ABA Banking Journal - January 2008 - (Page 38C) INSURANCE REPORT: DIGITAL MAGAZINE EXTRA BOLI PART II how to maintain harmony? You don’t want the bear stepping on your foot—or worse. Now that you’re dancing with the “BOLI bear,” I In the first article in this report, the authors addressed the prepurchase analysis recommended by banking agencies and the Office of Thrift Supervision issued in December 2004 in an inter-agency statement (OCC 2004-56) regarding the purchase and risk management of bank owned life insurance. The article also covered pending regulations regarding annual reporting, from the Treasury and IRS. In the first article, we suggested that selecting a bank-owned life insurance strategy is much like dancing with a bear—you don’t stop dancing until the bear stops dancing! So how do we make sure that the music remains “danceable” throughout your BOLI experience? The interagency statement suggests that banks incorporate a comprehensive risk management strategy with the introduction of BOLI into the bank’s employee benefit strategy. This second article, in part, summarizes the FDIC’s advice regarding ongoing risk management. In approaching this matter, it is important to keep in mind that only a limited number of life insurance companies have been in the BOLI market. In recent years, many of these carriers have been acquired; suffered rating downgrades by one or more of the major independent rating services; and/or ceased selling BOLI products. Also, from an investment standpoint, staying in step on the BOLI dance floor can be a problem. BOLI is not an investment, but a strategy to assist in offsetting the costs of employee benefits. Nevertheless, the bank’s board must apply investment analysis to determine if this product is an appropriate vehicle for meeting those expenses. Risk management framework In addition to conducting the risk assessment as part of a thorough pre-purchase analysis, monitoring BOLI risks on an ongoing basis is critical, especially if the aggregate BOLI holdings represent a capital concentration. The bank’s management should review the performance of the institution’s insurance assets with the board at least annually. More frequent reviews may be appropriate if significant changes are anticipated. This risk management review should include, but not necessarily be limited to: 1. Comprehensive assessment of the risks to the bank. 2. Identification of which employees are, or will be, insured. 3. Assessment of death benefit amounts relative to employee salaries. 4. Calculation of the percentage of insured persons still employed by the bank. 5. Evaluation of the material changes to BOLI risk management polices. 6. Assessment of the effects of policy exchanges. 7. Analysis of mortality performance and impact on income. 8. Evaluation of material findings from internal or external audits and independent risk management reviews. 9. Identification of the reason for, and tax implications of, any policy surrendered. 10. Peer analysis of BOLI holdings. Risk management specifics In assessing the various risks as part of its ongoing risk assessment, the board and bank management should consider the following: By Jeffrey G. Lenhart and Christopher J. Honenberger. Both are principals in the law firm of Lenhart Obenshain PC, Harrisonburg and Charlottesville, Va. Lenhart specializes in business and tax matters involving individuals, partnerships, and corporations. Honenberger, a former bank president, specializes in legal and regulatory matters affecting community banks. www.lenhartobenshain.com www.ababj.com/subscribe.html 1. Liquidity risk: In purchasing permanent insurance, the bank should recognize the illiquid nature of the product and ensure that the bank has the long-term financial flexibility to hold the asset in accordance with expected use. The inability to hold the life insurance until the death of the insured, where the death benefit will be collected, may compromise the ABA BANKING JOURNAL/JANUARY 2008 38c http://www.lenhartobenshain.com http://www.ababj.com/subscribe.html
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