Mitigating Risk When Choosing a BOLI Carrier for Your Community Bank

If your community bank is considering revamping your benefits offerings, you’ve probably thought about Bank-Owned Life Insurance (BOLI). Purchasing BOLI is one of the lowest risk ways for banks to fund the cost of their benefits, and for a community bank struggling to compete with commercial banks for top talent, this may be a strategic financial decision. While BOLI is a long-term investment, it generates tax-free interest, making it extremely appealing to community banks. As with any investment, the decision to purchase a BOLI portfolio must be carefully considered so you can get the most return with as little risk as possible. Here are some ways to ensure you choose the right BOLI carrier and get the most out of your policy.

1. Document every part of the process to ensure compliance. Regulations require careful attention, and national bank regulators provide a roadmap for the pre-purchase due diligence and ongoing risk management of BOLI. Before beginning the process of selecting a BOLI carrier, keep in mind that every step your community bank takes needs to be documented. From when you first purchase BOLI and throughout the life of your policy, documentation is absolutely critical for regulatory compliance, so you should frequently review reports of the performance of your BOLI assets. If any process isn’t documented, then in the eyes of regulators, it doesn’t exist. If you’re unsure of the proper protocol, working with a consultant who understands the regulatory process can help you with any issues that arise.
2. Conduct a financial analysis of BOLI carriers. When choosing between BOLI carriers, you need to look at a variety of metrics to make the best decision. In the past, some banks’ decision making was reliant on ratings from independent agencies, and while ratings are still important, they are not the only thing you need to consider. By conducting a financial analysis of the carrier, you can get a clearer picture of whether the purchase will keep risk low while providing the yield your bank needs to fund competitive benefits. Here are financial metrics that can help you narrow down your options to a shortlist of low-risk choices:
   • Financial strength: Looking at the carrier’s balance sheet and income statement can help you determine the company’s financial strength, as can ratings from outside agencies.
   • Asset quality: By reviewing publicly available information about the carrier’s assets, you can identify any unusual trends and verify the carrier’s claims paying ability.
   • Risk-Based Capital: Review the carrier’s level of capital over time, compared to the regulatory required amount.
   • Investment philosophy: How does the carrier approach their investment portfolio; what techniques do they use for asset liability matching?
   • Experience in the BOLI market: How long has the carrier been active in the BOLI industry, and have they built a reputation for success in that time?
   • Ownership structure: Is there a parent company that could provide support in time of distress? Does the carrier have a stock or mutual ownership structure?
3. If you need help, work with an executive benefits consultant. Choosing the right BOLI package for your community bank is an important decision and there are many compliance and regulatory issues that some banks just don’t feel comfortable navigating on their own. Working with an expert is the best way to make the most profitable, lowest-risk decision and to ensure regulatory compliance. Your consultant must understand the operating environment of your bank and your strategic interests in order to help you reach your financial goals and fund your benefits package. While selecting a BOLI carrier and deciding how to fund your purchase is complicated and may require outside help, it is an option that has enabled many community banks to offer more competitive benefits to employees.