reasonable multiple of an employee's salary. Institutions can control credit, interest rate, liquidity, and transaction risks by limiting the aggregate cash surrender value (CSV) of policies from any one insurance carrier, as well as the aggregate CSV of policies from all insurance carriers. Additionally, the statement discusses accounting issues, the limited conditions under which institutions may hold equities in a separate account BOLI product, and the risk-based capital treatment for BOLI.
The agencies expect bank management to take two specific actions if the institution plans to acquire BOLI in excess of capital concentration thresholds.
In the exercise of its supervisory discretion, the OCC may require, on a case-by-case basis, that a national bank exceeding the capital concentration guidelines set forth in the statement submit a special report pursuant to 12 USC 161(a) explaining why the bank believes its capital concentration in BOLI is prudent and is not unsafe or unsound.
OCC examinations of a national bank's BOLI program will include a review of the risk management framework implemented to identify, measure, monitor, and control risks. Examiners will evaluate the effectiveness of the pre-purchase analysis and the control framework used for the ongoing measurement and management of BOLI risks. In particular, examiners will assess the appropriateness of internal limits, with particular emphasis on the limit for aggregate CSV of BOLI, and evaluate whether or not such limits appropriately address liquidity, reputation, and compliance risks.
Effective immediately, this bulletin rescinds OCC Bulletin 2000- 23, Bank Purchases of Life Insurance-Guidelines for National Banks, dated July 20, 2000.
Please contact Janice Latulippe, CPA or Roger Prince, JD, APA at (207) 775-2387 if you would like more information on this topic.