A risk analysis of stable value protection for bank-owned life insurance. (25th January 2010)

• Record Type: Journal Article
• Authors: Kwun, David; Mohebbi, Cyrus; Line, Andrew; Tsai, Yong-Tai
• Is Part Of: International journal of applied decision sciences. Volume 2:Number 4(2009)
• Page Start: 406
• Page End: 421
• Publication Date: 2010-01-25
• Subjects: bank-owned life insurance -- BOLI -- corporate-owned life insurance -- COLI -- stable value protection -- surrender risk -- Monte Carlo -- duration -- book value -- market risk -- stochastic interest rate modelling; Decision making -- Periodicals; Management science -- Periodicals; 658.403005
• Languages: English
• ISSNs: 1755-8077

Abstract

Bank-owned life insurance is an increasingly popular tool used by banks to fund the compensation and benefit plans that banks provide to their executives. Assets held within bank-owned life insurance (BOLI) policies now exceed $126 billion and thanks to its tax-efficient status, these policies will likely remain a core investment for banks for the foreseeable future. These policies can be further enhanced using stable value protection (SVP) which allows banks to apply book-value accounting to their investment. Using a Monte-Carlo-based stochastic interest rate model, the paper explores the risk profile and sensitivities of the most common stable value swaps and proposes several simple design innovations which can be tailored to improve the risk profile for both the issuer and purchasers.