The keys to a bank’s success include its understanding of risk management, its approach to long-term planning and the lifelong relationships it develops with customers.
A vital consideration for bank management teams when selecting financial products and services is a like-minded alignment and shared approach to planning for risks that span decades, not quarters. As bankers diligently work with borrowers and customers, these turbulent times reaffirm a bank’s decision to acquire a valuable long-term asset: bank-owned life insurance, or BOLI.
Many bank executives and directors view BOLI as an asset that remains on their balance sheet for decades. It’s a sizable asset for many banks. While the average BOLI contract at MassMutual is around $3 million, we work with many clients with larger policies.
And because it’s a long-term decision, selecting a competitively priced product from a financially strong carrier helps ensure asset quality. This can provide bank boards with the assurance that their BOLI product is stable and that their carrier has the financial strength necessary to pay a market-competitive crediting rate at a time when banks need it most.
Stability in the BOLI business is a strength; banks need their insurance carriers’ commitment to the BOLI market to be unwavering. During volatile economic times, the long-term commitment and stability of your BOLI provider can be a key asset for your bank.
As bank management evaluates which companies to work with, some of the considerations should include:
Longevity: How long has the insurer been continuously active in this space and across market cycles?
Service commitment: What types of servicing protocols are in place for existing clients, and how are advisor relationships supported?
Values: Does the insurer share similar values as the bank, and how does it demonstrate those values through community involvement and investment?
Investment Philosophy Underpins Stability
Boards have an obligation to govern and supervise their BOLI holdings, as well as the insurers with which they do business. Selecting a BOLI carrier is a vote of confidence in that firm’s long-term portfolio management and risk management philosophy. It is incumbent that boards focus on their BOLI insurer’s approach to underwriting and its underlying long-term investment philosophy.
We believe the mutual company structure naturally gives MassMutual a long-term perspective when it comes to planning and investing, as we focus on economic value and not short-term stock prices.
The uncertainty caused by the coronavirus pandemic provides insight into how an insurer’s investment strategy performs in a volatile market. When it comes to due diligence on BOLI carriers, credit ratings are a great place to start. But directors should also look at the insurer’s capital levels, liquidity and financial cushion.
To meet long-term commitments, insurers must follow an appropriate asset-liability matching program, while achieving attractive portfolio returns to back customer obligations. An insurer’s general investment account should be well diversified and managed with a long-term view that withstands short-term fluctuations in asset values. Even in the most volatile market conditions, your bank’s BOLI provider should be positioned to meet the needs of those who rely on them.
In view of today’s economic uncertainty, we understand BOLI may not be top of mind for directors and banks. However, it’s important to understand the differences and nuances when it comes to BOLI management and investment.
Evaluating and aligning with companies that share a similar approach to risk management, long-term commitment and sound investment philosophy have proven to pay dividends over the long term. While post-pandemic planning may be hard to conceptualize, banks operate and run for the long term, and should consider relationships with companies that feel the same.
Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.