Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision
Interagency Statement on the Purchase and Risk Management of Life Insurance
Risk-Based Capital Treatment
If an institution owns a general account insurance product, it should apply a 100 percent risk weight to its claim on the insurance company for risk-based capital purposes. A BOLI investment in a separate account insurance product, however, may expose the institution to the market and credit risks associated with the pools of assets in the separate account. The assets in a pool may have different risk weights, similar to the assets held in a mutual fund in which an institution has invested. For risk-based capital purposes, if an institution can demonstrate that the BOLI separate account policy meets the requirements below, it may choose to "look-through" to the underlying assets to determine the risk weight.
Criteria for a Look-Through Approach
To qualify for the "look-through" approach, separate account BOLI assets must be protected from the insurance company's general creditors in the event of the insurer's insolvency. An institution should document its assessment, based upon applicable state insurance laws and other relevant factors, that the separate account assets would be protected from the carrier's general creditors. If the institution does not have sufficient information to determine that a BOLI separate account policy qualifies for the look-through approach, the institution must apply the standard risk weight of 100 percent to this asset.
In addition, when an institution has a separate account policy, the portion of the carrying value of the institution's insurance asset that represents general account claims on the insurer, such as DAC and mortality reserves that are realizable as of the balance sheet date, and any portion of the carrying value attributable to an SVP contract, are not eligible for the look-through approach. These amounts should be risk weighted at the 100 percent risk weight applicable to claims on the insurer or the SVP provider, as appropriate.
When risk weighting a qualifying separate account policy, an institution may apply the highest risk weight for an asset permitted in the separate account, as stated in the investment agreement, to the entire carrying value of the separate account policy, except for any portions of the carrying value that are general account claims or are attributable to SVP. In no case, however, may the risk weight for the carrying value of the policy (excluding any general account and SVP portions) be less than 20 percent.
Alternatively, an institution may use a pro-rata approach to risk weighting the carrying value of a qualifying separate account policy (excluding any general account and SVP portions). The pro-rata approach is based on the investment limits stated in the investment agreement for each class of assets that can be held in the separate account, with the constraint that the weighted average risk weight may not be less than 20 percent. If the sum of the permitted investments across market sectors in the investment agreement is greater than 100 percent, the institution must use the highest risk weight for the maximum amount permitted in that asset class, and then proceed to the next highest risk weight until the permitted amounts equal 100 percent.
For example, if a separate account investment agreement permits a maximum allocation of 60 percent for corporate bonds, 40 percent for U.S. government-sponsored enterprise debt securities, and 60 percent for U.S. Treasury securities, then the institution must risk weight 60 percent of the carrying value of the separate account investment (excluding any portion attributable to SVP) at the 100 percent risk weight applicable to corporate bonds and the remaining 40 percent at the 20 percent risk weight for U.S. government-sponsored enterprise debt securities. Because the sum of the permitted allocation for corporate bonds and government-sponsored enterprise debt securities totals 100 percent, the institution cannot use the zero percent risk weight for U.S. Treasury securities. However, if the permitted allocation for U.S. government-sponsored enterprise debt securities was 30 percent rather than 40 percent, the institution could risk weight the remaining 10 percent of the carrying value of its investment at the zero percent risk weight for U.S. Treasuries.
Regardless of the look-through approach an institution employs, the weighted average risk weight for the separate account policy (excluding any general account and SVP portions) may not be less than 20 percent, even if all the assets in the separate account would otherwise qualify for a zero percent risk weight. Furthermore, the portion of the carrying value of the separate account policy that represents general account claims on the insurer, such as realizable DAC and mortality reserves, and any portion of the carrying value attributable to an SVP contract, should be risk weighted at the risk weight applicable to the insurer or the SVP provider, as appropriate.
The following example demonstrates the appropriate risk-weight calculations for the pro-rata approach, incorporating the components of a BOLI separate account policy that includes general account claims on the insurer as well as the investment allocations permitted for different asset classes in the separate account investment agreement.
EXAMPLE: The separate account investment agreement requires the account to hold a minimum of 10 percent in U.S. Treasury obligations. It also imposes a maximum allocation of 50 percent in mortgage-backed securities issued by U.S. government-sponsored enterprises, and a maximum allocation of 50 percent in corporate bonds. Assume that the portion of the carrying value of the separate account policy attributable to realizable DAC and mortality reserves equals $10 and that the portion attributable to the SVP totals $10.
Carrying Value of Separate Account Policy
Less: Portion Attributable to DAC and Mortality Reserves
Portion Attributable to SVP
Net Carrying Value of separate account policy available for pro-rata
Risk weight calculation :
U.S. Treasury @ 10% x $80 = $8 x 0% RW
Corporate Bonds @ 50% x $80 = $40 x 100% RW
GSE MBS @ 40% x $80 = $32 x 20% RW
Separate account risk-weighted assets subject to pro-rata
Add Back: DAC and Mortality Reserves = $10 x 100% RW