Life insurance due diligence has gone into a ditch. Let’s put it on a road that can lead somewhere.

What would you like to see in these areas?
  • Due diligence checklists
  • Due diligence education
  • Analytical tools
  • Short instructional videos
  • Ideas for academic research
  • Information about curated product platforms
  • Other things

Use the form at the bottom to share your thoughts.

News

  • The Future of Life Insurance by Glenn S. Daily
  • Webinar: Glenn S. Daily, “Advanced Life Insurance Due Diligence: Reimagining the Process”, Advisors4Advisors.com, February 28, 2024
  • Presentation: Glenn S. Daily, “The Future of Life Insurance”, AICPA & CIMA Engage, Las Vegas, June 3, 2024

What is due diligence?

Answer from ChatGPT:
In its most basic sense, due diligence refers to the research, investigation, or audit of a potential investment, business, or individual, to confirm facts and details that could affect the decision-making process. It’s a precautionary measure intended to minimize risk. The depth and breadth of due diligence can vary significantly based on context, sector, or the specifics of the transaction.

In the legal sphere, due diligence refers to the duty a party has to take appropriate steps to protect legal rights and meet legal responsibilities, often related to business transactions. The exact nature of these duties varies, but they’re typically determined through the legal principle of ‘reasonable person’. In other words, they represent what a hypothetical ‘reasonable person’ would do under similar circumstances.

In business, finance, and especially in mergers and acquisitions (M&A), due diligence refers to the comprehensive appraisal of a business undertaken by a prospective buyer. It’s a core part of any significant business transaction. A prospective buyer, with the assistance of their financial advisors, will conduct an exhaustive review of the business’s assets, liabilities, cash flows, operations, sales, and more. The process can involve financial, operational, and legal due diligence.

In the real estate sector, due diligence involves an extensive appraisal of a property before its acquisition. This may include confirming the legal status of the property, verifying all permits and licenses, inspecting the condition of the property, and reviewing any potential liabilities, like environmental hazards or encumbrances.

When considering investments, such as in stocks, bonds, or alternative investments, due diligence refers to the investigation a potential investor performs prior to buying the asset. This research might involve evaluating the financial performance of a company, its position in the market, the quality of its management, and its competitors, among other factors.

Businesses often conduct due diligence when selecting vendors or third-party service providers. This process can involve examining the vendor’s financial stability, business practices, reputation, and more to ensure that they are a reliable and trustworthy partner.

In a more informal or general sense, due diligence can simply refer to the act of thoroughly researching or considering something before making a decision. For example, someone might ‘do their due diligence’ by reading product reviews before making a purchase.

The overarching goal of due diligence, regardless of context, is to mitigate risk by fully understanding what you’re getting into. As financial advisors, it’s crucial to guide clients through their due diligence process, assisting them in gathering and interpreting the right data, thus ensuring they make the most informed decisions possible. It is an integral part of risk management and a necessary step in ensuring a sound financial future.

Are you a researcher who is looking for questions to explore? Consider these.

  • What credited interest rate should be used for deterministic indexed universal life illustrations? Should a selected rate create parity across economic value or the cost of production?
  • Should stochastic illustrations use an economic scenario generator with market-consistent assumptions for all asset classes and derivatives?
  • How can life insurance cost disclosure measures be updated for stochastic illustrations?
  • What rules should be used to dynamically adjust premiums and/or death benefits in a stochastic illustration?
  • What can stochastic illustrations reveal about the risks of premium financing?
  • To reduce the asset/liability management risk of premium financing, is it possible to design a life insurance policy that explicitly links the cost of borrowing and the credited interest rate?
  • What can operations research (for example, dynamic programming) say about optimal premium schedules?
  • What are the pros and cons of using a variable universal life chassis for variable, indexed, and fixed-interest investment options?
  • What is the value added by the smoothing of returns created by book-value-based accounting?
  • What is the value added by active management of insurance company general accounts?
  • What mortality rates and discount rates should be used in expected present value calculations?
  • Is life insurance an asset class?
  • Are policyowners being adequately compensated for risk?
  • How does the insurance company’s financial strength affect policyowners?
  • Can statutory financial information be used as a proxy for product-specific pricing assumptions?
  • How can policy documents be designed more effectively?
  • What is the impact of better information on consumer behavior?
  • How can insurance regulators improve the marketplace?
    • Stochastic illustrations
    • Clear explanation of guarantees
    • Clear terminology (explanation of underwriting classes, variable universal life net rate of return, dividend interest rate, cash value vs. account value)
    • Public information about pricing changes
  • How can curated product platforms gain market share?

What are your thoughts?

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