Despite an ever increasingly regulated environment, more U.S. financial institutions are diversifying their investment portfolios with bank-owned life insurance.
How many? According to the Equias Alliance/Michael White Bank-Owned Life Insurance (BOLI) Holdings Report, 54.8 percent of banks and savings associations reporting (3,801 of 6,940) held BOLI assets at mid-year 2013. This is up from 51.9 percent of institutions in 2012. Just a few short years ago, less than 50 percent of banks and savings associations held any BOLI assets.
BOLI may be differentiated by three types of assets:
(1) General account BOLI is held by more than 93 percent of banks with BOLI, accounting for 40.3 percent of all BOLI assets. In general account BOLI, the general assets of the insurance company issuing the policies support their cash surrender values (CSV).
(2) Separate account BOLI accounts for nearly 50 percent of all BOLI assets, despite being held by only 15.5 percent of banks reporting BOLI. Under separate account BOLI, CSVs are supported by assets segregated from the general assets of the insurer and the policyholder assumes the investment and price risk of the assets.
(3) Hybrid BOLI is used by approximately one-third of banks reporting BOLI but only accounts for about 10 percent of BOLI assets. Hybrid BOLI combines features of both general and separate account insurance products, with the general assets of the insurer supporting the policy’s CSV but with the banks being able to select the investment strategies in which the premiums are invested.
BASEL III regulations will demand that insurers more frequently provide more data to their banking clients. As BASEL III is implemented, the likely impact will be a change in the mix—but not the popularity—of BOLI investments. Considering that more than 93 percent of institutions currently investing in BOLI use general account BOLI, increased analysis efforts and risk-weighting related to separate account and hybrid BOLI will likely drive more assets toward those general account products over time.
Clearly, BOLI is popular, and for good reason, especially in today’s interest rate environment. Many financial institutions find that the tax-deferred interest generated by fixed-income BOLI policies is higher than that earned on other investments with a similar risk profile.
BOLI’s status as a tax-favored asset has made it a favored method for offsetting the cost of employee benefit programs (e.g., health care and retirement), increasing earnings (and generating tax-free income when held to maturity), and improving shareholder value. Bank-owned life insurance investments have also proven to be an effective method of balance sheet diversification. Tapping into BOLI Market
Leading life insurance carriers and brokers long ago recognized the need to serve the bank-owned life insurance market with custom-tailored products and robust support solutions. After all, BOLI-specific products have been available for some three decades. But as the BOLI market grows—taking potential sales opportunities with it—it’s never been more important to operate efficiently, provide superior client service, and provide ever-increasing amounts of data analytics.
In today’s challenging economic climate, that’s often easier said than done. With budgets largely stagnant (or shrinking) it’s rare that carriers or brokers can simply throw money at the issue.
Working smarter, not simply more, is the key. In the real world, working smarter often manifests itself as an increased focus on system integration, leveraging modern technology and taking advantage of cost-effective outsource models for both core and secondary tasks.