Marketing Due Care

Here’s a very short history of Due Care from a marketing practitioner’s perspective, followed by a few clear calls how to do something about it in today’s era of rich opportunity for brokers who understand the issues.

Where did Due Care come from?

Back in the old days (the seventies and before), insurance companies built products similarly, even sharing information as they developed it. The variations were mostly in dividends, and that’s where the magic came from for selling. By the end of the seventies, producers could employ computer power to crunch all sorts of variations on the theme of managing the cash values of life insurance and especially the projected (oops, “illustrated”) dividends. In competitive situations, life insurance proposals were often compared based on illustrated dividends. Most brokers who knew what they were doing took time to review Best’s Flitcraft Compend and compared one insurer’s dividend paying history to another. No big deal. They simply pointed out that according to 10- and 20-year histories, Company A paid 98% of the dividends they illustrated and Company B paid 82%, “so on that basis, do you want the one that looks so much better in the sales illustration or the one that has the better track record of meeting their illustrated dividends?”

Then suddenly the consumer’s emotional distinction between the “savings dollar” that bought life insurance and the “investment dollar” used to purchase growth vehicles evaporated in the frenetic financial marketplace. Viola! Along came interest-sensitive insurance products, namely UL, to offset the client’s profound new interest in accumulating and protecting simultaneously. When the sex appeal of accelerated accumulating outshined the savings aspect of life insurance, buyers went for term and mutual funds or similar combinations of protection and accumulation. They wanted a piece of the high earnings that corporations were getting from high interest rates and incredible stock market gains. Mutual funds were taking off. So why not go for the gold, or at least a little more of it than life insurance alone offered?

With UL, instead of illustrating dividends, insurers illustrated interest rates. Same thing happened. Once a track record was established for companies, brokers compared 10- and 20-year histories of interest actually paid versus interest illustrated in the sales proposal. Of course, once you have a visible track record, poor historical performance almost automatically debunks hopeful sales illustrations. And it did not help that at the same time in the North American economies inflation was curbed, interest rates were kept down, and interest-sensitive life insurance products suffered. Of course, par ordinary insurance also suffers in periods of continuously low interest rates, but the pain shows up slower and isn’t so deep.

The problem for insurers became how to devise zingy sales illustrations that were not so easy to debunk with track records of actual dividend and interest payouts compared to illustrated values for these items. Also, insurers wanted to take the manipulation of illustrated values out of the salesperson’s hands. Creative product development gave birth to four ideas, all falling under the category of “undisclosed assumptions” in the building of a new product. They could project cost reductions such as computerizing and reducing labor, but this method is limited and usually short-lived as a management tool. They could project increased revenue from improved return on investment, but several companies then were realizing profits only because the investment side of the house outperformed the insurance sales side, so they would be on shaky ground trying to project that as the basis for a continuously improving situation. Something else was needed.

Mortality Lives

There is power for insurers in dealing with mortality. First, only they can do it, which is why only insurance companies (certified actuaries) can write life insurance and annuities. Then assuming (for illustrative purposes) certain recent improvements in mortality are compounded into the future, dramatic reductions in illustrative premiums result when showing new products. That’s not all, either. Even if assumed improvements in mortality are experienced, they don’t have to be given back to the policy series they came from (e.g., as reductions in mortality costs to benefit policyholders), but can be applied to new products to illustrate favorably in the new sales illustrations.

How does this work? Here’s the process in a rough nutshell.

1. The insurer assumes that recent mortality experience improvements will compound into the future and calculates them into the new product for illustrative purposes.
   
   
2. The insurer assumes that increases in lapses above actual experience will occur and incorporates them into contracts for illustrative purposes as well.
   
   
3. Contractual safeguards are established by the insurer to assure a profitable experience (such as reserving the right to change the premium in later years) if the undisclosed assumptions do not come true.
   
   
4. Higher than expected performance in one product is not put back into that product; rather, it is funneled into new products for new sales illustrative purposes.
   
   
5. By keeping all this “proprietary and confidential” as a trade secret, the presence of the undisclosed assumptions are generally unknown to the consumer because they are unknown to the practitioners selling the product or the non-insurance advisors offering counsel to the buyers who are their clients.

The resulting increased risk to the consumer that the product illustrated may not become the reality the consumer seeks remains undisclosed at sale time, and down the pike some difficulties may arise. The 66 years olds who purchased a survivorship policy at age 50 may now face premium increases they cannot afford and the policy lapses. The insurer is safeguarded by paying out some cash surrender values, but is off the hook for the death benefit. The insurer may also achieve higher than anticipated lapse ratios (which could have been one of the undisclosed assumptions in the sales illustration) making the product more profitable, but the profit does not necessarily accrue to the policyholder. If dividends or interest rates also drop, vanishing premiums don’t vanish, and consumers bite the bullet with more payments or participate in suits against the insurer. Either way, there are some potentially great risks for the consumer.

The Marketing Problem and The Opportunity

The problem is that consumers, the rating companies, brokers, agents and the host of non-insurance professionals who dabble in insurance don’t understand what they don’t know, and focus entirely on insurer solvency issues to the exclusion of product design issues that should also be raised. They think that “due diligence” — as they persist on calling their oversight of life insurance sales — means picking better rated insurers. But insurer solvency makes up only part of the problem and is fraught with problems of its own, such as the inconsistencies between rating firms and the various measures and vagaries they apply in their ratings.

Producers generally do not want to get involved. All this is too technical, and their own companies resist bringing up Due Care as an issue because compliance officers do not understand it and some companies have already been sued along with their agents who promised to perform due care and did not do it, or did not do it properly and the client suffered. And then there is the unfortunate fact that Due Care is not a legal obligation and has no recognizable standard for performance, whereas due diligence is a legal obligation in securities sales and has a clear standard for performance.

So here’s the great (albeit brief) marketing opportunity for Due Care: Brokers and agents don't want to do it, even though marketing it as an expertise could bring them tremendous advantage. While other producers avoid it because there’s no hurry (nobody’s forced the issue yet); no need (people still tend to trust their insurance agents and brokers and the insurers the represent); no interest (it’s too complicated); or they have no vision (in marketing you can succeed by being first or best, but it’s always best to be first), the opportunity to market Due Care for competent brokers who see the vision is remarkable. In fact, many top producers are already doing this in a big way.

The market falls into three categories:

•  Large life insurance portfolios that should have, although may not require annual performance reviews. Look for these in smaller trusts and personal estates with life insurance providing for future liquidity and capital needs. You may also find these in non-qualified deferred compensation cases and smaller qualified plans with blocks of life insurance.
  
  
•  Accountable life insurance portfolios, meaning blocks of life insurance where someone is accountable (read “liable”) for advising the client about the life insurance. Look for trusts and qualified plans with large blocks of life insurance, especially where the life insurance is the primary asset.
  
  
•  Major life insurance purchases. Whenever non-insurance professionals are being paid to give advice related to the life insurance being purchased, the case is usually large enough to merit performing Due Care formally.

The influencers can be trusts and estates attorneys, accountants, trust officers and fee financial planners. The approach that works is to introduce Due Care as one of your expertises, and offer the non-insurance professional (NIP) your expert counsel and advice in your specialties. This way you put yourself on the same professional level as the other advisors (but in your specialty) and avoid the fallacious quid pro quo style of doing business, which you probably cannot keep up with anyway. To grasp how other professionals tend to associate, think of your dentist and the oral surgeon who pulls your teeth or the endodontist who does root canals to save your teeth. Your general practice dentist may manage your dental work, but refer you to the other specialists for surgery, just as your attending physician may send you to a specialist for more focused treatment. You can be a specialist in Due Care, and maybe unique in your marketplace.

The basic questions to pose to NIPs are these:

1. Do you ever get involved in the decisionmaking process of your clients relating to life insurance?
   
   
2. What do you do? How are you involved?
   
   
3. How do you perform Due Care, or assure that it is done correctly?

At this point your discussion will reveal that the NIP does not know what Due Care is, may not care, relies on the agents or brokers s/he trusts (perhaps blindly) or the client’s agent, or simply does not know either the risks to the consumer purchasing certain life insurance contracts or the NIP’s own potential liability for rendering unqualified advice. We know that

• accountants who simply advise against life insurance in a qualified plan become de facto fiduciaries for that plan
  
  
• insurance trusts have been successfully sued by heirs for malpractice and negligence regarding the management of life insurance in the trust
  
  
• many errors and omissions carriers for lawyers have announced that they will no longer pay claims against attorneys for the life insurance advice they give because it is not legal advice they are qualified to give.

Ignorance, not stupidity

The vast majority of NIPs are as ignorant about all this as the vast majority of brokers are, but the legal, accounting and trust professions are gearing up to deal with it faster than the life insurance business. They are not stupid, and as they begin to see the need, they respond. In this regard, non-insurance professionals are truly advocates for their clients. Peat Marwick is hiring staff Due Care professionals to perform this function and have announced it in their quarterly newsletter to clients. Like it or not, eventually even the insurance business will be dragged into performing Due Care on life insurance products offered for sale or subject to performance review. Irony reigns. Do you know any insurer training its agents and brokers how to perform Due Care? If you don’t, don’t be upset…it’s a marketing possibility now for you, with a short window of opportunity. Your competitors’ lack of vision is your golden opportunity.

So what do you do?

Due Care is a procedural standard for identifying the suitability of a life insurance contract or offer to a specific buyer. To perform Due Care, you would generally do something like this:

• examine sales illustrations for reality and assess the risks to the consumer, examining the underlying assumptions used to back the projected values
  
  
• examine policy contracts for safeguards for and against the buyer, weighing them with the potential impact of the underlying assumptions either coming true or not
  
  
• compare 10- and 20- year dividend and interest performance histories of the insurers to demonstrate their integrity relative to their illustrative values at the time of sale
  
  
• compare each insurer’s ratings by the various rating firms against your standard (e.g., recommending only insurers who rank in the top three ratings of three or all of the four major rating firms
  
  
• weigh all this for suitability in light of the client’s goals, objectives and risk tolerance
  
  
• communicate effectively to your client (or the client’s appointed other advisors) so that an informed buying decision can be made
  
  
• continue to advise your client — in writing, during the course of the contract purchased — of any changes in experience that may affect the contract’s anticipated performance

You don’t have to set up a department to do this, but you must be organized and competent to perform Due Care if you wish to market it successfully. When you hang your hat on your competency, you must perform well to succeed. Besides Due Care, what other demonstrations of competence in life insurance are there? There are some for sure, but none so pure as knowing how to uncover and effectively disclose what the consumer risks when purchasing new life insurance contracts or managing old ones.

Market Due Care as a Service

Once you are competent performing Due Care,

1. Call on trusts and estates attorneys, estate planning accountants, trust officers, fee financial planners and anyone else you can think of who influences the purchase and management of life insurance contracts but does not truly understand the product, and who may have an aversion to dealing with life insurance at all although s/he should be advising the client to purchase some.
   
   
2. Tell them your procedural standard, step by step.
   
   
3. Show them how you work and perform Due Care, emphasizing that your counsel and advice is based on a variety of factors and comparisons.
   
   
4. Offer your expert services to those who recognize the need for Due Care in their clients’ insurance decisionmaking and want you on their team. For now, forget the ones who don’t see the need; they may or may not come around later.

As competition increases from different quarters (other brokers, accountants and attorneys with insurance licenses, banks and trusts, commission-based financial planners, etcetera), the more you understand your products, practice Due Care and market this specific life insurance expertise, the more you will prosper in the high-end marketplace.