WestPointDraftͲBestPracticesStandardforLifeInsuranceStewards
May7,2013
ExecutiveSummary
ThefirstdraftoftheBestPracticesStandardforLifeInsuranceStewards(Standard)was
preparedbyataskforceconsistingofBarryFlagg,JoeMaczugaandDonTone,andlater
augmentedbyVinceMicciche.
ThefirstdraftwassubsequentlyreviewedandeditedatWestPointApril24–25,2013bythe
followingindustrythoughtleaders:
PaulAuslander
JohnGilliam
VinceMicciche
MikeBrohawn
JoshHusbands
MikePepe
MarkChamberlain
AndyKalinowski
JulieSchneider
RitaCheng
BrettLotspeich
JacquelineSteinberg
BarryFlagg
JoeMaczuga
DonTrone
MathewGeherin
JimMcGuire
Theediteddraft,whichwillnowbereferredtoasthe“WestPointDraft”,willbeadministered
byanAdvisoryBoardoverseenbytheLeadershipCenterforInvestmentStewards,aSwissͲ
based,notͲforͲprofitprofessionalsociety.
Assoonaspractical,theLeadershipCenterwillpublishtheWestPointDraftandprovidethe
publicwebͲbasedaccesstotheStandardandtheabilitytocommentontheproposedlanguage.
TheStandardisbasedonauniversaldecisionͲmakingframeworkwhichconsistsofsixStepsand
seventeenDimensions(DimensionsdefinethedetailsofaStep).Asimilarframeworkhasbeen
usedtodevelopa:
9 Globalwealthmanagementstandardforwealthholders;
9 Fiduciarystandardforadvisors,trusteesandinvestmentcommitteemembers;
9 Governancestandardfordirectors;and
9 Projectmanagementstandardforstaff.
Step1ͲDefine
Dimension1.1:DefinerolesandresponsibilitiesofdecisionͲmakers
TheLifeInsuranceSteward:
a. DefinestherolesandresponsibilitiesofeachdecisionͲmakerandserviceprovider
(party);including:
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x
x
x
x
x
x
x
Policyowner
Insured
LifeInsuranceSteward
RelatedFinancialStewards
Attorney
Accountant
Payor/fundingparty
b. Confirmsthateachpartydemonstratesanawarenessoftheirroleandresponsibilities
c. RequiresastatementfromanypartywhomayhaveapotentialconflictͲofͲinterest,and
howthisconflictwillbemanaged.(ConsistentwithDimensions5.2and6.3)
Step2–Analyze
Dimension2.1:Stategoalsandobjectives(“objectives”)
TheLifeInsuranceStewarddefinestheclient’sgoalsandobjectives,intermsof:
a. Whatthelifeinsuranceisfor:
x AssetProtection
x BusinessContinuation
x FamilyProtection/IncomeReplacement
x EstatePlanning
x Investmentplanning
x RetirementPlanning/Funding
b. Corevalues,personalandbusinessrelationshipsand/orphilanthropicobjectives
Dimension2.2:BriefdecisionͲmakersonobjectives,standards,policies,andregulations
TheLifeInsuranceSteward:
a. DefinesthedecisionͲmakingframeworkforallpersonsservinginafiduciarycapacity
(suchasthetrusteeofalifeinsurancetrust)
b. Conferswiththeclient'staxadvisorthatthelifeinsurancestrategy(strategy)istax
compliant
c. Conferswiththeclient’slegalcounseltoconfirmtheappropriatenessofthelegal
structure
d. Confirmsthattheclientiseligibletoobtainappropriateinsuranceproducts
e. ConfirmsthateachpartyhasthecapacitytocomplywiththisStandard
f. Confirmsthatanypartylackingexpertisehasprudentlydelegated
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Step3–Strategize
Dimension3.1:IdentifysourcesandlevelsofRisk
Consideringtheclient'sgoalsandobjectives(consistentwithDimension2.1),theLifeInsurance
Steward:
a. Definestheclient’ssourcesofrisk,andcapacityofeach,intermsof:
x Lossofincome
x Longevity
x Disability,longͲtermhealthcareissues(seealsoHealthCarePlanningStandard)
x Investmentrisks
x BusinessnonͲcontinuation
x Changesintaxcodeand/orestateplanningregulations
x Familygovernanceissues;familydisruption;badactorsinthefamily
x Liquidityneeds
b. Conferswithpartiesontheclient'ssourcesandlevelsofrisk
Dimension3.2:IdentifyAssets
TheLifeInsuranceStewarddefinestheclient’sassets(allassetsinsummaryform,notjust
thosetiedtoinsuranceplanning),intermsof:
a. Liquidassets
b. Illiquidassets
c. Businessassets
d. Anticipatedfutureassets
e. Humancapital/earningcapacity
Dimension3.3:IdentifyTimeHorizons
TheLifeInsuranceStewarddefinesthetimehorizonassociatedwitheachstatedlifeinsurance
goalandobjective,takingintoconsiderationsuchfactorsas:
a. DefinitiveshortͲ,intermediateͲandlongͲtermtimelinesorevents
b. ContingentshortͲ,intermediateͲandlongͲtermtimelinesorevents
c. Durationofcoverage
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Dimension3.4:IdentifyExpectedOutcomes(“performance”)
TheLifeInsuranceStewardidentifiesperformanceobjectivesforlifeinsurancepolicies,andfor
assetsinvestedininsurancepolicies,intermsof:
a. Absolutereturnsandoutcomes/contractuallyguaranteed
b. Relativereturnsandoutcomes/nonͲguaranteedassumptions
c. Stabilityoftheproduct'spricing
d. Fundingobjectives
e. Contingencyoutcomes
f. Underwritingparameters
Step4–Formalize
Dimension4.1DefinethestrategythatisconsistentwithRATE
TheLifeInsuranceStewarddefinesthestrategywhichisconsistentwiththeclient’srisk
capacity,assets,timehorizonandperformanceexpectations,asapplicable,takinginto
consideration:
a. NonͲinsurancestrategies,includingthediversificationofcarriers
b. SelfͲinsurancestrategies
c. Useofexistingpolicy(s)
d. Newinsurancestrategies
Inthecaseof4.1.c.and4.1.d.above,theLifeInsuranceStewardshouldconsider:
e. Policystyleandfunctionalitywithregardtoanunderstandingof:
x Premiumdependence
x Cashvaluedependence
x Riskassumedbyeachparty
x Responsibilitiesassumedbyeachparty
Dimension4.2:Ensurethestrategyisconsistentwithimplementationandmonitoring
constraints
TheLifeInsuranceStewardensuresthatthelifeinsurancestrategy:
a. IsnotconstrainedbytheSteward's:
x Compensationmodel
x Distributionstructure,oragencyrelationships
x Useofproprietaryproduct
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WestPointDraftͲBestPracticesStandardforLifeInsuranceStewards
b. Isnotconstrainedby:
x
Prevailingindustrymarketingpractices
[Toillustrate,fromtheSocietyofActuariesFinalReportoftheTaskForcefor
ResearchonLifeInsuranceSalesIllustrations:“Illustrationsshouldnotbeused
forcomparativepolicyperformanceproposes”becausedoingsois
“fundamentallyinappropriate.”]
x Insufficientunderwritingoffers
c. Isconsistentwithprevailingindustrybestpracticeswhensuchpracticesarenotin
conflictwiththisstandard
[Toillustrate,FINRARule2210states:“Itisinappropriatetocomparea…life
insurancepolicywithanotherproductbasedonhypotheticalperformance…”
becausesuchcomparisonscanbe“misleading”andare“strictlyprohibited.”]
Dimension4.3:Formalizethestrategyindetailandcommunicate
TheLifeInsuranceStewardpreparesawrittenLifeInsuranceStrategyStatement(LISS),which
ataminimum,identifies:
a. Policyowner(client)
b. Insured
c. Thelegalstructureofthepolicyownerifotherthananindividual.
d. Therolesandresponsibilitiesofeachparty
e. Asitrelatestothelifeinsuranceproduct(s),theclient'srisks,assets,timehorizons,and
expectedoutcomes(consistentwithDimensions3.1Ͳ3.4)
f. Theduediligencecriteriafortheselectionofthelifeinsuranceproduct(s)(consistent
withDimension5.1)
g. Themonitoringcriteriaforthelifeinsurancestrategy(consistentwithDimension6.1)
h. Theprocessforcontrollingandaccountingforfeesandexpensesassociatedwiththelife
insurancestrategy(consistentwithDimension6.2)
i. Realorpotentialconflictsofinterests(consistentwithDimension6.3)
j. Rateclassoftheinsured
Step5ͲImplement
Dimension5.1:Definetheprocessforselectingkeypersonneltoimplementthestrategy
TheLifeInsuranceStewarddevelopsaduediligenceprocessforselectingproduct(s)which
includes,asaminimum:
a. Thetypeoflifeinsurancecompany
b. Itsdistributionchannel
c. ItsfinancialstrengthandclaimsͲpayingabilityrating
d. Itsretentionlimits
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Itsunderwritingcapabilities
It’sreputationforclientservice,clarityinclientcommunication,andintegrity
Contractualprovisionsthatallowformaximumcontrolandflexibilityandliquidity
Transparencyoffeesandexpenses;including:
x CostofInsuranceCharges
x FixedAdministrationCharges
x PremiumLoads
x CashͲValueͲBased“WrapFees”(e.g.VUL,M&Es)
x Surrender/EarlyTerminationCharges
x FundManagementFees(FMEs)
i. Performanceofinvestedassetsunderlyingpolicycashvalues,including:
x Availabilityofinvestmentoptions
x Tenureofportfoliomanagementteam
x Styleorpeergroupconsistency
x Assetsundermanagement
x Performancerelativetopeergroup
x RiskͲadjustedperformancerelativetopeergroup
x Fundfeesandexpenses
x Contractualprovisions
j. Competitivenessofproductpricingandperformancewithinitspeergroup
k. Liquidity
e.
f.
g.
h.
Dimension5.2:Definetheprocessforselectingtools,methodologies,andbudgetsto
implementthestrategy
TheLifeInsuranceStewarddefinesaprocessfor:
a. Theselectionoftheappropriateproduct(s):
x Term
x Universal
x Variable
x WholeLife
x Single,Joint
b. Ensuringthesustainability/continuationofthepolicy,considering,asaminimum:
x LapseRisk
x LiquidityRisk
x DefaultRisk
x SystemicRisk(theriskthatafinancialcrisiscouldimpairtheabilityofanotherwise
adequatelycapitalizedinsurertopayadeathclaim)
c. Reducingexpensesthroughtheblendingofstrategies(conversionofexistingpolicies)
d. Pricingconsiderationofthesecondarymarket.
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Dimension5.3:Ensurethatserviceagreementsandcontractsdonotcontainprovisionsthat
conflictwithobjectives
a. TheLifeInsuranceStewardensuresthatserviceagreementsandcontractsdonot
containprovisionsthatconflictwiththegoalsandobjectivesoftheclient
b. Contractsreflectrepresentationsmadebyproductprovider(s).
Step6ͲMonitor
[Editorialnote:AsusedinthisStandard,thefrequencyof“periodic”isdependentontypeof
product(s)utilizedwiththeclient’sstrategy.]
6.1:Prepareperiodicreportsthatcompareperformancewithobjectives
TheLifeInsuranceStewarddefinesaprocesstoperiodicallymonitorthelifeinsurancestrategy
whichincludes,asaminimum:
a. Changestotheclient'ssourcesandlevelsofriskcapacity,assets,timehorizons,or
performanceexpectations
b. Changestotheinsured’shealth
c. Financialstabilityandratingoftheproductprovider
d. Fundingadequacy(overͲfunded/underfunded)oftheinsurancestrategy;takinginto
consideration:
x Increasing/decreasingtheplannedpremium
x Increasing/decreasingpolicybenefits
x Rebalancingtheassetallocationoftheunderlyinginvestmentstrategy(cashvalue
products)
x Changingpolicycontracts
x Changingcoverageduration
e. Thereviewofproductcostsandexpensesrelativetotheoriginalproposal(s)and
representativebenchmarkaverages
f. Changesintaxand/orestateplanninglaws
g. Changesinbeneficiarydesignations
h. Alternativesforapolicyonceariskhasbeenreducedoreliminated.
Dimension6.2:Prepareperiodicreportsthatanalyzecosts,orROI,withperformanceand
objectives
TheLifeInsuranceSteward:
a. Periodicallyanalyzesfeesandexpensesassociatedwiththelifeinsurancestrategy,
including:
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x Feespaidtothirdpartyadministrators,trustees,andinsuranceconsultants;
x Brokeragecosts,anduseofsoftdollars;and
x Feesandexpensesofserviceproviders.
b. Analyzestheimpactfeesandexpenseshaveontheproduct,seekingtominimizecost
andmaximizecapitalefficiencies.
Dimension6.3:ConductperiodicexaminationsforconflictsͲofͲinterestandselfͲdealing,and
breachesofacodeofconduct
TheLifeInsuranceSteward:
a. Conductsperiodicreviewsofallpartiestoensurethattherearenonewconflicts
(consistentwithDimension5.2)whichmayconflictwiththeclient’sstrategy
b. Defines(orrefersto)anethicscodeorstandardsstatement,andensuresthatallparties
periodicallyacknowledgethesame
c. Remainsobjectiveandpromotesapolicyoffulldisclosure
i. Advisestheclientwhenconflictsariseandhowsuchconflictswillbemanaged
Dimension6.4:PrepareperiodicqualitativereviewsorperformancereviewsofdecisionͲ
makers
TheLifeInsuranceSteward:
a. Conductsperiodicqualitativereviewsofallserviceproviderstodeterminewhether
therearepersonnelororganizationalchangeswhichmayimpactthequalityofservices
beingprovidedtotheclient;and
b. Takesintoconsiderationanylegalorregulatorychargesbroughtagainstaservice
provider.
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