For more insights into American insurance, Finance Monthly interviewed Joe Montgomery, the Founder and Managing Director - Investments of The Optimal Service Group of Wells Fargo Advisors.
Since you founded The Optimal Service Group in 1975, what are the three biggest observations you’ve made in regard to the US insurance sector?
Number one is going to be the environment they're working in. Since interest rates broke in 1981, the decline of interest rates has taken away the ease of making money in fixed income, which predominantly composes many insurance companies’ investment portfolios. Subsequently, the decline has continued to make a case for the diversification and the exploration of other asset classes to compensate for the decline in interest rates. Thirdly, it has highlighted the importance of developing the expertise of those who manage their investments such that prior to 1981, we would argue, would have been important but now is critical to the success of these companies.
What are the biggest trends you follow today and how do these work in growing relationships with your clients?
As a follow on from the second point we discussed, the expansion of the use of asset classes in order to be able to get an adequate investment return, whatever that may be for that particular company, makes the customisation of the investment process for the insurance company that much more important. Our constant motive to innovate and be ahead of the curve carries over to our diligence in working with our Investment Institute to implement new or broadly underutilised asset classes into our clients’ portfolios.
What do you find are the considerations your clients commonly fail to make when it comes to insurance? How do you help prioritise the important considerations?
When clients need to drive a business with sales, they normally have a focus on the front end of the business i.e. the bringing in new business, competing and pricing. Because that goes through cycles on the underwriting side, the investment side tends to take a little bit of a back seat. We help prioritise these considerations by functioning as an investment consultant to those companies. By delegating us to this role, we are helping make sure the investment policy is written so that the management of the assets can be done on a long-term basis, while not having an overreaction by management regarding changes to the investments each time there is a shock in the underwriting cycle.
What are the biggest obstacles you run into in doing so?
The biggest obstacle for most people in anything is running out of time. They don't have enough time in their day, so they set a priority; frequently because things haven't been broken or they became accustomed to doing well when interest rates were declining. The investment side then does not really become a priority for some companies. Unfortunately, they then realise that a focus on their investments should have taken a higher ranking in their priorities when it’s too late.
Within the institutional consulting sphere, what would you say are the top three insurance challenges and how do you find solutions to these alongside your clients?
It's an interesting combination of time and cycles where people should have enough time to pay attention to the investment side by getting the policies in place before there is a crisis situation. Additionally, because of the decline in interest rates, as mentioned earlier, the constant search for yield is more prevalent now than ever. And because companies had to move away from just the traditional high quality bonds they used, they are now in uncharted waters which has resulted in a learning curve. The questions many insurance companies are asking themselves now are ‘How should we develop the investment expertise necessary to allocate appropriately in today’s environment’ and ‘Should we develop in-house or hire a team externally?’.
Another challenge we see is navigating how portfolios are structured within the highly regulated and restrictive insurance industry. We are able to utilise our knowledge and 28 years of experience in navigating these highly regulated industries to mold a strategic asset allocation that is built with enterprise level objectives and risk as the backdrop.
You are charter member of both the Barron’s Top Institutional Consulting teams and the Top 100 Financial Advisors and have remained on each list. How do you feel such accolades incite confidence in your clients?
All accolades and any honours are appreciated and humbling. As far as our clients, we think the accolades hopefully provide some comfort along with the research they should do before working with us or anyone in this industry. Furthermore, we believe they provide some confidence that our experience and background can add value to our clients’ businesses.
How do you continue to uphold this reputation today?
That's basically a combination of the strength, experience, background and training of our team, as well as our constant due diligence and professional development. One of the big things we are able to do for our clients in terms of adding value to their portfolios is spending the time to look for resources, developing them and then helping determine the best way to apply them.
For the past 16 years, Melanie White Terry has been working through her financial advisory firm, Harbor Financial Group. Her clients are primarily busy and highly successful professionals or entrepreneurs that have comfortably broken the six-figure barrier and want to secure their legacy.
Harbor Financial Group helps clients crystalise their objectives and take the time to understand what they want to accomplish from a business and personal perspective; giving them piece of mind.
What are the typical challenges that clients approach you with in relation to the management of their finances?
Most people don’t have the time, knowledge or inclination to implement all of the ideas and opportunities they want to pursue. Many have done some good planning. They have existing relationships with very good advisers. They have spent a lot of time talking about these things but, for some reason, the job never gets done. We will never undo any of the good work that they may already have in place, we tend to focus on their areas of vulnerability. We take responsibility for seeing their plan to fruition.
We typically explore some or all of the following seven areas:
What are the most important aspects that need to be ironed out in order to achieve satisfactory result and a well-organised retirement plan for your clients?
Understanding my clients’ objectives is paramount. I want to know how they feel about the areas they would like for us to consider: security for themselves and their spouse, estate distribution, general terms of their will or plan, succession plan, key employees, and tax issues.
It is also important to gather information about their family, business, real estate, liquid assets, qualified plans, life, disability and long-term care insurance, liabilities, charitable giving, and advisers.
Identifying issues and gaps in their planning and how they feel about them is critical.
Lastly, our clients should have enough discretionary income and/or sufficient assets to be able to either execute or at least begin the plan and the willingness to learn about what might be non-traditional planning opportunities.
How do you assist clients with finding out if they are compliant with federal requirements applicable to retirement? What are the key issues that they face in relation to compliance?
We collect statements to support all of the information that we gather and keep up with the changing laws and regulations by taking applicable continuing education courses and leaning on the consultants on our team that have a wealth of expertise in tax law as attorneys and CPAs.
Additionally, we do a proper fact-finding analysis to determine their time horizon, investment risk tolerance and ensure that they are in plans for which they qualify, based upon their income, employer plan offerings, business structure, employee information etc.
How can your clients ensure that as much of their estate goes to their family on their death?
Insurance is one of the foundations in a comprehensive planning strategy. We assess the amount and type of coverage they have already relative to their objectives and determine if there is a gap to fill.
We tend to recommend that our clients have enough life insurance to replace their income and pay off liabilities to creditors and Uncle Sam. When appropriate, we may recommend establishing appropriate trust documents.
Disability income insurance is recommended to protect what could be their greatest asset; their ability to earn an income.
Long-term care planning is recommended to protect assets because most of our clients did not budget for an additional $7,000-10,000 per month of expenses to self -insure above their retirement expenses.
Does Harbor Financial Group offer any solutions in respect of maintaining and growing wealth for future generations of the same family?
We make it a common practice to reach out to beneficiaries and other family members of our clients to address their planning needs as well.
Contact details:
9861 Broken Land Parkway, #150
Columbia, MD 21046
Telephone: 410-740-4719
Website: harborfinancialgrp.com
Email: mwhite@ft.newyorklife.com
Austin Newkirk began his insurance career at a local agency in his hometown of Toccoa, GA and later on transitioned to Country Financial for an expansion of opportunities. Currently a sales leader for the firm’s local office in Toccoa, his role involves finding new ways to market Country Financial’s products and recruiting new businesses and individuals. Below Austin tells us about his passion for insurance and how this passion changed his life!
What are the typical insurance matters that you assist clients with?
Each day I assist our customers with typical insurance matters such as servicing current policies and making sure that they are taken care of properly. I process payments daily, work on claims and make any policy changes that a client may request - these are just a few of the many things I do for my customers.
What drew you to this field?
Insurance was not my first choice as a career. I am an extrovert and I love to socialise. As I grew older and began college, I started thinking about different career paths that interested me. At that time I had no idea what I wanted to do. While in college, I served as a parts sales manager at AutoZone. I loved the job and the socialising, but there was no opportunity for advancement within that company. I started reading online and the idea about a career in insurance hit me like lightening! I love the customer service side of this job and being able to help people with something that truly makes a difference in their lives is a phenomenal feeling.
What are some of the complexities of working within insurance?
Insurance is very complex and helping people understand it can be just as challenging. When working within insurance, there are so many different aspects to focus upon, but at the same time, so many resources to help you learn. Insurance is constantly changing and there is always something new to learn.
What are the challenges that you’ve been facing recently in relation to changes in what customers expect in terms of insurance products and services?
In the insurance industry, one challenge you will always face in relation to changes in what customers expect are rates – they are constantly fluctuating. It is a battle that all agencies fight. It is especially difficult when a long-term customer with a clean record comes in and we have to tell them that the state has raised the rates. At this point, we, as professionals, have to show these customers value in what we do to keep their business.
Technology and systems are always changing and this can cause customers to be uneasy toward any change - especially when trying to show customers new products and services. Sometimes change must happen due to ever-changing factors in the insurance business and customers’ lives. With these changes, we must prepare to assist our customers with any new updates that are happening frequently. Programs are added and removed, making everything change which, in turn, can upset our customers and sometimes, the agent too. Due to mandated insurance laws, every company and its agents should always be prepared to adapt to new changes in the insurance industry.
What do you hope to accomplish in the future?
Working in insurance has changed my life. My goal is to open my own office in just a few short years and run a successful insurance business of my own. I’m going to continue to love the career path I have chosen and continue to help service my clients to the best of my abilities.
I encourage any person who’s not sure what career path to take to look into the insurance industry. It is a sector that will always be around and there is always opportunity for advancement. The satisfaction of helping a person identify their needs and providing them with a solutions is very satisfying and it makes me feel like I have helped someone in need.
To hear about Environmental Impairment Liability Insurance, Finance Monthly reached out to one of the US’ leading experts in the field - Susan K. Neuman, Partner at the Hickey Smith law firm who provides counselling and coverage advice to parties to contaminated property transactions and to environmental insurers.
As one of the US’ leading experts on environmental insurance for owners, buyers and developers of contaminated properties, what are the complexities of resolving disputes in relation to Environmental Impairment Liability (EIL) Insurance?
There are a number of complexities in EIL coverage. The term EIL refers to a policy which covers liabilities caused by pollution conditions, new or pre-existing/historical, at a specific site; a more current term is Site Pollution Liability (SPL). Underwriting EIL/SPL policies has a highly technical aspect. For example, underground storage tank (UST) policies are underwritten, based on the age, construction, contents, and leak detection method of the tanks as required by federal and state regulations. Another complexity is the modular structure of current SPL policies and their coverage for very specific risks rather than public tort liability covered by CGL policies. Also, unlike CGL policies, they are non-standardised and coverage turns on whether the language is unambiguous. Unlike earlier versions of the policy, the current SPL policy was designed to facilitate contaminated property transactions, and to do this successfully, legal coverage expertise is required. In 1997, there were a handful of brokers that had this sort of expertise. However, as the product became commoditised, brokers without it placed policies that were poorly drafted and resulted in claims and losses.
What have been any recent trends in the EIL insurance field in the US?
Recent trends in environmental insurance include several mergers since 2014. ACE bought Chubb and kept the Chubb name, XL bought Catlin to become XL Catlin, Ironshore merged with Liberty (the new name is still not clear).
Then there is AIG, which was the major SPL provider back in 2015. The company suddenly cancelled its site pollution program and non-renewed almost $1 billion in premium. It still writes blended casualty and pollution products, which is a growing market generally. Elsewhere, brownfields insurance for redevelopments and M&As continue to pose difficulties for underwriters who want protection from long-term potential moral hazards associated with known conditions and voluntary testing. A key driver for environmental insurance business is contractual obligations. Emerging issues include renewable energy, including coverage for solar redevelopment of brownfields, and coverage for post-remedial institutional and engineering controls liability that can address the moral hazards concern.
Can you tell our readers about the recent ‘unavailability of EIL insurance’ in the US?
The ‘Unavailability of EIL Insurance’ is another complexity in the field. The availability rule, set forth in the landmark Owens Illinois 1994 decision, requires that, under the pro rata allocation method, if a policyholder decides not to buy available insurance for a particular risk, it must cover a portion of the costs associated with claims arising during that period. If, however, there is no insurance available for purchase in certain years, the unavailability rule applies and the policyholder doesn’t have to pay a share of costs attributed to those years. This rule makes sense in the context of thousands of separate asbestos products liability claims and the permanent unavailability of asbestos products liability coverage after 1985, when asbestos was excluded from all CGL policies. It makes no sense at all in the context of one regulatory claim for cleanup costs arising from one very long occurrence (pollution condition) at a manufactured gas plant (MGP) site. In this context, the unavailability of EIL insurance is a fallacy in every sense.
In the recent Keyspan v. Munich Re decision, the NY Court of Appeals affirmed the 1st Dept. Appellate Division decision rejecting the unavailability rule and held that Keyspan, not Century, had to bear the risk for loss associated with periods, outside of Century’s policy periods, when insurance was unavailable. However, under the leading 2nd Circuit Court of Appeals Olin v. INA decision, coverage for these periods was available from policies Keyspan could have purchased between 1980 and 1985. The policies were claims made, and they covered pre-existing conditions without a retroactive date. In addition, they only had a single claim made trigger of coverage with a reporting tail of indefinite length, so a claim not made until 1995 would be covered. In addition, in 1995 and a few years thereafter, Keyspan could have purchased a broadly worded and loosely underwritten cleanup cost cap (CCC) policy that would have applied to investigation as well as remediation costs. This information was undoubtedly included in an expert’s report which Keyspan received, but failed to submit with the original motion. It subsequently did everything possible to suppress these facts. This case is the best example of how the unavailability rule acts as a disincentive to the purchase of insurance and management of environmental risk.
Website: http://www.hickeysmith.com/
Finance Monthlyhad the pleasure to speak with Tracy Alan Saxe, President and CEO of Saxe Doernberger and Vita P.C. (SDV) - an insurance coverage practice firm that represents policyholders in insurance coverage matters. With offices in Connecticut, Florida and California, the firm advocates across the nation to resolve disputes with insurers on all lines of coverage, including general and professional liability, commercial property, business interruption, directors and officers, and pollution coverage. Below, Tracy tells us more about it.
Your career began as a general litigator – can you tell us about that experience? What drew you to the insurance field?
I began my career at a small general practice firm of less than 20 lawyers, in Stamford, Connecticut. There, I tried many cases of all types – both civil and criminal. Beginning in the 1980’s, I worked in insurance coverage doing asbestos insurance coverage work. I began working in this area after a friend of mine from law school who was in-house counsel at Combustion Engineering (later owned by ABB) asked me if I was interested in doing insurance coverage work. At that time, they worked on a lot of asbestos claims and insurance coverage disputes. Initially, I thought that it sounded boring, but once I began doing insurance coverage work, I realised that I loved the intellectual challenge that came with it and started turning away other types of work. By the 1990s, I was doing insurance coverage work to the exclusion of all else. I found insurance coverage to be the most interesting and exciting type of work that I’ve had the chance to do – the exact opposite of what I thought it would be!
It’s been three decades since that day and I haven’t looked back! I find it very exciting to work in this field, on behalf of policyholders. I take great pride in the fact that we level the playing field for policyholders who are up against insurance companies whose sole focus is to use their vast resources to find the areas of a policy that reduce coverage. It’s much more rewarding to be fighting for David than Goliath.
By 1994, I was Co-counsel on a major coverage matter with Anderson Kill and after a couple of years, they asked me to open their Connecticut office for them - something that I happily did. After about three years, it became clear to me that there was a better way to service our clients. This area of law benefits from an efficient, creative and nimble organisation that a large firm typically does not provide. In 1996, We changed the name of the firm, but everything else stayed the same. We started with three lawyers, and today we have 28 lawyers in three offices nationwide.
Over the years, we’ve seen considerable organic growth and we continue to expand. The other very exciting thing about doing insurance coverage work is dealing with liability policies. A liability policy is when Person A is bringing a suit against Person B and Person B is then seeking insurance coverage for that suit. These are called third-party liability policies that are supposed to provide for the expense of Person B’s defense fees and to pay for any settlement or judgment against them. In those matters, we get a bird’s-eye view of the strategic decisions about what goes on in the suit against Person B, which is defended by a different set of lawyers. Our goal is to get the insurer to pay the lawyers’ fees, as well as our client’s settlement. This dynamic gives us the opportunity to work with lawyers all over the country who are very good at their specific field, but don’t do insurance coverage work, adding to our strategic ability.
How can potential insurance disputes be minimized in relation to coverage, so that litigation can be avoided?
There are many ways to do this. Thoughtful strategies on the purchasing side of insurance are important. When it comes to commercial property coverage, we make sure we’ve figured out what the client’s business interruption valuations are. In other words, what type of losses they are likely to sustain because of a business interruption of any sort, making sure they get proper coverage for that. Then, our lawyers look at the actual policy language, with the claim scenario in mind, to make sure that the endorsements give the client the coverage that they expect. In addition, we review your contractual relationships with vendors, customers, sub-contractors, sub-consultants, landlords, tenants, or any variety of contractual relationships, to make sure they have properly specified the insurance coverage that is required of them and to what extent they are required to be an additional insured, to what extent they expect indemnification and the opposite. This is to say to what extent they are providing additional insured coverage to other parties and to what extent they indemnify them, making sure that any indemnity they give or get is actually covered by the respective insurance policy.
On the other side of a litigation avoidance is for our lawyers to come in before bringing any sort of suit against an insurance company, making a thorough examination of where the coverage is and making a thorough rebuttal of denial letters. We work with our clients’ insurance broker to approach the resolution of the matter, in a business-like environment rather than a litigation setting. We try to help them understand the facts, laws and policies that apply and present this in a cohesive fashion so they can put their best foot forward.
What strategies do you employ to successfully defend against a coverage issue?
The most important thing is a detailed understanding of all the key issues and the policy, what laws might apply in which state and where the suit might be brought. Most of the cases that we work on are very large and the way we look at each case is very strategic. When compared to typical litigation, our work is more like three- or four-dimensional chess. For instance, it is very common that the insurance policy we are fighting with the insurance company about has ‘no choice of venue’ or ‘choice of law’ provisions. Our clients are almost uniformly national or global entities which means that the lawsuit can take place anywhere in the country or in other parts of the world as well. The law that’s going to apply could be determined differently in each jurisdiction where the suit might be brought, thus, what we often end up doing is looking at anywhere from four to seven issues that might decide the outcome of the case, before we even decide whether a suit should be brought. We look at each issue under the various different laws that might apply in the specific jurisdiction and then make a strategic determination of where a suit should be brought - if it needs to be brought.
We also need to be fully prepared with the facts that support our position.
At SDV, we find that the quickest settlements come when we are fully prepared to aggressively litigate a case. If not handled aggressively or if you don’t have a comprehensive strategy to start with, cases tend to drag on and become very, very expensive. This is where SDV’s experience as trial attorneys adds great value to our clients. In this area of law, it is critical for clients to have a firm that has experienced general litigators who have tried cases to verdict representing them from Day One. Many cases in this area of law are multi-dimensional, and they can move through a number of stages in litigation. A client needs to know that the firm representing them has attorneys that can build a successful case with trial in mind.
How is mediation used to resolve disputes within the sector?
We find that many cases are helped by mediation and if it’s used at the right time, an early resolution is possible. That’s because many firms do not appreciate that the mediation process is not always a zero-sum game. If used strategically and timed correctly, mediation can help both sides understand their cases first, which in turn, helps both sides begin to see the opportunities where resolution is possible. Mediation is very common in the sector - probably almost every case that we work on involves mediation. Some cases could even require more than one mediation (with a third-party mediator) or a court- side mediation conducted by a magistrate or a judge. It has also become a common practice for us to go through these dispute resolution processes without any suit pending. We often have face-to-face negotiations and include mediation as part of this process.
It is critical for clients to have a firm that utilises this alternative dispute resolution process in a strategic and effective way. Once again, it is helpful to our clients that our partners came to this area of law with decades of experience resolving civil cases through mediation.
What motivates you about working within the field? What are your goals for the future?
I find it very exciting to work in this field, on behalf of policyholders. Typically, my corporate clients are busy working on other things and insurance is not their day-in/day-out business, and neither is litigation. Insurance companies on the other hand are solely focused on insurance, so they are naturally better prepared for this battle than the policyholders. I take great pride in the fact that we level the playing field by coming in with the type of expertise that matches or exceeds the insurance companies’ own expertise on insurance coverage disputes.
Our goals for the future is to continue to build our high-quality clientele and reputation for doing high-level, complex insurance coverage work on behalf of policyholders.
Contact
Saxe Doernberger & Vita, P.C.
Website: http://www.sdvlaw.com/
Email: coverage@sdvlaw.com
Phone: 203-287-2100
This month, Finance Monthly caught up with Aubrey Mills – a mother, Ms. California Woman of Achievement 2018 and a Business Development Leader at World Financial Group. Below, Aubrey tells us about her passion for educating families, individuals and businesses in ways to make money, save money, and stay out of debt.
What does your daily work consist of and what do you believe you bring to your clients?
Most of my time is spent building relationships with clients and associates. I don’t want to just hire people and have them work for me; I want them to build careers and lives they are proud of. I want to get to know my clients so that I can best guide them on financial decisions. Learning how people work or what makes us think differently was important, not just so I could be a better saleswoman, but so I could better serve my clients. I studied Human Nature and Communication, so I could better understand people. I’m currently learning to better understand other cultures because I believe that everyone deserves the opportunity to be educated financially. I teach free classes to the community and I want to be as effective as possible.
What attracted you to the insurance field and what drives you to push further the boundaries of your work?
I never wanted to work in finance. I came from a low-middle income family and had always assumed that finance people were older men. I once heard a woman speak about finances and I remember two things about what she said: she was raised by a single mom (I’m a single mom) and how hard it was for her growing up that way, and the Rule of 72. It was one of those awakening moments. I didn’t want my children to feel deprived growing up. The Rule of 72, or compound interest, showed me how little I needed to save for retirement and my children’s college fund and how fast my debt was doubling. I have had friends whose spouses didn’t have life insurance and they suddenly passed away. I couldn’t stand to just sit by and continue to watch that happen. Money doesn’t bring a spouse back, but it allows the family to properly grieve.
You commonly work with military families; what challenges are presented for these clients, particularly in the insurance sphere, and how do you help them overcome these?
My biggest obstacle is conveying to them that the insurance they have will not necessarily remain the same when they exit the military. Most of our service members are young and they get a basic ‘money talk’ when they enter, but this is not sufficient. I believe strongly in doing whatever we can for our service members, not just to equip them for keeping us safe and free, but to have a rich and full life after they leave the military. I don’t feel like we are doing enough - not even close. Many of our service members join right out of high school and they now have an income they didn’t have before, so of course they want to spend it. I know when I was aged 18-20, all I did was work, so I can then shop. But this wouldn’t have been the case if I had known what I know now, 13 years later.
Education and getting young people to see the value in saving are two of the most important things I can provide them with.
What have been some of the most difficult issues you have dealt with alongside clients?
Anytime I have an older client with multiple investments, it gets tricky. They have a fear of losing money and a fear of change. Even if they aren’t in guaranteed accounts, they have a hard time switching. That’s where the friendship and rapport that was built comes in. You really must know who they are and how they communicate. You want to build trust, so you can have those hard conversations.
As a thought leader in this field, what would you say must change to ensure a fair and just future for your clients when it comes to insurance?
First of all - be you. Whatever that means. People like you need help from you. When I first started in the industry, I thought I had to fit a mold. It wasn’t until I allowed myself to be unapologetically me that things changed. I love to laugh. I use humour to ease tension and those hard conversations. I’m a bit goofy and I’ve learned that it makes it easier to help others learn as opposed to being uptight and rigid. So just be you.
Secondly - integrity, 100% of the time. I see people come into the industry and they get so blinded by the amount of income you can make, and they chase it. The business that pays is the business that stays. You can’t keep clients and agents if you don’t have integrity and heart.
Website: http://www.worldfinancialgroup.com
The long-awaited General Data Protection Regulation (GDPR) becomes legislation in a week, on 25 May 2018. Below Narrinder Taggar, Partner and defendant personal injury insurance litigation specialist at Shakespeare Martineau, sheds light on the extended implications of the regulation on the insurance sector.
With GDPR coming into play, organisations across a wide variety of sectors and industries, including insurance companies, will be forced to adjust and assess their data protection strategies or face fines of up to €20 million or 4% of annual turnover, whichever is greater.
The GDPR contains rules protecting individuals when their personal data is processed. This also includes further rights around how this personal data is handled and shared with other parties.
The sensitive nature of personal information used in many insurance claims could cause a serious headache for the industry and is set to cause significant disruption to how all parties involved in the insurance claims process store, manage and process personal data. The risk created when information is shared between claimants/their advisors, brokers; insurers and other parties, such as medical professionals, all of which would be classed as “data controllers”, is great.
A data controller determines the purposes, conditions and means of the processing of personal data. The data processor is the entity that processes data on behalf of the data controller.
But what about accident investigators, who are instructed to process data on behalf of the data controller? They may well be data controllers for the purposes of obtaining and drafting witness statements which would be subject to legal professional privilege until such time the statements are disclosed to any third parties. Of course, it should be noted that a claimant does not have a right to access any data which is subject to legal professional privilege.
With the GDPR placing a greater emphasis on transparency and accountability, the insurance industry will have to be even more careful with the storage of sensitive data. With personal data being intrinsically linked to the claims process and regularly being shared with third parties, the need to be prepared is particularly urgent and parties must rethink exactly how this information is shared during the process.
Hard copy documents such as instructions to barristers may have previously been sent in the post. However, under the new GDPR it remains to be seen whether this way of sharing sensitive documents will still be deemed to be a compliant activity. Instead, encrypting files containing sensitive personal data is set to become the norm.
Under the GDPR all data controllers will be responsible to ensure not only that the receiver, or processor, is GDPR-compliant, but also to find how they intend to store and use data and delete the data once it is no longer required. This can be achieved through the arrangement of a data sharing agreement. This might include a description of the data processing, an assessment of any possible risks and how those risks will be mitigated. Because of the need to ensure compliance throughout all stages of the process, those involved in insurance claims, for example insurers and their solicitors, should set up data sharing agreements with their contacts and suppliers; including other data controllers.
However, duty of compliance also continues after the claims have been settled. The 'right to be forgotten' places a responsibility on the controller to delete any personal data if requested by the subject and not to keep data any longer ‘than is necessary for the purposes for which the personal data is processed’. Yet, there are a number of grounds in which data controllers may keep personal data, including if it needs to be retained in case of any further legal proceedings for example appeals. Therefore, organisations may need to set their own retention periods for data depending on the information in question and how it may be used in future. It is worth remembering in this case that any data deemed relevant must be recorded and held securely offline.
Under the new requirements, data controllers will be obliged to report breaches to the relevant authority within the first 72 hours. Should a breach occur under the new legislation, the fault will lie not only with the data controller but could also lie with the data processor who shared the information, making it vital for all parties to be accountable for the information they process.
The GDPR has undoubtedly changed the goal posts for the insurance industry and many questions still remain around the identification of sensitive information and how the usual correspondence between parties will be affected after the new legislation is introduced. With such large penalties coming into play, the worry of doing something wrong has never been greater.
The industry currently awaits further guidance from the UK Information Commissioner on what the legislation will really mean in practice. However, with the deadline fast approaching, doing nothing is no longer an option. The industry must prioritise collaboration and transparency, in order to ensure they are fully prepared for the changes ahead.
London Market insurers must be quick to react to technology developments – such as automation and increased cyber security risk – if they are to successfully navigate the future claims landscape, according to BLM and the Institute of Directors (IoD).
The assertion is amongst others released in volume two of BLM’s Macroeconomic Trends Series, a suite of research papers created with economists at the IoD. The papers look at macroeconomic forces and how they will shape the insurance claims landscape in the London Market. The second paper looks at technology risks through the lens of product liability, motor, employers’ liability and technology-specific claims.
Tim Smith, partner at BLM who co-led the writing and insights within this paper said: “We have a thriving technology sector in the UK, but given changes ahead we foresee significant knock-on effects on a number of traditional markets. The pace of technology advancement can leave entire industries playing catch-up, which is why it’s so important for the insurance market to understand the impact these will have and adapt accordingly.”
Jim Sherwood, partner at BLM and co-leader of the paper said: “From our work across the London Market with insurers, brokers and managing general agents, we know the importance of understanding how emerging risks will impact the volume and nature of claims. We hope this paper will provide the market with a better understanding of what’s on the horizon and how technology will continue to affect all aspects of insurance.”
The paper also argues that employers’ liability (EL) insurers must react to the growing use of automation and increased self-employment.
Malcolm Keen, associate at BLM said: “Whilst disputes continue as to the definition of an ‘employee’, changes in the nature of employment are affecting the pool of those who can potentially be compensated for an injury or illness by an EL insurer.
“We’ve seen significant rises in self-employment in the UK, with a million more workers since 2008 opting to ‘be their own boss’, and technology is playing a key role in enabling this. On top of that. the increased use of automation will likely to affect the profile of the UK labour market in the short, medium and long-term.
“Coupled together, we expect this may shrink the extent to which the financial burden of injuries or illness caused by work is borne by insurers.”
The Macroeconomic Trends Series will continue to cover other other key claims categories for the London Market in the coming months. This is the second series of papers from BLM and the IoD, with these volumes building on the trends and reflections last identified in 2016.
(Source: BLM)
As part of this month’s Professional Excellence feature, Finance Monthly speaks with Michael Kasula - the owner and Founder of Brokerage Agency Producer Resources. Based in the Chicagoland area, the company is a tightknit community that aims to find like-minded partners, grow businesses, and build lasting relationships. Producer Resources’ mission is to become a valuable partner for the advisers they serve, saving them time and money with the design and implementation of life insurance planning. Here Michael tells us about setting up Producer Resources, their identity and mission and his new company Clarus Hall.
How did you decide to start your own company?
Very early on in my career, I knew I wanted to start my own organisation and be a trusted resource for agents in the life insurance space. In 2013, I was already having success being that resource, but I was working for someone else. That company was going through an acquisition and I knew that changes were coming. That same year, I had a client meeting at a coffee shop in the north suburbs of Chicago. During my presentation to him, he interrupted me and asked, “Why don’t you start your own company?” I had already been forming Producer Resources in my head, but a question like that - from one of my best clients - got me even more excited. I knew there was never going to be a better time, so this is how I decided to found Producer Resources in 2013.
What was the process of setting up Producer Resources like? How did you attract your first customers?
When I was first looking at who I wanted to attract and retain with Producer Resources, it was pretty simple - life insurance advisers who wanted to grow their business without having to grow their overhead. We are an extension of an adviser’s business - that is the message I started with and a big reason why Producer Resources has been so successful. Whether you need case design, advanced sales, or underwriting assistance, we are an experienced and professional team aiming to help our partner firms. I am a value person and I look for opportunities everywhere. If someone has an idea or a referral, I look at how I can use that for the benefit of my clients and my business. That’s what Producer Resources is all about.
In what ways have the company’s services evolved over time?
Producer Resources is a full-service extension of an adviser. From case design to policy issue, we have what an independent life insurance adviser is looking for. This couldn’t happen without our amazing and passionate team. Through a few changes on the sales side of the company, I think we have found our identity - an elite unit working together rather than independently as satellites. This has kept everyone invested in and accountable for the same goals and allows me to manage our company’s growth and be tactical about it.
Equally important, in an industry plagued by a lack of technology, we’re constantly giving our advisers the most up-to-date software out there. We’ve added different tools to help an adviser be their best with their clients: in-force policy management tools, interactive product presentations, co-branded marketing material and presentations, etc.
What are the challenges that US insurance companies have been facing over the past year?
I’m not an actuary, but knowing the way they invest their large general accounts, I would have to say interest rates have been the most challenging hurdle insurance companies have faced in recent years. When they receive premium payments, these monies are locked up for long durations. With interest rates this low, it is difficult to keep pricing competitive. Some companies have put premium or death benefit restrictions on products and some have just stopped sales of certain products altogether.
In the political arena, we’re seeing hotly debated regulations from the Department of Labour. Insurance companies have a lot of housekeeping to do to make sure they are compliant with any guidelines that have or will be enacted. There is also that grey area of fixed annuities and life insurance and what will and won’t be part of the eventual DOL decision. As far as public perception, some carriers have faced increased scrutiny in the last year due to increased COIs, reduced dividend/crediting rates, or just a general lack of customer service. In a constantly evolving market, I think carriers need to learn how to streamline their process; from application submission to ordering there in force illustrations, things need to be made more efficiently. In some ways, insurance companies need to get with the times and I think the DOL is attempting to address that, at least on the transparency side, with regulations. We’ll see how that goes. Regardless of that, improving transparency and technology for the benefit of their customers will serve the industry well, and their customers will be better because of it.
What differentiates Producer Resources from its competitors in Illinois?
I think the biggest differentiator is that Producer Resources is in high-growth mode, and we are passionate about what we do. We have a young and motivated team, with a mission to change the industry. I realise that can sound a bit presumptuous, but we have a vision, we work hard, and we’re getting closer to our goal every day. I want advisers to know that when they partner with us, their life insurance business gets done as efficiently and successfully as possible.
At our core, we are a team of highly skilled life insurance professionals that offer expertise in sales, advanced design, case management, and underwriting. We also have several strategic partnerships in the life insurance industry and closely related industries that we frequently use for the benefit of our advisers. To give you an idea of our capabilities—one of our best producing advisers runs his company as the only member, keeping his overhead low and focusing on networking and building his client base. He utilizes us for everything else. Together, we recently put in force a large estate planning case that we’ve been working on for the better part of a year. He told us that partnering with us was the best decision he’s made in his entire career.
What does 2018 hold for you and your company?
One of the key exciting things happening to us is the new company we are rolling out - Clarus Hall. “Clarus” is Latin for clear, bright, and shining. We combined the word with “Hall” because we want our members to think of our group not as a static place, but somewhere they can move forward with bright, like-minded people. With Clarus Hall, we are creating an organisation where life insurance professionals can get the support, comradery and growth opportunity they are looking for in a long-term partner. This group is going to eventually consist of 100-150 life insurance advisers that want to be part of something that allows them to grow while maintaining their independence. They will have additional resources with our firm and will have bonus and profit sharing opportunities to make their compensation very competitive and allow them to grow with our group.
What more can you tell us about Clarus Hall? What are your goals with this organisation?
We want to create a place for the advanced life insurance adviser to partner with a firm of significance to give them the support they need to grow their business. When we attract enough life insurance professionals to partner with Clarus Hall, we can create something much larger than any of these firms can do by themselves. Giving us depth, we will be heard by others. I want to make this firm’s initiative also marketing to the public on the importance of life insurance, attracting key advisers such as CPAs, attorneys, investment managers, property and casualty agents - anyone in the business that is looking for a group of vetted life insurance professionals to help their client with any type of estate or business planning need.
Michael Hosford is the Founder & CEO of Synergy and its two branches - SynergyPRO & SynergyPhD. Founded in 2001, Synergy Insurance and Investment Advisery Services helps clients build and manage their wealth. SynergyPRO is the company’s branch that serves the MLB, NFL, NBA and entertainers that Michael and his company have been fortunate enough to represent.
In June 2017, with the help of Co-founders Kurt Marozas and Alex Pina, Michael launched and franchised SynergyPhD to serve pension professionals nationally. This branch is helping people who are educators, fire fighters, and police officers properly select their pension options at retirement.
Here Michael speaks to Finance Monthly about the start of his career, the motivation that drives him and his goals for the future.
Your upbringing was slightly unusual, however you founded your own company during your senior year at Southwest Texas State
University. How did you manage to achieve this and what was the motivation that was driving you?
I think when you grow up without a father and your mother moves out of state when you are 14 years old, this leaves you with two choices. You can either fold or fight back at your chance for a successful life and take advantage of the American Dream. I chose to fight back!
Early on, I learned a few things about myself – that I did not like feeling embarrassed, or not having nice clothes and having to stand in the free lunch line at school. I wanted more and I knew understanding money would be a good start. I put myself through college by working for four years at Wal-Mart, and then launched Synergy, an independent financial advisory firm, during my senior year at Southwest Texas State University.
I graduated with a BBA in Finance in 2001. In 2002, I was asked to address the advisers at a large financial services firm at their Leaders’ Conference in Hawaii. In 2002, I was also named to American General Life’s prestigious Legion of Honor.
I have spoken all over the nation to clients and advisers and I have qualified for the Million Dollar Round Table (MDRT), Court of the Table, and Top of the Table on numerous occasions. In addition to helping hundreds of teachers understand and improve their pension plans, I have helped many HNW individuals including NFL and MLB professional athletes, properly structure their wealth distribution plans. I believe that my success comes from treating each client the way I would personally like to be treated and giving them the care and attention they deserve.
What attracted you to the financial advisory field?
The ability to help people properly plan their future, protect what they have and take care of their families should death, disability or the need for long-term care arise.
What is Synergy’s philosophy?
Our philosophy is protection with steady growth and a complete understanding of the situation, despite what your retirement plan will look like when considering pensions, social security, other assets and net of taxes. I think the reason people are not good at retirement is simple – ‘they have no experience at it and they have never done it before’. To me, it’s important that a future retiree knows where they stand and gets properly educated on insurance and certain annuity products that can provide stabilization and growth when they need the money most. Our philosophy can be described as ‘choose not to lose’.
What would you say are the specific challenges of assisting clients with insurance?
I think one of the challenges is the name ‘insurance’ itself and what some people think about it. If I am on a plane and want to take a nap, I just tell the person next to me: “I sell insurance”, and they won’t say a word to me!
In all seriousness, the ‘fee only’ adviser, and certain talk show hosts, have denounced insurance because they simply do not or do not want to understand the leverage, strength and value these products provide. I jokingly say: ’None of my clients wanted those products prior to being educated, but once needed - they love them’.
What strategies do you implement to minimize financial burdens in regards to insurance packages?
Our strategy is education - help people understand that life is not based on a 20-year or 100-year ‘average rate of return chart’. Life happens daily and there will be both good and bad news. Both scenarios require the need for money. Don’t tie it all up until you’re 59 or when you lose your job. Be in a position to utilize your assets.
Your firm also provides investment advisory services – how are most financial investments structured in Texas?
The investment advisory service allows me to utilize fee-based accounts or charge a fee, should a client simply want an outside option. This allows us to buy low after any market corrections. Given that I am licensed in several other states, I would imagine that Texas is similar to other states and we use the wide range of products available to us.
How do you assess levels of risks for investment strategies? How can you accurately assess the level of risk that an individual is prepared to accept?
We have a unique way of planning. We utilize products that have built-in guarantees to provide a steady and somewhat, predictable income distribution plan. Clients either accept or reject this offer. With markets at all-time record highs, I am concerned that people who say they are ‘risky’ could lose and lose badly, while needing the money they’ve invested. I do not want to be a part of that - I have not forgotten 2001 and 2008.
In what ways has your company changed in recent years?
In recent years, Synergy has downsized some of the adviser affiliations and we are moving forward with a more focused group. We will focus on the franchise model of bringing people in with a high desire to be an entrepreneur, people that have the income or savings to transition into becoming a franchisee and are excited about the opportunity. We’d like to work with professionals that have a high desire to help people, individuals that have won at life previously and want to help SynergyPhD grow into the #1 recognized firm for helping pension employees properly choose their pension options at retirement.
What excites you about the future?
At age 38, married, and the father of four children, I am excited about the future. With 17 years of experience, I feel as excited about this industry as I did at age 21. I am prepared to have 100 franchisee store fronts across the nation within 10 years.
Contact details:
Email: michaelh@synergytx.com
Website: https://www.synergytx.com/
Twitter: @SynergyPro7
Below Mark Boulton, Insurance Sector Lead at Fujitsu UK&I, delves into the introduction of automation and AI in the insurance sphere, touching on the future prospects of the insurance sector throughout 2018.
Insurance has always been a grudge purchase, often seen as a necessity or safety net, but not something that immediate benefit is felt from.
It will have been frustrating for many, therefore, to see that car insurance premiums have risen by 11% on average in the last year alone, according to the Association of British Insurers (ABI).
Many of us may even start to question the value we’re getting for our insurance purchases in light of such news.
The price – which is the most important factor in choosing an insurance package (A New Pace of Change, Fujitsu) – is just one element, however. Compounding this situation is the fact that people often find insurers difficult to deal with, particularly when trying to make a claim.
It’s this group of factors that demonstrate the opportunity the insurance industry has to transform itself into a more value-driven service for customers.
At the heart of any change will be technology, and two of the leading areas here are Artificial Intelligence (AI) and automation. How is technology impacting insurance for the better? There are three main areas to consider - customer experience, assessments and risk mitigation.
Personalisation
Think of going through a process for a life insurance policy. Multiple in-depth questions to taken into account age, lifestyle, and health, with an existing model applied to the answers provided.
Such models have been used for decades at some companies, resulting in off-the-shelf packages for people that do not necessarily reflect them as individuals.
Technology is helping change this. Based on any assessment and wider data analytics, automation can quickly produce more personalised experiences for the customer. This might be a payment model that suits their lifestyle or financial situation or a more nuanced insurance package to reflect their needs.
Such personalisation sit at the heart of the transformation. We’ve seen this across other industries, and it is one crucial way insurers can start to move from transactional-based relationships to value-based relationships with their customers.
Convenience and speed
It’s not just adding value of course, it’s getting the basics right. Services like Amazon Prime and Netflix have totally transformed the expectations we have of all companies when it comes to speed and convenience. We want things served to us exactly how we want them, and quickly.
Insurers have certainly made progress in recent years – for example, it is standard now for policies to be quoted and purchased online. More interestingly, however, is the use of apps and chatbots.
These give a holiday maker who may have lost their camera easy access to their policy, but also the chance to ask questions to the chatbot. Powered by AI, we can expect chatbots to play an increasingly important role in the relationship between insurers and policy holders.
Given the often complex nature of insurance policies, chatbots can be a simple way for people to get the answers they need. No need to phone customer services or wait an hour in a call queue; just direct answers delivered instantaneously.
Of course, there is still progress to be made with chatbots, but these will only get better in the years to come.
Apps and chatbots are also interesting because they both rely on and deliver vast amounts of data. The more these are used, the more they can be refined to give people services that suit them better. They fuel the personalised services.
Working together
It’s all very well talking about the benefits and transformative powers of technology, but making these a reality is something many organisations are grappling with.
Something I’ve observed in the financial services industry is the existence of distinct groups of employees. On the one hand, there are those innovation-focused, digital savvy experts who want agility, speed and flexibility. On the other hand, there are those who want to focus on the central facets of their areas products - keeping those long-standing traditions working in good order for the customer.
These two groups are naturally at odds. They often speak in different terms, work in different ways, and approach problems completely differently. Imagine the kinds of conversations that might come up with discussing emerging trends like AI and automation. It’s not easy for them to get to the place they need to.
To be able to respond to the concerns being voiced by consumers, and to harness the business agility needed to respond to market trends, insurance businesses from the c-suite down need to make a culture shift. Driving change from the top is the only way to future proof the business in a digital world that has already changed the state of play for good. We simply cannot afford to rely on the same rules.
Find your digital path now
Our ‘Fit for Digital’ survey found 98% of insurers believed their organisation had been affected by digital. A further 72% said their sector would fundamentally change in the next four years.
Change is inevitable. And the technology that will enable that change - including AI and automation – is here today. Insurers must find the cultural harmony to embrace new digital services and products, without losing the heart of what they already do well.
The next few years will see some insurers thrive and others struggle. To be a thriver, it’s vital to the right digital path now.
Tenzing Advisors is a boutique firm that specializes in the design, analysis, implementation and administration of life insurance plans for affluent families and businesses. Ken Knox founded Tenzing Advisors a decade ago, after working in life insurance brokerage for 16 years. Headquartered in Needham Massachusetts, the company works with both US-based and international clients.
Ken got his start in the life insurance industry in New York City in 1992, as an agent with Connecticut Mutual, which was acquired by Mass Mutual in 1996. He spent the next ten years at two leading independent life insurance brokerage firms in New York and Boston, and has worked with some of the most innovative people in the life insurance industry. Ken and his firm serve as resources to some of the top legal, tax and financial advisors in the US in all life insurance-related matters. Here Ken tells us more about establishing the company, its relationship with M Financial Group and the impact of technological advances on insurance.
What’s the history behind Tenzing Advisors? What are the factors that led you to setting up the company?
I had worked with some of the top people in the industry in each of my prior three stops in New York and Boston. After the Boston firm was acquired by a public company, I decided to start my own firm. Both of my prior firms had been M Member Firms, giving me the opportunity to learn from other top industry professionals in my office and around the country. I was also fortunate to have experience in all aspects of my business; in fact, I had developed comprehensive processes and procedures for staff members to follow. I was determined to combine industry best practices with thorough, objective advice and excellent service. Starting my own firm allowed me have a longer-term focus and the flexibility to base more decisions on building and supporting advisor and client relationships.
Tenzing Advisors takes its inspiration from Tenzing Norgay, the Sherpa who guided Sir Edmund Hillary and his team on the first ascent of Mount Everest. We are also experienced guides who help people reach long-term goals with planning, teamwork and great execution.
Please tell us a little about Tenzing Advisors’ business focus.
Our business is primarily focused on evaluating and providing solutions for affluent and super-affluent individuals and families in estate planning situations. Our clients are often individuals who do not have traditional needs for life insurance, as their wealth allows them to self-insure against a potential loss of income for their families. They are typically represented by sophisticated tax, financial and wealth advisors, and many have family offices who are charged with the responsibility of managing their affairs. We provide objective analysis, showing how life insurance can be an effective tool in transferring wealth to the next generation.
Life insurance provides liquidity that can be used to pay taxes, avoiding the disadvantageous liquidation of other assets and additional tax burdens. Life insurance strategies can be quite straightforward and simple, but for families of significant means, they often require an integrated approach, utilizing and complimenting many other strategies, such as GRATs, QPRTs, charitable giving plans, discounted sales of interests in LLCs and partnerships, inter-family loans and third-party funding, to name just a handful. To be effective, we rely on our skills in communicating complex financial and tax concepts to highly analytical advisors and the end clients, who may not have the same level of financial sophistication, despite their wealth and success.
Many of our clients are business owners or senior executives of valuable businesses, so our work often involves business uses of life insurance. This includes succession planning, risk management, and executive compensation and retention. Insuring buy-sell agreements and key-person coverage are common uses of life and disability insurance.
Many of our engagements begin with a review of existing life insurance plans, and when this is the client’s sole objective, we are pleased to provide a report concluding that no changes are recommended. The client advisors who routinely engage us know that we’re not simply trying to sell life insurance to everyone we encounter. We frequently are able to recommend changes or enhancements to plans, so our credibility is enhanced each time we tell clients that they needn’t change course or buy something new.
Please explain your relationship with M Financial Group and why that is an important aspect of your business.
M Financial Group is a consortium of more than 150 independent life insurance and wealth management firms in the US and abroad that was founded nearly four decades ago. M Financial, which is based in Portland, Oregon, now has over 200 employees that provide support to Member Firms in the areas of client advocacy, industry and marketing intelligence, product innovation and design, underwriting support, and practice management and development.
While the resources and information sharing are vital to my firm’s growth and ability to stay at the leading edge of our industry, M’s proprietary products are perhaps the most visible and compelling point of differentiation. M Financial’s Partner Carriers, including Pacific Life, John Hancock, Prudential, TIAA, Symetra and Nationwide, offer insurance policies that are available only to M Member Firms and our clients. These products, developed jointly with M’s reinsurance company, are priced using our clients’ actuarial experience, resulting in lower costs and better features than most products that are available outside of M Financial. Because we are an independent firm, we also regularly sell non-proprietary policies from M carriers and non-M carriers in order to best meet our clients’ needs in every situation, but our membership brings us unmatched product choices and resources.
What would you say are the specific challenges of assisting clients with life insurance in estate planning and wealth management situations? What are the different challenges you face with your domestic clients vs. your international clients when it comes to estate planning?
Despite the proliferation of wealth managers and financial advisors, there is a profound lack of understanding of life insurance among consumers and financial advisors. A significant portion of US families do not own life insurance, or they are inadequately covered. Some of this can be blamed on the insurance industry itself, which has relied largely on an outmoded distribution system, as well as opaque and confusing products.
Among affluent and super-affluent consumers, this lack of understanding persists. It is often too easy for advisors to dismiss life insurance by telling their clients that they “don’t need it,” which is of course, true. However, those same clients probably don’t need ETF’s, hedge funds, laddered bond portfolios, GRATs, family LLCs, or a variety of other strategies, but their clients often use many of these financial and legal tools in helping them obtain objectives. I disabuse people of the notion that they can’t benefit by using life insurance simply because they don’t have an income replacement need. If a patriarch dies without life insurance or other effective estate planning strategies, resulting in a loss of 50% of the family’s assets, it’s easy to see how even a simple life insurance plan might have provided an effective solution.
Educating clients and advisors on the financial and tax benefits of utilizing life insurance in estate planning is not a challenge with a willing audience, but other challenges may affect any individual, including health issues. Not everyone is insurable, but many people are surprised to learn that we can obtain competitively priced policies for many people who have experienced serious health problems in the past. A high percentage of our clients are in their 60s, 70s and even 80s, so most of our clients have some health issues to be underwritten. Survivorship life insurance, which is issued on two lives, pays a death benefit at the death of the surviving insured (typically a spouse). In many cases, survivorship policies issued with one uninsurable spouse have significantly lower premiums than single life coverage on the healthy spouse.
Occasionally, we face challenges involving limitations or restrictions for foreign nationals who wish to purchase US life insurance products. Fortunately, M Financial has built a very effective resource in this area, assisting us in providing US domestic policies, international corporate benefits, Bermuda-based products and offshore private placement life insurance products when appropriate. It is easier than ever to work with tax experts in various jurisdictions, reaching and assisting clients who might have been outside our range just a handful of years ago.
With more foreign nationals owning real estate and other US assets, the demand for life insurance for these individuals has grown significantly. The ownership of US assets often creates an estate tax liability that life insurance can meet, and the attractiveness of financial assets is enhanced by the fact that these may be protected in the event of political turmoil in their homelands. The US life insurance market has lower cost products and much more capacity than most of the other insurance markets in the world. We work with international tax experts in various jurisdictions to design plans that meet foreign individuals’ needs while avoiding unfavourable tax implications.
Can you comment on the current tax environment in the US? What is your position on the recent tax legislation and the uncertainty relative to the estate tax?
The current tax environment in the US provides us with challenges and opportunities. The Trump administration and the Republican Congress have proposed repeal of the Federal estate tax, as well as reductions in marginal income tax and capital gains tax rates. For the life insurance industry, which sells products offering tax deferral and tax-free benefits, this could obviously lead to reduced sales. Just the talk of estate tax repeal initially caused many families and advisors to halt estate planning while proposals were being developed.
We have already seen many of those clients resume their planning, as tax reform proposals have been met with opposition and the reality of budgetary concerns, government deficits and ballooning debt have crept back into public consciousness. Experienced advisors have lived through past estate tax repeal, and many have counselled their clients about the fickle nature of repeal, especially in light of our fiscal reality. Estate planning is by nature long-term, and plans must be able to weather political changes. Most advisors with whom I speak don’t believe that the estate tax will be repealed, and even if it is, they believe the tax will be reinstituted or replaced in the long run, perhaps with higher rates. This Administration and this Congress have thus far been unable to accomplish much of their agenda, reducing the confidence of those who would like to see some of these taxes reduced or eliminated.
The current tax system has created an opportunity for affluent individuals to enhance their after-tax investment returns using life insurance, and this opportunity even exists for super-affluent clients who invest in hedge funds. Private Placement Life Insurance (PPLI) and Private Placement Variable Annuities (PPVA) allow accredited investors and qualified purchasers to invest in non-registered investment funds (i.e. hedge funds) within a flexible, ultra-low-cost insurance vehicle. While these products, particularly PPLI, can be used in estate planning situations, they are often based on investment decisions, focusing on current taxation. The simple math behind their appeal is that the insurance policy fees are much less than the taxes that are saved or deferred.
What are some of the most common mistakes, in relation to life insurance, that can be detrimental to beneficiaries?
Many of the most common mistakes that we see are related to products purchased many years ago, sometimes without proper disclosure and usually without adequate administration and review. Of course situations exist in which clients’ families wish they had more coverage, and sometimes the policy ownership creates adverse tax implications, but affluent families often have sophisticated advisors to help them avoid these pitfalls.
Older policies often have performed worse than originally projected, due to the declining interest rate environment, poor (or absent) asset allocation decisions and market performance, or changes made by the insurance company. Policies that haven’t been regularly reviewed can be in danger of policy lapse, often with little notice. For an older client, if a policy is in danger of lapse, due to reduced dividends or credited interest, the cost required to maintain coverage may already be too great to bear. If an insurance policy lapses with a loan outstanding, the loaned amount is often taxable as ordinary income. We were able to recently replace policies carrying ballooning loans with new, efficient policies, allowing the clients to repay the loans using policy values and eliminating the risk of potential income tax liabilities of several million dollars per policy.
There are a variety of issues and problems that we find in policy reviews for new clients. Many families are surprised to learn that older policies no longer maintain the expected guarantees if premium payments were not made as planned. Older policies typically matured at age 100, since few people lived that long. As a result, many older universal life policies have little or no benefit once a client reaches that age, but we can often fix this problem if it is identified before a person gets too close to 100.
We occasionally encounter sad situations in which a client agreed to a premium plan designed to increase over time, perhaps with questionable original assumptions. When a client could have easily afforded somewhat higher premiums at younger ages, some unsuspecting families have learned that the higher premiums required to maintain coverage in that insured’s 80s or 90s are simply too much to bear, making the complete (and significant) investment in life insurance a total loss.
Policies that were funded with third party loans or with a “Split-Dollar” structure often face difficulty if there was no adequate exit strategy. These plans, if left unmanaged, can sometimes result in losses and significant tax liabilities. In some cases, the brokers who sold these complex and risky plans haven’t provided service to their clients for years.
What are the particular challenges that insurers in the US have been facing over the past year in relation to changes in what customers expect in terms of products and services?
The continued low interest rate environment has created a challenging environment for the US life insurance industry for many years. Some companies are burdened by minimum guaranteed rates in old insurance products that exceed the current market rates, while all companies have seen their profit margins negatively impacted by lower rates. This, along with increased reserve requirements, has forced many insurance companies to stop offering guaranteed universal life policies, which were the most popular products for estate planning in the past. All of the companies who continue to offer that product have dramatically increased premiums for new policies to reflect their own increased costs. The duration of the fixed income securities in insurance companies’ portfolios will cause carriers to continue to experience downward rate pressure for the foreseeable future, even if rates rise modestly. As one might expect, this challenge has spurred product innovation, such as the development of Indexed Universal Life, which links policy performance to market indices such as the S&P 500 or the Hang Seng.
US insurers also face challenges with distribution, in part due to the decline of the agency model, which provided the bulk of training to new agents over the years. Less young people have been entering the industry. At the same time, consumers desire the ability to research products on their own or with a roboadvisor, with less sales pressure than a stereotypical insurance agent might provide. The complexity of insurance products and the burdensome application process have hindered many consumers’ ability to effectively navigate this without an advocate.
Fortunately, many technological advances are making it possible to obtain life insurance quickly and easily, sometimes in as little as 30 minutes. More advances are forthcoming, and this will change how typical Americans buy insurance. Affluent clients continue to need personalized advice and implementation experience, but IT advances will continue to make the process more convenient.
Can you tell us about your involvement in the community and its impact?
With school-age children, a lot of my community involvement has involved coaching youth sports, so I’d like to believe that I’ve had a positive impact on kids. I’ve also been involved with The Boston Foundation and the University of Rhode Island, in support of disadvantaged families and public education. I’m active in the Association for Advanced Life Underwriting, which is a great organization, dedicated to preserving the ability of our industry to help families provide and protect their financial security.
