Management Requirements According to the OCC Unique and … · 2016-01-06 · 12/2/2014 1 Life Insurance Management Requirements According to the OCC Unique & Hard-to-Value Assets

This course qualifies

for Continuing

Education for both

CFP® and CTFA

designations. See the

last page of this

handbook for a CE

Credit Application.

Life Insurance

Management Requirements

According to the OCC

Unique and Hard to Value

Assets Handbook

Barry D. Flagg, CFP®, CLU, ChFC

December 2, 2014

The Institute of Certified Bankers (ICB), a subsidiary of the American Bankers Association, is dedicated to promoting the highest standards of performance and ethics within the financial services industry. This statement should not be viewed as an endorsement of this program or its provider.

The Educational Series

Insurance Trust Monitor, Inc. 809 W. 1st Street, Suite B Cedar Falls | IA | 50613

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Life Insurance Management Requirements According to the OCC Unique & Hard-to-Value Assets HandbookBarry D. Flagg, CFP®, CLU, ChFC, GFS®

December 2, 2014

Please Note: Handbooks have been provided for this session. They can be obtained at the ITM website www.youritm.com

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//Visit Veralytic at http://www.veralytic.com

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• Review specific guidance in the August 2012 Comptroller’s Handbook for Unique and Hard to Value Assets (i.e., What to do.)

• Review new Best Practices for life insurance

Today’s Agenda

and relevant guidance from other authorities (i.e., How to do it.)

• Determine actions you may/may not have/wantto take to follow the “new” rules

The OCC Handbook …

…provides guidance for examining these types of discretionary assets held in fiduciary accounts in asset management areas of national banks and federal savings associations…provides bank examiners with expanded examination procedures…

Many states have recently passed legislation to limit the liability of bank fiduciaries, in certain situations, by rescinding requirements under state law to perform due diligence on insurance companies as a directed bank fiduciary The OCC however continues to


bank fiduciary. The OCC, however, continues to require bank fiduciaries to follow 12 CFR 9.6(c) and 12 CFR 150.220 and to conduct annual investment reviews of all assets of each fiduciary account for which the bank has investment discretion.

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12 CFR 9.6(c)

§ 9.6 Review of fiduciary accounts.(c) Annual review. At least once during every calendar year, a bank shall conduct a review of all assets of each fiduciary account for which the bank has investment discretion towhich the bank has investment discretion to evaluate whether they are appropriate, individually and collectively, for the account.

§ 150.220

At least once every calendar year, you must conduct a review of all assets of each fiduciary account for which you have investment discretion. In this review, you must evaluate whether the assets are appropriate individuallyassets are appropriate, individually and collectively, for the account.

Appropriate

Suitable for a particular person, condition, occasion, or place; fittingor place; fitting.

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A bank fiduciary must understand each life insurance policy that the trust accepts or purchases

Appropriate

Duty to Monitor. Subsections (a) through (d) apply both to investing and managing trust assets “Managing”

Uniform Prudent Investor Act


both to investing and managing trust assets. “Managing” embraces monitoring, that is, the trustee’s continuing responsibility for oversight of the suitability of investments already made as well as the trustee’s decisions respecting new investments.

D i i S b i (d) i f d h



Duty to investigate. Subsection (d) carries forward the traditional responsibility of the fiduciary investor to examine information likely to bear importantly on the value or the security of an investment.

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SECTION 7. INVESTMENT COSTS: “a trustee may only incur costs that are appropriate



y y pp pand reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.”

SECTION 2. RISK AND RETURN OBJECTIVES: “a trustee shall [have] an overall



OBJECTIVES: a trustee shall [have] an overall investment strategy [with] risk and return objectives reasonably suited to the trust” and “consider … the expected total return.”

A bank fiduciary must understand each life insurance policy that the trust accepts or purchases, or the bank fiduciary must employ an advisor who is qualified, independent, objective, and not affiliated with an insurance company

Appropriate

affiliated with an insurance company to prudently manage these assets.

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A bank fiduciary with discretion over the account must complete formal pre‐acceptance, initial post‐acceptance and annual reviews of the insurance policy.


A bank fiduciary needs to have well‐developed risk management practices to evaluate and administer accounts with insurance policy holdings … that address the following.


• Sufficiency of premiums

Best Practices Side Bar in Handbook• Obtain original illustration• Periodically obtain an in‐force illustration• Monitor the effectiveness of the policy to date and project how the policy may perform in the future and plan for any potential shortfall in premiums.



• Sufficiency of premiums

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• Sufficiency of premiums Reasonableness of the illustrated rate?

i.e., UPIA Section 2(c)(5) Impact of volatility on the actual rate?

e.g., Monte Carlo Life Expectancy?



• Sufficiency of premiums• Suitability of the insurance policy



• Sufficiency of premiums• Suitability of the insurance policy

OCC Handbook:“This policy illustration is subject to a high degree of fluctuation.”

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• Sufficiency of premiums• Suitability of the insurance policyFINAL REPORT OF THE TASK FORCE FOR RESEARCH ON LIFE INSURANCE SALES ILLUSTRATIONS: “Illustrations should not be used for comparative policy performance purposes” because doing so “is fundamentally inappropriate.”



• Sufficiency of premiums• Suitability of the insurance policyFINRA Rule 2210: “It is inappropriate to compare a … life insurance policy with another product based on hypothetical performance…” because such comparisons can be “misleading” and are “strictly prohibited.”



• Sufficiency of premiums• Suitability of the insurance policy Costs Pricing Stability (e.g., Guarantees) Premium Flexibility Investment Risk/Return Product Type

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Premium Loads

Surrender Charges

Cost of Insurance (COIs)

• Sufficiency of premiums• Suitability of the insurance policy Costs Product Type Pricing Stability (e.g., Guarantees) Premium Flexibility Investment Risk

Fixed Admin Expenses(FAEs)

Cash‐Value‐Based “Wrap Fees” (e.g., VUL M&Es)



40%40%40%40%

Worst-Available Rates & Terms

Best-Available Rates & Terms

WART

BART

Inforce Policy or Recommended

Product

• Sufficiency of premiums• Suitability of the insurance policy Costs Product Type Pricing Stability (e.g., Guarantees) Premium Flexibility Investment Risk



• Sufficiency of premiums• Suitability of the insurance policy• Carrier selection

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Hint: R.A.T.E

R - Risk Tolerances of ClientA - Assets & Asset Class Preferences

• Sufficiency of premiums• Suitability of the insurance policy• Carrier selection• Appropriateness of investment strategy

A - Assets & Asset Class PreferencesT - Time HorizonsE - Expected Outcomes

So What Should You Do?

1. Develop a “risk management system”2. “Understand each life insurance policy….or….employ an

advisor who is qualified, independent, objective, and not affiliated with an insurance company…”

3. Complete preacceptance, post‐acceptance and annual p p p , p previews + 4 considerations specific to life insurance

4. Determine “whether the policy is performing as illustrated or whether replacement should be considered”

5. Manage the policy for the “benefit of the beneficiary”

Best Practice Standards for Life Insurance Stewardship (West Point Draft)

Trusts & Estates:A Shot Across The Bow

Take Aways

S ot c oss e o

3 Questions to Ask about EVERY Policy Review

Complementary Veralytic Report (For ITM Customers)

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Veralytic is an independent life insurance research company based in Tampa, Florida. Veralytic provides objective, innovative research solutions to help reduce costs and risk, improve consistency, and document due diligence processes against possible lawsuits and regulatory requirements. Our research reports are based upon a patented "five star" rating system that benchmark suitability against an ever growing database. Veralytic has been endorsed by the New York Bankers Association (NYBA) accepted by the Financial Planning

About Veralytic

the New York Bankers Association (NYBA), accepted by the Financial Planning Association (FPA), reviewed by the chief regulatory body of the financial services industry, and trusted by financial advisors, brokers, and fiduciaries across the United States.

For more information: Barry D. Flagg, CFP®, CLU, ChFC, GFS™[email protected]

Questions?

Please remember to fill out the Continuing Education

Credit Certificate Form at back of Handbook

Insurance Trust Monitor, Inc. (“ITM”) does not sell life insurance or provide investment or life insurance advice to grantors oradvisors. All investment and insurance decisions are made by the trustee who is the owner of the policy. This presentation is for the use of Agents/Advisors and not for the public use. The information provided herein is for informational purposes only and is notintended to be legal advice.

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Management Requirements According to the OCC Unique and … · 2016-01-06 · 12/2/2014 1 Life Insurance Management Requirements According to the OCC Unique & Hard-to-Value Assets

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