The U.S. division of Sun Life Financial Inc. has introduced bank-owned life insurance that it says makes separately managed accounts available for the first time in this product to community and small regional banks.
It also pools small-bank participants to minimize the costs that had made the product economical only for large banks.
The Pooled Stable Value Option supplies stable-value protection through a selection of bank-eligible managed accounts for bank-owned life insurance, or BOLI, purchases that range from $1 million to $20 million.
Michele Van Leer, a vice president and the general manager of Sun Life’s individual insurance division, said the product is the first of its kind for smaller banks. “For cost reasons, for innovative reasons, this product used to only be available to the largest banks,” she said, “but we wanted to bring the product down-market.”
In a BOLI program, a bank buys life insurance policies on the lives of its executives. It pays the premiums, owns the cash value, and is the designated beneficiary. BOLI can be structured in a number of ways, depending on whether it is designed to be primarily a “cost-recovery” vehicle or to provide periodic funding for benefit payments as they come due.
For example, BOLI may be used to offset the current and future costs of medical, group life, and other Employee Retirement Income Security Act benefits, as well as qualified retirement plan benefits and supplemental nonqualified benefits.
Jack Coleman, the vice president of corporate markets for Sun Life’s individual insurance unit, said companies have offered stable-value BOLI to large banks since the mid-1990s but that cost had made it uneconomical for smaller banks.
“Small banks didn’t want to go near these products,” he said. “There were a lot of complications and costs, and the regulatory bodies never backed them.”
In 2004 the Office of the Comptroller of the Currency released an interagency memo that supported the use of separately managed accounts in stable-value products. With this regulatory support, Mr. Coleman said, smaller banks began to inquire about the product, but it was still too costly.
Sun Life solved the economic problem by pooling smaller banks, he said. Now these high-end investment products, including a mortgage-backed securities strategy by Goldman Sachs Asset Management LP and a fixed-income securities fund managed by the insurer’s Sun Capital Advisers Inc., are accessible to smaller institutions.
Ms. Van Leer said Sun Life, which has $4 billion under management through BOLI products with large banks, has developed a strong book of business with community banks by selling other BOLI policies to them.
“With this memo from the OCC, we are seeing a lot of activity from community banks asking for this kind of product,” she said. “By developing smaller premiums there is a lot of interest with community banks.”
Analysts said other insurers will quickly follow suit. “It is difficult to innovate before other providers begin offering something similar,” said Burton Greenwald, a Philadelphia analyst at BJ Greenwald Associates.
The Wellesley, Mass., unit of the Toronto insurer knows competitors will follow suit, Ms. Van Leer said, but Sun Life can generate a lot of early business by getting to the market first.
