Bank-Owned Life Insurance (BOLI): A Tier One Asset Secured by Actuarial Expertise

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January 31, 2024

In this article, I “nerd it out” and attempt to provide an argument that Actuaries and Actuarial science, on which the insurance industry as a whole relies on, in certain aspects, grants individuals and entities more financial safety and can provides more financial liquidity than other more well known financial markets.

Bank-Owned Life Insurance (BOLI) has emerged as a significant component in the financial strategies of many banks. It is a form of life insurance where the bank is the owner and beneficiary of the policy.

Below I will provide basic intricacies of BOLI, highlighting the crucial role actuaries play in making it a safe asset, and explain why life insurance is considered a tier one asset for banks.

Understanding BOLI BOLI is a life insurance policy purchased by banks on the lives of key executives. These policies serve as a tax-efficient method to finance employee benefits and offset the costs associated with retirement benefits.

The cash surrender value of BOLI grows tax-deferred and, upon the insured’s death, the bank receives a tax-free death benefit. This unique structure makes BOLI an attractive asset for banks. This often comes as a surprise to many, who do not view the life insurance industry favorably.

Cash Surrender value life insurance is often associated with Whole Life Insurance, and the returns and financial structure of whole life insurance is heavily reliant on actuaries.

Actuaries: The Pillars of BOLI Actuaries are instrumental in ensuring the safety and viability of BOLI as an asset. They bring their expertise in risk assessment, financial modeling, and statistical analysis to the table.

Actuaries meticulously evaluate the risks associated with life insurance policies, considering factors such as mortality rates, economic conditions, and policyholder behavior. Their assessments are crucial in determining the pricing of BOLI policies and ensuring that the policies are financially sound.

Bank Owned Life Insurance, Company Owned Life Insurance, Whole Life Insurance

Risk Mitigation The actuarial analysis helps in identifying and mitigating risks inherent in life insurance. By accurately predicting life expectancies and modeling financial outcomes, actuaries play a vital role in safeguarding the bank’s interests. Their work ensures that the policies held under BOLI are stable and provide a predictable return, making them a safe asset for the banks.

Regulatory Compliance Actuaries also ensure that BOLI policies comply with regulatory standards. In Canada, this involves adherence to the guidelines set by the Office of the Superintendent of Financial Institutions (OSFI) and other regulatory bodies. Actuarial evaluations are essential for meeting these regulatory requirements and maintaining the financial integrity of BOLI.

Canada is known for having a sound banking system. Canadian consumers have Assuris (Assuris.ca) that protects them in the event their insurance company goes bankrupt, and they have The Canada Deposit Insurance Corporation(CDIC.ca) in the event their bank fails.

Life Insurance as a Tier One Asset Tier one assets are the core capital of a bank, essential for its financial stability. Life insurance policies, like BOLI, are considered tier one assets due to their high credit quality and liquidity. The predictable cash value growth of BOLI and its tax-advantaged status make it a valuable asset for banks. Furthermore, the death benefits provide a significant influx of capital, enhancing the bank’s financial cushion.

Tax Benefits and Financial Performance BOLI offers banks considerable tax benefits. The growth in cash surrender value and the death benefits are generally tax efficient. This tax efficiency, combined with the stable returns and low risk, enhances the overall financial performance of the banks, bolstering their tier one capital, which also allows Canadian banks the flexibility to lend more capital to Canadian consumers.

Bank-Owned Life Insurance represents a strategic asset in the financial landscape of banks, backed by the meticulous work of actuaries. Their role in assessing risks, ensuring regulatory compliance, and maintaining financial stability is invaluable.

BOLI’s status as a tier one asset is a testament to its safety, profitability, and the essential role it plays in bolstering a bank’s core capital. As the banking sector continues to evolve, the significance of BOLI and the actuarial profession in managing these assets remains more relevant than ever.