DEPARTMENT OF AUDIT
DIVISION OF BANKING
Jeffrey C. Vogel
To: Wyoming Financial Institutions
From: Wyoming Division of
banks have been purchasing Bank-Owned Life Insurance (BOLI) and Key-Man Life
Insurance for many years. Although
there is no specific statutory citation in Wyoming Banking Law, it has been a
permissible practice. This office
believes this practice is incidental to the business of banking according to
Wyoming Statutes 13-2-101 (a)(xii). Since
this is a permissible practice, prior written approval of the commissioner is
are no specific statutory limitations on BOLI in the Wyoming Banking Statutes.
Therefore, the Division follows the guidance established by the Federal
Deposit Insurance Corporation. The
FDIC references the OCC Bulletin 96-51 in their last memorandum on this
subject. This memoranda states,
“State banks wishing to own life insurance policies not permissible for a
national bank must obtain specific Corporation approval.
Furthermore, the activity must not pose a significant risk to the
deposit insurance fund, and the applicant must comply with applicable capital
standards.” Since OCC Bulletin
96-51 was replaced with the revised bulletin, it appears the purchase
standards set forth in the OCC Bulletin 2000-23, Bank Purchases of Life
Insurance, (Bulletin) would apply to Wyoming state-chartered banks.
Bulletin states that the safe and sound use of BOLI depends on effective
senior management and board oversight. The
board’s role in analyzing and overseeing BOLI should be commensurate with
the size, complexity and risk inherent in the transaction.
Although the board may delegate decision-making authority to
management, the board remains responsible for ensuring that purchases of BOLI
are consistent with safe and sound practices.
Consistent with prudent risk management practices, management should establish internal quantitative guidelines. These guidelines generally limit the aggregate CSV of policies from any one insurance company and the aggregate CSV of policies from all insurance companies. Among other things, a bank should consider the legal lending limits and concentration of credit guidelines. Regulatory agencies have determined that a purchase of BOLI can not exceed twenty-five percent (25%) of Tier One Capital plus the Allowance For Loan And Lease Losses. Any amount greater than this would be considered an unsafe and unsound banking practice.
Bulletin recognizes that life insurance can be categorized into two broad types
of insurance, temporary or permanent insurance. The following are a list of common types of life insurance
Insurance – consists of various forms of term insurance that provide insurance
protection for a specific period of time.
Insurance – intended to provide life insurance protection for the entire life
of the insured. Types of permanent
insurance include: whole life, universal life, general account, variable or
Life – a traditional form of permanent insurance designed so that fixed
premiums are paid for the entire life of the insured.
Life – a form of permanent insurance designed to provide flexibility in
premium payments and death benefit protection.
Account – form of whole or universal life insurance where the policyholder’s
cash value is supported by the general assets of the insurance company.
Account Product – a form of whole or universal life where the policyholder’s
cash value is supported by assets segregated from the general asset structure of
the carrier. The policyholder
assumes all investment and price risk.
Insurance – insurance on the life of an employee whose death would be of such
consequence to the bank as to give it an insurable interest in his or her life.
Certain directors of the bank may also be “key-persons.”
Dollar Insurance Arrangements – the employer and the employee share the rights
to the policy’s CSV and death benefit. The
employee and employer may share premium payments.
If the employer pays the entire premium, the employee must recognize the
economic value of the insurance as taxable income each year.
following is a summary of the Bulletin to assist banks that are considering BOLI.
Bulletin requires that pre-purchase analysis should consider the following ten
of the Need for Insurance
The bank should determine the need for insurance by
identifying the specific risk of loss or obligation to be insured against.
The existence of a risk of loss or an obligation does not necessarily
mean that a bank can purchase or hold an interest in life insurance.
Additionally, the purchase of insurance to indemnify a bank against a
specific risk does not relieve a bank from other responsibilities related to
managing that risk. For example, a
bank may purchase life insurance to indemnify itself from the loss of a
“key-person” life insurance should not be used in place of, nor does it
diminish the need for, adequate management or “key-person” succession
of the Amount of Insurance Needed
The bank should estimate the size of the obligation
or the risk of loss and ensure that the amount of insurance purchased is not
excessive in relation to the estimate. For
such estimates, banks may include the cost of insurance and the time value of
money in determining the amount of insurance needed.
The estimate of the amount of insurance needed should be based on
reasonable financial and actuarial assumptions.
The vast majority of BOLI purchases are made through
vendors, either brokers/consultants or agents.
The role of the vendor, if any, depends on the type of vendor selected.
For example, the vendor may be an agent of a specific insurance company
who serves as the bank’s primary contact with the insurance company.
Or, the vendor may be an independent broker who establishes working
relationships with many insurance companies.
If the bank uses a vendor, it should make appropriate
inquiries to satisfy itself regarding the vendor’s ability to honor its
commitments, which may be long term. In
assessing the vendor’s ability to honor its commitments, the bank should
typically review the vendor’s services, general reputation, experience, and
financial capacity. The nature and
thoroughness of the review should be determined by the size and complexity of
the potential BOLI purchase.
Carrier selection is on of the most critical steps in
a BOLI purchase because BOLI plans are typically of long duration and may
represent significant risks for the bank. The
bank should review the product design, pricing, and administrative services of
the carrier(s) and compare them with the bank’s needs.
Furthermore, before purchasing life insurance, the bank should perform a
credit analysis on the selected carrier(s) in a manner consistent with safe and
sound banking practices for commercial lending.
the Characteristics of the Available Insurance Products
There are a few basic types of life insurance in the
marketplace. However, these
products can be combined and modified in many different ways with the resulting
final product quite complex. The
bank should review the characteristics of the various insurance products
available and thoroughly analyze and understand the product(s) being considered.
the Benefits of BOLI
The bank should analyze the benefits of BOLI
purchases being considered. The
analysis should include an assessment of how the purchase will accomplish the
objects specified in step 1. It
should also include an analysis of the anticipated performance of the insurance.
the Reasonableness of Compensation Provided to the Insured Employee if the
Insurance Results in Additional Compensation
Split-dollar insurance arrangements typically provide
additional compensation and/or other benefits to the employee.
Before a bank enters into a split-dollar arrangement, it should identify
and quantify the compensation objective, and ensure that the arrangement is
consistent with the stated objective. Also
the bank should combine the compensation provided by the split-dollar
arrangement with all other compensation to ensure that total compensation is not
excessive. Excessive compensation
is prohibited as an unsafe and unsound practice.
the Associated Risk and the Bank’s Ability to Monitor and Respond to Those
Ownership of or beneficial interests in BOLI may
subject a bank to several risks, which include:
transaction, credit, interest rate, liquidity, compliance, and price.
A bank’s pre-purchase analysis should include a thorough evaluation of
these risks. Furthermore, the pre-purchase analysis should allow a bank to
determine whether the transaction is consistent with safe and sound banking
practices. In assessing the size of
the transaction, a bank should consider the CSV relative to its capital levels
at the time of purchase.
Some BOLI purchases involve indemnifying the bank
against a specific risk. Other BOLI
purchases are used to recover costs or provide for employee benefits.
Regardless of the purpose of BOLI, a complete pre-purchase analysis will
include an analysis of alternatives.
The primary objective of
the Bulletin is to provide guidelines that will help banks make informed
decisions consistent with safe and sound banking practices. A bank should maintain documentation adequate to show that
the bank made an informed decision. Furthermore, the bank should continue to
monitor that decision.
risk is the risk to earnings or capital arising from problems with service or
product delivery. The degree of
transaction risk associated with BOLI is a function of a bank not fully
understanding or properly implementing a transaction. Bank management should have a thorough understanding of how
the insurance product works and the variables that dictate the product’s
management should also consider the impact on the bank’s earnings and capital
should the bank, for any reason, surrender the insurance before maturity at the
death of the insured.
risk is the risk to earnings or capital arising from an obligor’s failure to
meet the terms of any contract with the bank or otherwise perform as agreed.
Credit risk is primarily a function of the insurance carrier’s ability
(financial obligation) and willingness to pay death benefits as promised.
With permanent insurance, credit risk arises from the insurance
carrier’s obligation to pay death benefits upon death of the insured and from
its obligation to return the CSV to the policyholder upon request.
Before purchasing life insurance, bank management should evaluate the
financial condition of the insurance company and continue to monitor its
condition on an ongoing basis. In
addition to reviewing the insurance carrier’s ratings, the bank should conduct
an independent financial analysis consistent with safe and sound banking
practices for commercial lending.
rate risk is the risk to earnings or capital arising from movements in interest
rates. Since a bank’s investment
in permanent insurance is recorded at the policy’s CSV, the bank’s earnings
decline as the policy’s interest crediting rate declines.
Before purchasing permanent insurance, bank management should review the
policies past performance over various business cycles, analyze projected policy
values (CSV and death benefits), and consider having the carrier use a different
interest credit rate for each set of policy projections.
Before purchasing a separate account product, bank management should
thoroughly review and understand the instruments governing the management and
investment policy of the separate account.
The bank should establish monitoring and reporting systems that will
enable the bank to monitor and respond to price fluctuations.
risk is the risk to earnings or capital arising from a bank’s inability to
meet its obligations when they come due, without incurring unacceptable losses.
Before purchasing permanent insurance, management should recognize the
illiquid nature of the product and ensure the bank has the long-term financial
flexibility to hold this asset in accordance with its expected use.
risk is the risk to earnings or capital arising from violations of, or
non-conformance with, laws, rules, regulations, prescribed procedures, or
ethical standards. Because tax
benefits are critical to the success of most BOLI plans, bank management should
exercise caution to ensure that its plans comply with all applicable tax laws.
Additionally, management should ensure that its plan complies with
applicable state insurance laws.
risk is the risk to earnings or capital arising from changes in the value of
portfolios of financial instruments. The
amount of price risk is dependent upon the type of assets held within the
separate account. Before purchasing
a separate account life insurance product, bank management should thoroughly
review and understand the instruments governing the investment policy and
management of the separate account.
risk is the risk to earnings or capital arising from negative public opinion.
This effects the institution's ability to establish new relationships or
services, or continue servicing existing relationships. This risk can expose the
institution to litigation, financial loss, or damage to its reputation.
Bank management should take necessary steps to ensure that individuals
covered under a BOLI product are aware of the policy.
summary, the purchase of BOLI is a permissible practice for Wyoming State
chartered banks. However, the steps
outlined by the Bulletin and summarized in this memorandum should be adhered to
and fully documented prior to completing the transaction.
For additional information or questions or a copy of the OCC Bulletin
2000-23, please contact Albert Forkner, Bank Examiner with the Wyoming Division
of Banking. This memorandum is for
informational purposes only and is not intended as legal, accounting or tax
advice. Bank management should
consult with the bank’s own professional advisors as to how this material may
apply to their own specific circumstances.