Thursday, May 10. 2012
The inspiration for today's blog post are recent conversations I've been having with Barry Flagg, founder of Veralytic, a company that crafts analytics tools and reports on life insurance policies. In a world of opacity where it's often hard to tell what's really going on "under the cover" and what's buried in the details of a policy illustration, Veralytic is crafting the equivalent analytical tools for life insurance that Morningstar created for investments.
For instance, below is a snapshot of Veralytic's summary page for a sample VUL (variable universal life) policy. It contains some "familiar" metrics to those accustomized to Morningstar, including a lattice of policy pricing "style boxes" (from retail to experienced-rated on one axis, and maximum accumulation to minimum premium on the other). It offers a star rating system, where policies are ranked with 0, 1/2, or 1 stars in each of 5 categories: financial strength & claims-paying ability; cost competitiveness; pricing stability; relative policy value; and historical performance (adding up a 0-1 star rating in each category yields a cumulative policy rating between 0 and 5 stars). Expenses in the policy, from cost-of-insurance charges (COIs), to fixed administration fees (FAEs), to premium loads are benchmarked against industry averages for institutional and retail pricing, along with the premium amounts, and the fund offerings and expenses (for a variable policy, and the historical performance of invested assets underlying policy cash values for fixed-type universal life and whole life policies).
You can see a full Veralytic sample report here; the first few pages provide an executive summary of the policy, the report analysis, and an illustration of hypothetical policy values that generally includes what the insurer is representing they will charge, while the remaining 2/3rds of the report provides detailed explanation of the tools and analytics.
Unfortunately, though, given the inconsistencies of how policies are illustrated by various insurance companies, and the fact that pricing for policies changes over time (so an old policy may have different pricing than the ones currently being offered), the Veralytic analytical tools must be done on a policy-by-policy basis, using the actual illustrations and/or in-force ledgers provided by the insurance company. As a result, unlike researching mutual funds in Morningstar - where a particular fund can simply be looked up and evaluated for its metrics - you can only get a report on a policy from Veralytic by submitting the policy illustration to them and letting them put it through their system to "x-ray" what's going on inside (which is also how they've built up their database of industry information over time).
The New Baseline For Planner Due Diligence?
Historically, planners reviewing a client's life insurance policy had few options to rely upon. The insurer's financial ratings could be assessed to determine whether the company itself was at risk for not being able to pay on its obligations. The health of the policy could be assessed by requesting an illustration of the proposed policy or an in-force ledger for an existing one, but it was almost impossible for the planner to tell from the projection alone whether the policy's projections were competitive against a peer-group, or even realistic at all. Was the company projecting using current cost-of-insurance charges that were likely to be sustained, or ones that were almost certain to rise in the future and cause the policy to underperform the projection? Were the policy's underlying costs even competitive in the first place? With permanent policies in particular, where there are so many moving parts, it is so difficult to make an apples-to-apples comparison between to policies to assess which was cheaper in the first place, that FINRA actually has rules that “strictly prohibit” such comparisons involving variable universal life policies (under FINRA Rule 2210) and the Society of Actuaries - the chief actuarial body of the life insurance industry - has similarly published guidance (1991-92 SOA Final Report of the Task Force for Research on Life Insurance Sales Illustrations) indicating somewhat shockingly that illustrations "used to compare one policy to another are an improper use of the policy illustration!"
On the other hand, Veralytic's tools x-ray straight through the opacity of the standard illustration, and provide a deeper look at what's really going on with the cost competitiveness of the policy and the feasibility of its projections, benchmarked against Veralytic's own increasingly comprehensive database of policies from various companies and the industry at large. For the first time, the planner actually has a tool to analyze a client's existing policy and determine "yes, this policy really is healthy and competitively priced" or alternatively to find "no, this policy has a lot of high costs embedded in the projections and its cash valued are unlikely to be sustained; it's time to look at alternatives." Arguably, the tool is even more powerful to assess a proposed new policy the client may be considering, to determine whether better alternatives exist from the start. Veralytic reports have also been reviewed by FINRA and can thus be used with all types of permanent life insurance products.
Long-Term Implications of Veralytic's Growth
However, the most significant implications of Veralytic as it grows are not just how it alters the financial planner due diligence process for life insurance, but its potential to revolutionize the life insurance industry itself. As Veralytic's tools shine a clear light of transparency on previously opaque illustrations, insurance companies that offered non-competitive and high-cost products obfuscated by projections using favorable, unrealistic, and unsustainable "current" rates, will find reduced sales for their products. On the other hand, companies that have tried to price fairly and in their policyowners' interests - that previously struggled to compete against other companies using unrealistic and unsustainable projections - will find their market share rise as Veralytic's transparency reveals what are truly the most favorably priced and realistically sustainable policies.
The challenge in the near term, though, is that Veralytic can only become an industry standard if it gets used enough to become an industry standard. Sadly, but perhaps not surprisingly, insurance companies are not yet electronically feeding pricing and performance data into the Veralytic database, forcing Veralytic to load the insurers’ pricing and performance representations from the client illustration or in-force ledger one at a time. Which means the only way they accumulate data and grow is to have more people submitting illustrations and using the Veralytic analytical tools. In the long run, as Veralytic's process and tools grow, and insurance companies should eventually feel the pressure to work with Veralytic more directly, which will likely bring Veralytic's costs down and make their tools even more accessible to planners and clients.
Using Veralytic In Your Practice
A standalone report can be purchased from Veralytic for $500. Firms that expect they might use the software for multiple reports (potentially across the clients of multiple planners in the office) can purchase a subscription for $199/month, which provides access to an unlimited number of reports; if you're not happy with the reports and results after getting up to 3 reports in the first 90 days, Veralytic will fully refund your purchase.
Once subscribed, you can obtain a report for a particular policy by submitting an illustration, including the detailed expense pages and the dividend interest crediting rate information (which can be requested from the insurance company). Although the process and results are not instantaneous, because illustrations need to be loaded into the Veralytic database one at a time, Veralytic generally provides a turnaround in just a few hours (and has a published service standard of no longer than two business days), allowing ample time for results to be incorporated into a financial plan or to adjust a client's life insurance implementation plans.
Tracked: May 30, 02:49
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two articles about the ongoing debate in Washington on the Investment Advisor Oversight Act of 2012 (the so-called "Bachus SRO
Tracked: Jun 01, 17:14
I wouldn't pay for it though. Out of my price range. As a fee-only planner, I can tap a few different brokerages to help me with policy reviews.
I might be attracted to send more business to whichever brokerage provided that comparison to benchmarks.
Frankly though, regarding due diligence, I don't know if this type report satisfies responsibility significantly better than what's available now via the current process of policy reviews and getting preliminary comparison quotes. Do you think it's a big difference?
There's nothing about quotes from a company that tell you whether the policy has a 10% chance of coming true or a 50% chance of coming true. The company could be building on unrealistic expectations regarding flexible pricing (in UL policies), unrealistic dividend scales (in participating whole life), etc., and there's virtually no way to intuitively see it from the quotes themselves.
In point of fact, one of the most common current uses of Veralytic reports is for trustee fiduciaries and attorneys specifically to demonstrate that they did appropriate due diligence on a policy.
They don't charge for this service as they anticipate that by doing a good, thorough job, business from the planner will come their way.
Indeed, many third-party analyst companies that do these reviews use Veralytic themselves.
The caveat, for better or for worse, is that many planners (and/or clients) don't feel comfortable getting a 2nd opinion from a provider that makes money by finding a 'problem' to fix and/or a policy to replace.
I have absolutely nothing bad to say about Low Load Insurance in this regard. But it is a concern for many, and the only other alternative is a third-party solution that doesn't have a financial incentive to make one recommendation over another.
The short answer YES because I am prohibited by both the subscription license agreement and system operation from receiving ANY compensation on the sale of a life insurance products related to Veralytic reports for subscribers. This is an essential requirement of our fiduciary and institutional customers. In other words, the ONLY revenue either Veralytic or I receive from the use of Veralytic Reports by anyone other than me are the subscription and/or report fees from Veralytic customers. So as Michael points out, there is NO financial incentive to rate a policy one way or the other.
I am also often asked why I don’t keep Veralytic to myself and just use to sell life insurance? Because I started my career as a CFP® in the investment business and learned early on the usefulness of being able to look up pricing and performance for investments from research publishers like Morningstar, Lipper, ValueLine, etc. This was in stark contrast to the type of comparisons of illustrated HYPOTHETICAL policy values discussed in Michael’s blog here that are “strictly prohibited” by the chief regulatory body of the financial services industry because they can be “misleading” and are cautioned against by the chief actuarial body of the life insurance industry as “improper”.
From this combined investment and life insurance industry experience, I knew being able to look up pricing and performance of life insurance products relative to the universe of all peer-group products could be useful both A) to advisors who need to go beyond what may be marginally better than what a client already had to instead knowing which product(s) actually serve the client’s best interest, and B) to brokers who can now look up product suitability/competitiveness for any permanent life insurance product far faster and more cost-effectively than by the old way of running and comparing by hand some limited number of products.
I invented Veralytic to address the problems I experienced as a practitioner with comparing illustrations of HYPOTHETICAL values that can be “misleading” and “improper”, and pull reports from the database for MY clients just like everyone else. Ultimately, each prospective user must come to their own conclusion about the objectivity of Veralytic research, but our subscribers know Veralytic is objective for similar reasons that other research publishers are objective, namely: 1) because results are entirely database driven from rules fully-disclosed in both the User Guide available with each Veralytic report and in our various patents, and 2) because Veralytic research is NOT a “loss leader” provided free of charge in the hopes of selling a life insurance product in the end.
Steve, I recall talking on occasion over the years but don’t see that you have ever run a Veralytic research report. If you wanted to give Veralytic a try now and comment here about Veralytic objectivity, I would be happy to provide you with a complementary Veralytic report. Either way, thanks again for your comment/question and I welcome talking again soon.
It's the same service - TheInsuranceAdvisor has renamed itself Veralytic.