Bulletin 2004-56 introduces eight risk categories associated with bank owned life insurance (BOLI) including the newly identified “reputation risk” or the risk to earnings and capital arising from negative publicity surrounding the public perception of institutions owning or benefiting from life insurance on employees. The guidance suggests that an insured’s informed consent prior to the bank’s purchasing BOLI as well as the bank’s monitoring of the amount of insurance purchased on any one individual will mitigate this risk.
Management actions which Bulletin 2004-56 recommends for an effective pre-purchase analysis include:
- Identifying the need for insurance and determining the economic benefits and appropriate insurance type
- Quantifying the amount of insurance appropriate for the institution’s objectives
- Assessing vendor qualifications
- Reviewing the characteristics of available insurance products
- Carrier selection
- Reasonableness of compensation provided to the insured employee if the insurance results in additional compensation
- Analyzing the associated risks and the bank’s ability to monitor and respond to those risks
- Evaluating alternatives
- Documenting the bank’s decision
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