Podcast Center
Video Center
Webcasts
Resource Center
Events
November 01, 2009 at 07:00 PM
Most investment managers have a well articulated methodology for why they recommend a particular stock, bond, or fund out of the universe of offerings.
Insurance brokers, however, have traditionally not had their own formal methodology to explain their carrier selection to clients. This needs to change, and there is a way to do that.
First, here is some background that bears on this issue. The recently decided Cochran vs. Keybank case shows that irrevocable life insurance trust beneficiaries can and do question trust management of life insurance policies, and they do seek to have the trustees held accountable for the carrier and product selections the trustees make. [See In re Stuart Cochran Irrevocable Trust, 901 N.E.2d 1128 (Indiana Court of Appeals, March 2, 2009.)]
The court did rule in favor of the trustee for life policy decisions the trustee made, but the decision also signaled that the trustee had done only the bare minimum. Given current efforts in Washington to require investment brokers and broker-dealers to operate under the fiduciary standards that now apply to registered investment advisors, it may be that future courts will not be so lenient with trustees and other fiduciaries.
Meanwhile, the Uniform Prudent Investors Act or similar state legislation has been adopted in many states, with more to come. This has exponentially increased the potential for more liability on trustees and fiduciaries in the management of trust-owned life insurance.
Such activity suggests that developing a systematic approach for carrier selection is not only a sound business practice; it will also assist insurance brokers in limiting exposure to professional liability and future errors-and-omissions claims.
An immediate reaction may be to say that the broker’s practice already uses the prevailing insurance carrier ratings system as the benchmark for selecting a policy for the client. However, the existing system raises a few questions.
For instance, has the system been captured in writing and communicated with clients, trustees, and staff? 
Also, do the ratings in and of themselves provide enough information for carrier selections? This may not always be the case, and often is not, because company ratings do not necessarily take into account such factors as size, new business written, or limited/select distribution. Neither do they reflect whether the carrier is a subsidiary of a larger carrier–an important factor when the two have potentially different ratings.
Finally, Congress is currently considering whether the current model of having the insurers pay the rating services for their ratings creates a conflict of interest.
A potential outlet would be for the broker to use an independent third-party rating company. These firms operate under a user-pay model in order to avoid potential conflicts of interest.
