In a unanimous decision on October 20th, New York state’s highest court recently held that the First Amendment to New York Department of Financial Services’ Insurance Regulation 187 is constitutional. Life Risk News spoke to Barry Flagg, Inventor, Founder and President of Veralytic, to learn more about the implications of the ruling on the life insurance industry.
LRN: Barry, the to-ing and fro-ing around New York state’s Reg 187 has finally come to an end. In your view, what is the immediate implication for the life insurance industry now that it has clarity going forward?
BF: Now that the to-ing and fro-ing around New York state’s Reg 187 has finally come to an end, the life insurance industry can begin the transition towards serving client’s best interests in ways more consistent with the meaning of client’s best interests for every other asset on clients’ balance sheets. The immediate implication is the industry will start learning a “new language”. I believe this difference between the “old language” and this “new language” is the reason industry participants argued that Reg 187 was “unconstitutionally vague”. If you asked me to follow instructions written in some language I don’t speak, I’d also find those instructions at least “vague”, if not down‑right impossible, for me to follow until I learned that other language. Now that we have clarity for this “new language” going forward, more and more financial services professionals will be speaking the same “language” resulting in better cooperation and coordination between insurance and investment professionals, and better integration of insurance and investment products in ways that better serve the client’s best interest.
LRN: Do you think that New York-based RIAs will now begin to incorporate life insurance into their client’s overall financial and estate plans now that there is clarity around the ‘best interest’ rule, and therefore, a fiduciary duty?
BF: Perhaps, but I also think many RIAs could still be slow to incorporate life insurance into client’s financial and estate plans for a couple reasons. First, because the “old language” for talking about insurance products didn’t even include the words essential to performing fiduciary duties, I think many RIAs will be sceptical and getting past that scepticism will take some time. Second, while the meaning of client’s best interest under Reg 187 includes important similarities to most fiduciary rules, because the duties prescribed in Reg 187 are still somewhat different than the duties prescribed under most fiduciary rules, those differences will need to be reconciled, which will also take some time. All that said, I know of forward-thinking insurance professionals who see the business opportunity in serving RIAs as their outsourced insurance desk (OID) by speaking their language. I also know The Center for Board Certified Fiduciaries is teaching a program at Wake Forest called InsuranceMetrics that reconciles these differences in these different regulatory regimes. For all these reasons, I think it’s only a matter of time until RIAs begin to incorporate life insurance into their client’s overall financial and estate planning.
LRN: What about other states? Could this act as a catalyst for other states to follow suit?
BF: I do think other states will adopt a Best Interest Rule for life insurance in some form or fashion. For instance, the NY Department of Financial Services (DFS) was first to propose a Best Interest Rule just for annuities. The National Association of Insurance Commissioners (NAIC) has now also promulgated a Best Interest Rule for annuities that includes many of the provisions of the original NY DFS annuity rule. This NAIC Best Interest Rule for annuities has now been adopted by some 30 states. NY DFS then expanded their Best Interest Rule for annuities to include life insurance. The SEC also issued Reg BI which also applies best‑interest principles to certain life insurance policies. As such, I believe it’s just a matter of time before other states adopt a Best Interest Rule for life insurance in what I call on LinkedIn the #RelentlessMarch towards #ClientsBestInterests.
LRN: In the life settlement market, many asset managers highlight how high lapse rates in policies adversely affect deal flow. Do you think that increased RIA participation in the life insurance industry will have an effect on deal flow coming to market for life settlement brokers?
BF: Absolutely, due to a couple of motivations. First, RIAs generally pride themselves on being able to advise their clients on all things financial and more in some cases. Life insurance has been the glaring exception, albeit because RIAs have not had access to the information essential to fiduciary advice. Best Interest Rules like NY Reg 187 and SEC Reg BI are rectifying that, and I expect will result in increased RIA participation in providing life insurance advice to their clients. Advising clients over time (i.e., beyond the initial placement) in response to inevitably changing needs will invariably result in more opportunities to sell client’s policies on the life settlement secondary market. Second, selling a policy on the life settlement secondary market that is or will soon otherwise become worthless increases the AUM for the RIA. As such, now that RIAs have access to information essential to fiduciary advice, many will be motivated to advise clients both about life insurance and life settlements both for the “psychic income” from being even more of an expert in serving clients’ best interests and for the additional “financial income” from more AUM, thereby increasing the deal flow coming to life settlement market.
LRN: Finally, Barry, what else is still acting as a headwind to better performing life insurance policies and what can be done about it?
BF: Life Insurance is the last, largest, most‑neglected in client’s financial and estate plans. As with anything else, neglect more often than not results in poor-performance. Life insurance is no different and as a result is arguably the worst performing asset relative to client’s expectations. I believe this poor performance and high lapse rates are due to the fact that life insurance has been almost completely left out of the wealth management process. Wealth management involves both the management of assets (i.e., investment management) and the management of liabilities (e.g., income needs beyond retirement, income taxes, estate taxes, etc.). RIAs are currently best at investment management. Insurance professionals and products are best at managing liabilities. Anything that’s catalytic to bringing these professions and professionals together (e.g., like Reg 187) will result in better overall wealth management, increased use of insurance products in clients’ financial and estate plans, increasing consideration of life settlements that benefit both the insurance professional and the RIA with more AUM, and better serve client’s best interest. Anything that maintains the status-quo is a headwind.
Barry Flagg is Inventor, Founder and President at Veralytic
