Risk assessment and risk management are vital components of an effective Bank Owned Life Insurance (BOLI) program. In addition to conducting a risk assessment as part of a thorough pre-purchase analysis, monitoring BOLI risks on an ongoing basis is important. Management of an institution should review the performance of the institution’s insurance assets with its board of directors at least annually. This BOLI risk management review should include, but not necessarily be limited to: 

  • Comprehensive assessment of the specific risks discussed in this section, including: 
  • Liquidity Risk 
  • Transaction/Operational Risk 
  • Tax and Insurable Interest Implications 
  • Reputation Risk 
  • Credit Risk 
  • Interest Rate Risk 
  • Compliance/Legal Risk 
  • Price Risk 
  • 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. 
  • 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. 
  • 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. 
  • 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. 
  • Analysis of mortality performance and impact on income. Material gains from death benefits can create reputation risks. 
  • Evaluation of material findings from internal and external audits and independent risk management reviews. 
  • 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. 
  • 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.