Committee defers bill on bank-owned life insurance after industry, insurers flag tax and consent concerns

Baton Rouge — The House Insurance Committee on May 12 deferred action on Senate Bill 509, a measure sponsored by Senator Cloud that would allow banks to exchange underperforming bank-owned life insurance (BOLI) policies for better-performing ones while addressing who retains "insurable interest." Committee members adopted a Department of Insurance amendment clarifying the bill does not alter existing state or federal consent or notice requirements, then agreed to postpone the bill to give sponsors and industry more time to draft compromise language.

The sponsor, Senator Cloud, told the committee the bill aims to give banks flexibility to move underperforming policies into contracts that yield higher returns. "We're trying to refine the flexibility they have with these bank-owned life insurance policies, to earn more money," he said, describing the goal as leveling the playing field for banks whose policies are earning poorly.

Jeff Butler, a consultant with Executive Strategies, framed the technical issue to lawmakers: under a Section 1035 tax-free exchange, a bank may move an underperforming policy to a better-performing one, but questions arise about whether the bank retains an insurable interest in former employees who are no longer employed by the bank. "The intent of this is to say that the insurable interest moves forward, carries forward with that existing policy to a new policy," Butler said.

Tom Clark of the American Council of Life Insurers said industry stakeholders worry an overly broad change to how insurable interest is defined could have unintended federal-tax consequences. "Federal law for taxation purposes and state law for how we determine insurable interest … intersect to a large extent," Clark said, adding the industry is not yet prepared to present a final amendment and that the parties are continuing to work toward a solution.

Department of Insurance witnesses told the committee a recently offered amendment (identified to the committee as amendment set 5415) was intended only to confirm that the bill would not change existing federal or state consent or notice rules. The committee adopted that amendment by voice vote without recorded opposition.

After extended questioning about whether a second consent from a retired or former employee should be required and who would be responsible for obtaining it, the chair moved to voluntarily defer the bill. With no objections, the committee agreed to revisit SB509 next week to allow additional drafting and discussions among the department, banks and insurers.

The bill was presented with industry witnesses on hand, including representatives of the Louisiana Bankers Association and the Louisiana Insurers Conference, who were noted as available for follow-up. The committee did not take a final vote on the underlying policy; the official action recorded was a voluntary deferral pending further amendments.

What happens next: Sponsors and counsel will continue negotiations with Department of Insurance staff and industry representatives; the committee expects to consider revised language when it reconvenes.