The selection of a counterparty is one of the most critical decisions a credit union can make. Many investments for employee benefits, either insurance or non-insurance product, have long lives, and the selection of a counterparty can have long-term consequences.
While a broker or consultant can help a credit union evaluate counterparty options, the credit union alone retains the responsibility for counterparty selection. Before purchasing an investment, a credit union should perform a credit analysis on the selected counterparty in a manner consistent with safe and sound investment practices. Insurance products may require an enhanced level of counterparty analysis due to the potential illiquidity and potential long-term and uncertain maturity.
Management should review the insurance and investment product design, pricing, and administrative services of each proposed counterparty and compare them with the credit union’s needs. With insurance, management should also review the carrier’s commitment to the insurance product, general reputation, experience in the marketplace, and past performance.
Carriers not committed to general account insurance products may have an incentive to lower the interest-crediting rate on insurance over time, reducing the favorable earnings of the product. The interest-crediting rate refers to the gross yield on the insurance, the rate at which the cash value increases before considering any deductions for mortality cost, load charges, or other costs that are periodically charged against the policy’s cash value. Insurance companies frequently disclose both a current interest-crediting rate and a guaranteed minimum interest-crediting rate. A credit union should be aware that the interest-crediting rate may be periodically reset in accordance with the terms of the insurance contract, which can result in the potential for a decline in the rate.
Last updated September 25, 2017
