Insurance – Pre-replacements Information
(Pre-replacements Work Group)

White Paper

August 2006

Final

This White Paper was created with the help of the following Pre-replacement work group firms who graciously gave of their time and professional expertise to participate and collectively work to document this process. Special thanks are given to:

  • AG Edwards
  • Allstate
  • Blue Frog Solutions
  • Edward Jones
  • Finetre Corporation
  • Merrill Lynch
  • Merrill Lynch Insurance Group
  • Pacific Life
  • Riversource

Table of Contents

Executive Summary

Goal of the IPS Initiative

Current Process/Environment

Current Process Work Flow Diagrams

Options for Consideration

Recommendation

Recommended Process Work Flow Diagram

Key Assumptions for Recommended Process

Next Steps

Glossary of Terms

Transfer Transactions and Pre-Replacement Information

Executive Summary

When a registered representative works with a client on a potential transfer from one annuity contract to another, certain key information with regard to the existing contract (referred to here as pre-replacement information) must be obtained from the ceding carrier. This pre-replacement information is used to determine the suitability of the transfer. In many cases, this information is obtained verbally as described below. In addition, most distributors do not have a process in place to verify the accuracy of the information. This creates the potential for a transfer to be reviewed and approved by a registered principal, based on inaccurate information.

The pre-replacement information required by most distributors includes the following:

  1. Current contract value
  2. Current death benefit amount
  3. Type of death benefit and associated fee
  4. Surrender penalty amount or percentage
  5. Surrender penalty schedule/end date
  6. Optional features/riders and associated fees
  7. Mortality & Expense fee
  8. Admin fee

This White Paper will begin to identify a concept for automating and standardizing the pre-replacement information process between distributors and carriers.

Goal of the IPS Initiative

Bring efficiencies through automation during the accumulation of pre-replacement information between the distributor and carrier. IPS will provide an environment for the distributor and carrier to electronically communicate information through message standardization.

Current Process/Environment

The current process distributors use to obtain pre-replacement information for a policy owner’s annuity contract is typically a verbal process. However, it can also include written communication between the distributor’s registered representative and the potential ceding carrier. Typically the distributor’s registered representative is in contact (in-person or via telephone) with the policy owner to discuss the policy owner’s current annuity holdings. In order to determine if a transfer to a new annuity product might be appropriate, the registered rep must obtain the pre-replacement information. The policy owner may have the actual annuity contract, which contains most of the information needed. Unfortunately, in many cases the existing contract has been lost. Even if the contract is provided to the registered rep, it does not include such information as the current death benefit amount and the surrender value (because, in most variable annuities, each premium payment is subject to it’s own surrender penalty schedule). Policy owners typically have a statement from the insurance company, but the statement does not usually contain much of the information needed. Consequently, the information on the old contract is usually obtained over the phone from the ceding carrier.

The process to obtain the pre-replacement information depends on whether the distributor is the dealer of record on the contract. If the distributor is the dealer of record, the registered rep can call the ceding carrier to obtain the pre-replacement information verbally. As agent of record, the rep is entitled to the information. In addition, most of the pre-replacement information can be provided to the distributors as optional data in the POV records sent by the carriers. Unfortunately, many carriers do not provide all of the optional data. Even if the optional information is included in the POV records, many distributors do not currently have a way to provide it to their reps (e.g. some distributors and service providers do not support the service features data in POV).

If the distributor is not the dealer of record, the rep must call the ceding carrier with the client on the line, so the client can verbally authorize the carrier to release the information to the rep. In some cases, the ceding carrier requires written authorization, signed by the policy owner. The ceding carrier cannot release confidential information with regard to the policy owner’s annuity contract, without authorization from the policy owner. In addition, distributors do not receive POV records unless the distributor is the dealer of record.

Upon receipt of the pre-replacement information, the registered representative must determine if a transfer to another annuity product is suitable and appropriate. If the rep considers the proposed transfer to be suitable, he or she typically completes a suitability form (or enters the information in a front-end system that produces the suitability form). Most distributor suitability forms include a side-by-side comparison of the existing and proposed contracts, using the pre-replacement information.

The proposed transfer (suitability form, application, transfer letter, etc, or an electronic version of these documents, if a front-end system is used) is usually then reviewed by a registered principal (branch manager or central supervision unit). In some cases, depending on the details of the situation, an additional level of review and approval is performed. These reviews rely, in part, on the pre-replacement information provided by the registered rep. Consequently, it is absolutely critical that this information is accurate. If approved, the transaction is processed and completed.

Current Process Work Flow Diagrams

The following diagrams represent the current process for two distributors:


Pre-replacements white paper final (082906).doc1

Options for Consideration

The work group considered the following alternatives for the collection of pre-replacement information by distributors. Each option was reviewed for its potential benefit and associated cost, risk or other issue.

The options reviewed were:

  1. Keep the current manual process between the distributor and potential ceding carrier, as documented and defined in the section above.
  • Benefits
  • No development costs
  • No change to operational processes
  • Costs/Issues
  1. Risk of approving and processing transfer transactions, based on inaccurate information.
  2. The current process is manual and time consuming, resulting in added operational expenses.
  3. Process not evolving to promote straight through processing (STP).
  1. Require IPS member carriers to include the pre-replacement information identified above in the IPS Positions and Valuations (POV) records they provide. This data would become mandatory.
  • Benefits
  • POV process is recognized and documented
  • Most pre-replacement required information is already defined in the POV record as optional fields
  • Costs/Issues
  1. Distributors would not receive the information for contracts for which they are not the dealer of record. Completing a dealer of record change prior to initiating a transfer is not usually practical, due to the time it takes to accomplish.
  2. Would require processing changes by many carriers to report the information.
  3. May require service providers to make processing changes to report the information received from the carriers to their distributor clients.
  4. Many distributors still receive only weekly POV files. As a result, the information would not be completely up to date.
  1. Develop an automated request/response process for the distributor to request, and the ceding carrier to provide, the pre-replacement information.
  • Benefits
  • An automated process would ensure the accuracy of the information that will be used to determine suitability. Reduced risk of approving and processing transfer transactions, based on inaccurate information.
  • An automated system would be more efficient than the current, manual process.
  • Distributors could potentially receive this critical information, even if not the dealer of record (if the proper authorization is in place - see discussion of confidentiality and privacy below).
  • Distributor could potentially use the pre-replacement information to electronically feed their “front-end’ systems for pre-population of transfer applications and suitability forms.
  • Costs/Issues
  1. New development costs for distributors, carriers and service providers
  2. Will require carriers to respond to distributor requests in real time or near real time. This could be a technology issue for some carriers.
  3. There are privacy/confidentiality concerns when the distributor is not the dealer of record. Policy owner authorization would have to be obtained and somehow communicated or provided to the ceding carrier.
  1. Utilize the carrier websites to access pre-replacement information.
  • Benefits
  • Distributors of record would receive accurate pre-replacement information directly from the ceding carrier on a timely basis.
  • Costs/Issues
  1. Distributor must be the dealer of record to receive access to contract information on the carrier websites.
  2. Some carrier web sites do not include all of the required information.
  1. Expand Carrier Quarterly Statements
  • Benefits
  • Carriers already provide policy owners with regular statements
  • Policy owners usually have a statement from the potential ceding carrier
  • Cost/Issues
  1. Development change to carriers for supporting distributor requirement would be extensive and costly. The carriers represented in the work group felt the cost would be prohibitive.
  2. The information on the statement could be several months old.

Recommendation

The work group recommends that DTCC develop an “Automated Position Inquiry Service.” Such a system would provide a real time (or near real time) request/response process for distributors to request, and the ceding carrier to provide, the pre-replacement information. This could be done as an enhancement to the Replacements system currently being developed by DTCC. Before such a system could be developed, two primary issues would have to be addressed – privacy/confidentiality and technology issues.

Privacy and confidentiality – If the distributor is not the dealer of record, the policy owner would have to provide authorization to the ceding carrier, before the carrier could release the pre-replacement information to the distributor’s registered rep. For this process, we envision something similar to the way ACATS/IPS[1] handles client authorization. A selling agreement addendum could be drafted that would allow the distributor to obtain the written authorization from the policy owner. As a part of the request for pre-replacement information, the distributor could include an indicator that the authorization has been obtained.

Technology – Some carriers might not currently have the ability to provide a response in real time, without incurring a substantial development cost. While it would be ideal for the distributors to receive an immediate (synchronous) response, a near real time (asynchronous) response (e.g. within 5 minutes) may be sufficient. A response time service level agreement would have to be worked out among the distributors and carriers. We suggest the use of XML technology and ACORD standard messages.

At a high level, the following steps describe how such a request/response system could work:

  1. If the distributor is not the dealer of record, the registered rep obtains written authorization from the policy owner. The distributor keeps the signed authorization on file.
  2. The registered rep accesses a front-end system and enters the carrier, the contract number and policy owner’s social security number(s).
  3. An automated request message is sent to DTCC. The request includes the contract number, ceding carrier DTCC participant number, distributor participant number, policy owner’s SSN(s) and an indicator that written authorization is on file (if not the dealer of record).
  4. DTCC routes the request to the ceding carrier.
  5. The ceding carrier processes the request and sends a response through DTCC and on to the distributor.
  6. The distributor could potentially use the response to pre-populate a suitability form and application in a front-end system.

The work group recommends this approach for the following reasons:

  1. The current method for obtaining pre-replacement information is inefficient and subject to human error.
  2. Transfer transactions are subject to heightened regulatory scrutiny.
  3. The POV and carrier web site approaches address only half the problem – when the distributor is the dealer of record.
  4. The recommended alternative is a comprehensive, automated solution.

Recommended Process Work Flow Diagram

The following diagram represents the work group’s recommended process:

Key Assumptions for Recommended Process

  • Distributors and carriers will support the Selling Agreement Addendum.
  • Carriers will support and uphold the time constrain for responding to the broker/dealer inquiry.
  • Pre-replacement information will be available and accurate from the ceding carrier.
  • Distributors and carriers will support the recommended process.

Next Steps

  • User community approval and commitment, including the SIA and NAVA, to the automation and standardization of pre-replacements processing.
  • If approved, create an IPS work group to define detailed requirement for process.
  • Analyze anticipated weekly/monthly volume for pre-replacements automation
  • Finalize the role of IPS in the automation and standardization of the pre- replacements processing.
  • Gain legal and compliance approval of automated process, as defined in this document.
  • Amend IPS rules (if needed).
  • Ascertain ACORD position.
  • Review of ACORD messages for compatibility.
  • Document IPS implementation under separate cover document.

Glossary of Terms

  • Asynchronous - A type of two-way communication that occurs with a time delay, allowing participants to respond within an agreed time delay period.
  • Ceding carrier – The carrier whose contract may be liquidated to fund the purchase of another annuity product.
  • Dealer of record – The distributor of record on an annuity contract. As dealer of record, the distributor is entitled to confidential contract information.
  • POV – DTCC positions and valuations record.
  • Pre-replacement information – Certain key contract information, such as the current contract value, death benefit amount and associated fee, optional riders and associated fees, surrender value, etc.
  • Straight Through Processing (STP) – electronic processing of an annuity application without manual intervention.
  • Suitability – the appropriateness of an investment for a particular client, based on product features and the client’s investment objective and financial situation.
  • Synchronous - a type of two-way communication with virtually no time delay, allowing participants to respond in real time.

Pre-replacements white paper final (082906).doc1

[1] DTCC product allowing the broker/dealer to provide insurance carriers with information regarding broker/dealer changes for insurance products. ACATS (Automated Customer Account Transfer System) automates and standardizes procedures for the transfer of assets in a customer account from one brokerage firm or bank to another. IPS (Insurance Processing Service) automates and streamlines the sale, servicing and back office processing of annuities and life insurance. Visit the IPS website for more information at: