Use Case for Assessing Risk on Bank-owned Life Insurance (BOLI)
Why assess the risk? Life insurance holdings can serve a number of appropriate business purposes. Because the cash flows from a BOLI policy are generally income tax-free if the institution holds the policy for its full term, BOLI can provide attractive tax-equivalent yields to help offset the rapidly rising cost of providing employee benefits. Life insurance with an aggregate cash surrender value (CSV) in excess of 25 percent should be the threshold when establishing internal limits for their BOLI holdings. Acquiring BOLI as part of a “yield-chasing” asset/liability management strategy in an attempt to increase earnings during the recent period of low interest rates and reduced loan demand is a higher risk proposition and should not be undertaken without having an adequate understanding of the full array of risks it poses – especially risks that are difficult to measure, such as liquidity, transaction/operational, reputation, and compliance/legal risks.
Who should assess the risks? Chief Financial Officer, Controller, Accounting Manager, Investment Officer, Board of Directors
How to assess the risk: Rate the KRIs to determine if a threat would successfully exploit a vulnerability and to justify expenditures to implement countermeasures to protect the bank’s assets or reputation. Use the “Focus Risk Assessment” tool for in-depth analysis of risks and mitigation techniques.