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Copyright © 1999 Society of Actuaries. Reproduced with permission.
Date: November 03, 1998 08:21 AM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Barnes Standard(TM)
If anyone's interested, I've a posted a $25,000 challenge to the advocates of the
Barnes Standard(TM) at my website, www.glenndaily.com. The cover story in the November
1998 issue of Dow Jones Investment Advisor www.djia.com) may be of interest to actuaries.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=3911)
Date:
December 01, 1998 11:28 AM
Author: Confused
Subject: Barnes Who?
For fear of losing my designation I must admit my ignorance. I've never heard or read
anything about the "Barnes Standard" although I don't work in a pricing or
illustration function. After reading this thread and your website I got the impression
that this could be the end of civilization as we know it, but I couldn't find anything
that really explained the mechanics of a "Barnes" type cost analyis. Other than
that it attempts to look at an insurance contract from the viewpoint of a mortgage, an
analogy that as you mentioned has been made before. Could you give us an example of where
it makes an obviously ludicrous cost comparison? I tried www.bstandard.com but couldn't
connect. I feel like I've missed the punch line to really good joke. Could someone clue me
in?
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5307)
Date:
December 01, 1998 12:07 PM
Author: Busy (not.now.but.maybe.later)
Subject: Barnes Standard
Check back in a week or so. If somebody hasn't taken it upon themselves to describe the
Barnes Standard in detail, I'll try to come up with a numerical example.
In the meantime, I'd suggest taking a look at the November issue of the Dow Jones
Investment Advisor, which features Al Barnes in its cover story. You can view the article
at djia.com after registering and obtaining a password (registration is immediate and
free). This article could serve as a good foundation for future discussions about the
merits of the Barnes Standard and some of the ideas put forth by his constituency.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5310)
Date:
December 01, 1998 11:37 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Example to follow
I deliberately avoided providing an example, because (1) the methodology has mutated
since 1995, and (2) the advocates do not excel in clear exposition. However, Charles
Haines's CCH Retirement Planning article does have a good example, and I'll post it here
shortly.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5337)
Date: November 03, 1998 09:51 AM
Author: Glenn Daily (gdaily@glenndaily.com)
I forgot to mention...
If any actuaries would like to participate in this challenge, I'll be happy to add your
amounts to my $25,000.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=3916)
Date:
November 03, 1998 10:08 AM
Author: Glenn Daily (gdaily@glenndaily.com)
Oh, I forgot to mention this, too. Here's what one of the leading advocates of the
Barnes Standard(TM) said last month at a conference sponsored by the International
Association for Financial Planning:
"Premium refunds, or dividends, are absolutely defined by the Internal Revenue
Code Section 72. Dividends on a participating life insurance policy are tax-exempt as a
return of investment. Dividends are considered to be a partial return of basis; therefore,
they reduce the cost basis in a contract. Dividends, I think, can be compared to the
overpayment of income taxes. Many individuals have more tax withheld than necessary, so
that they get a refund at the end of the year. Premium refunds paid to policyholders are
tax-exempt as a return of investment. Therefore, the policyholders have overpaid their
premiums and given the insurer an interest-free loan. This dividend would be reported as
taxable income if it represented a return on capital, versus a return of capital."
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=3917)
Date: November 18, 1998 03:02 PM
Author: Anon
Subject: Barnes Standard
Are there any actuaries out there who will defend the Barnes Standard? As an insurance
industry, we should take offense at this ridiculous attempt to exploit consumers' lack of
knowledge.
Please post (anonymously at this point) a message if you or your company has
investigated the Barnes Standard. I'm particularly interested if you think that the
approach has merit.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=4843)
Date:
November 20, 1998 10:55 AM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Forthcoming article
A financial writer is working on an article about my challenge. If any actuaries would
like to be interviewed -- presumably, on the record -- let me know.
I noticed that the November 1998 issue of Wired has a long, generally favorable article
about cold fusion. So maybe it's an offense to cold fusion for me to say that the Barnes
Standard(TM) is to life insurance cost disclosure what cold fusion is to physics.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=4989)
Date:
November 20, 1998 11:31 AM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Forthcoming article
On second thought, instead of contacting me (which is difficult, although not
impossible, to do anonymously), you can contact the writer directly:
AndyGluck@clientnewsletter.com
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=4994)
Date: November 30, 1998 10:45 AM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Come out, come out, whoever you are
Charles Haines is a fee-only financial planner and an early supporter of the Barnes
Standard(TM) of cost disclosure. Here's an excerpt from his "Life Insurance Due
Diligence: Finally, There Is a Way!" in the July-August 1998 issue of CCH Retirement
Planning:
"Over the course of the last three years, professors of math and actuarial
science, an actuarial consulting firm, reporters, attorneys, and insurance consultants
have assisted us. Actuaries at insurance companies are even risking their jobs by secretly
offering their assistance. They are sick and tired of what marketing departments do with
their work. Obviously, this process poses some threat to the status quo. In fact, one huge
company sent its entire in-house legal team to witness a legal case in which this
revolutionary [A.R. Barnes, Jr.] served as an expert."
When I proposed a few years ago that option pricing theory could be applied to life
insurance purchase decisions, I gave a presentation to an audience of insurance professors
at a meeting of the American Risk and Insurance Association. Nothing terrible happened to
me. And I didn't even have the prospect of winning $33,000 as an incentive.
Once again, I invite secretive actuaries, math professors, astrophysicists, and anyone
else who is working on the Barnes Standard(TM) to visit my website (glenndaily.com) and
accept the challenge.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5251)
Date:
December 01, 1998 10:40 AM
Author: Anon
Subject: Wishful thinking . . .
I'm hoping there won't be any actuaries that answer your challenge. As a result of the
rigorous examination process required to attain an FSA (or even an ASA for that matter),
actuaries should be well-educated and knowledgeable about insurance pricing. By definition
then, it should be impossible for an actuary to endorse the Barnes Standard (which I'll
conveniently refer to as BS!)that Barnes and his disciples are preaching.
Haines hit the nail right on the head when he suggested that actuaries would risk
losing their jobs if they came forward and defended the BS--in my opinion, they should
risk losing their designations as well!
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5305)
Date:
December 01, 1998 11:25 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Clearly, it's also useful to have this public record of failure to defend. So I
appreciate your messages.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5336)
Date: December 07, 1998 12:38 PM
Author: Anonymous (money.for.nothing)
Subject: Barnes Standard questionnaire
It seems that the Barnes Standard questionnaire changes every time it surfaces, but
here is a relatively current (less than one year old) snapshot of the elusive Barnes
Standard. Where appropriate, I've taken the liberty to paraphrase some of the garbled
language that Barnes uses. (When a non-actuary starts speaking the actuarial language, the
dialect is often unintelligible.)
The Barnes Standard questionnaire requests a summary of historical values (premiums,
cash values, dividends, etc.) and an inforce ledger for each policy under review. In
addition, the following questions are asked for each policy:
1. a. Insurance Company: b. Age and Smoking Status: c. Insurance Plan: d. Policy Size:
e. Policy Date:
2. List the following ratings (both current and 5 years ago) for: a. A.M. Best: b. Duff
and Phelps: c. Moodys (sic): d. Standard & Poor: e. Weiss:
Guaranteed Value Information
For questions 3-10, all values are computed using the interest rate and mortality
factors used for determining guaranteed cash values. (I've been very generous here, since
it's apparent that Barnes believes that for all products there is a guaranteed interest
rate and a set of guaranteed mortality factors.)
3. Actuarial present value of remaining gross premiums to endowment on a per $1000
basis: 4. Actuarial present value of gross premiums to endowment at issue on a per $1000
basis:
5. Net single cost for $1000 of paid-up benefits at current attained age:
6. Enter the cash value calculation rate per the Standard Valuation and Nonforfeiture
Laws:
7. Enter the net single premium per $1000 of benefits at issue:
8. Enter the net level premium per $1000 of benefits at issue:
9. Enter the actuarial present value of the spread between the gross level and the net
level premium at issue:
10. Enter the present value annuity factor (ax) at issue:
Current Value Information
11. For Interest Sensitive Whole Life, list the current interest rate that is depicted
in the inforce ledger illustration:
12. For Interest Sensitive Whole Life, list the current mortality rates that are
depicted in the inforce ledger illustration:
13. For participating contracts, provide the actuarial present value of all future
illustrated dividends (from the next anniversary to endowment):
General Hybrid and Inforced (sic) Ledger Information
14. Enter the gross annual premim per $100 for the whole life premium portion and for
the rider portion:
15. Enter the type of rider and the actuarial present value of the expense loads for
the term rider:
16. Does the inforced (sic) ledger contain any of the following: a. mortality
improvements? b. expense improvements? c. terminal/maturity dividends? d. excess interest
rate bonus? e. persistency rate enhancements? f. any other ledger enhancements? If yes to
any of above, please provide explanation, Schedule M, etc.
The form is signed and dated by the person providing the information.
I'll leave it to someone else to critique Barnes' approach.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5547)
Date:
December 07, 1998 04:31 PM
Author: Linda Lankowski (LLankowski@NA2.US.ML.COM)
Subject: Oh, that "Survey"
Until I saw the questions, I'd forgotten that I'd spoken to Al Barnes about his
"survey." Apparently there isn't a lot of education given to "financial
planners" who are using the survey, or the parts they like. We received two similar
surveys to complete, despite the fact that the products being analyzed were single premium
variable life products.
Al Barnes agreed that the surveys weren't in the least applicable to single premium
products, since future out-of-pocket cash flows could not be broken into acquisition
expense, principal and interest, as his analysis is meant to do for premium paying
products. I seem to recall an analagy to baseball, but I never followed through with him
on trying to perfect his analysis.
I believe Al Barnes would prefer complete disclosure of all assumptions used in
pricing, complete unbundling of all expense charges, compensation, mortality loading, etc.
There are a number of people out there who think this is a reasonable approach.
Unfortunately, until we start selling life insurance as a product with a death benefit,
there will always be people trying to second guess the costs associated with these
financial products.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5575)
Date:
December 09, 1998 07:26 AM
Author: Glenn Daily (gdaily@glenndaily.com)
>I believe Al Barnes would prefer complete disclosure of all assumptions used in
pricing, complete unbundling of all expense charges, compensation, mortality loading, etc.<
No, I think he
justs wants the four items that are needed for a "complete understanding":
principal, term, rate, and total acquisition costs. His questionnaire asks for current
mortality assumptions, so that he can compute term (i.e., life expectancy) on a current
basis, in addition to the guaranteed values. He doesn't want lapse rates, profit
objective, reinsurance rate, pricing methodology, etc.
In contrast, I would like to see everything, or at least I'd like to have an
independent actuarial review by a qualified actuary who has looked at everything. I was
fortunate to be involved in an assignment last year where my consulting actuary and I had
everything, and it was very nice to have everything. When I knew what could go wrong, I
was more comfortable with the product. It's the unknown risks that are most likely to
cause trouble.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5639)
Date:
December 11, 1998 03:54 PM
Author: Skeptic
I have no problem with the notion of increased disclosure, but if this increased
disclosure can be presented in a misleading fashion (e.g., the Barnes Standard), I would
argue that little has been accomplished.
In fact, consumers are worse off than they were before. As far as I can tell, the only
folks who benefit from the Barnes Standard (I've seen references to fees in the $50-$100
range) are Barnes and the financial planners/consultants who utilize the Barnes Standard.
(David Bohannon and Charlie Haines are two consultant types who are advocates of the
Barnes Standard, and they are mentioned in virtually every single article about the Barnes
Standard.)
Oh yeah, someone else also benefits--companies that minimize the difference between the
net single premium (valued at guaranteed cash value interest and mortality) and the
actuarial present value of gross premiums (again valued at guaranteed cash value interest
and mortality). If you're a pricing actuary and you really believe that the Barnes
Standard will impact consumers' buying decisions, the message here is: Ignore policyholder
value and focus on arbitrary (as long as the guaranteed cash values are greater than the
minimums) pricing elements.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5823)
Date:
December 13, 1998 03:25 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Pricing exercise
>If you're a pricing actuary and you really believe that the Barnes Standard will
impact consumers' buying decisions, the message here is: Ignore policyholder value and
focus on arbitrary (as long as the guaranteed cash values are greater than the minimums)
pricing elements.<
Indeed. I told a Bloomberg reporter a long time ago that if the Barnes
Standard(TM) caught on, I'd create a policy that was awful for consumers but that looked
good using the Barnes Standard(TM). And in fact, I've had a few conversations with
actuaries on this subject. So here's an exercise for a pricing actuary with nothing better
to do:
Create a nonparticipating, fully guaranteed whole life policy that has gross premiums
equal to net premiums based on 4.75% interest and 90% of 1980 CSO Nonsmoker. That should
look very good on a Barnes evaluation, but it will obviously have terrible illustrated
values (illustrated = guaranteed). Would that product be profitable for the insurer,
taking account of deficiency reserves, etc?
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=5857)
Date:
January 08, 1999 09:57 AM
Author: Anon
Subject: Barnes Standard [TM] Manipulation
Barnes defines "closing costs" as the difference between the actuarial
present value of gross premiums and the net single premium.
(G times ax) less Ax or alternatively, (G times ax) less ( P times ax) which reduces
to: (G less P) times ax
In words, this is the actuarial present value of the difference between the gross
premium and the net level premium.
Since Barnes focuses on "disclosing" these "closing costs", the
obvious inference is that higher "closing costs" mean inferior value to the
consumer. Not true.
Here's an example of how the Barnes Standard can be manipulated:
I used a $1,000,000 participating whole life contract issued to a 35-year-old best
class male. I fixed the guaranteed cash value interest rate and toggled the guaranteed
cash value mortality between 1980 CSO Composite and 1980 CSO Non-Smoker.
The "closing costs" when the Composite table was used were about $50,000,
while the "closing costs" jumped to about $74,000 when the Non-Smoker table was
used.
I kid you not, I've seen multiple numerical demonstrations where Barnes (or one of his
followers) would then make a statement similar to the following: Product B (the one using
Non-Smoker mortality)has "closing costs" that are nearly 50% higher than Product
A (the one using Composite mortality)!!! This difference will become more pronounce over
time due to the magic of compound interest. Thank God we could use the Barnes Standard
[TM] to unearth this ridiculous profit-taking by the company offering Product B.
BUT, here's the kicker: Based on the current dividend scale, for the lifetime of the
two contracts, their cash values and death benefits are essentially identical!
I only adjusted the mortality table and I wreaked havoc with the "standard."
One could also manipulate the use of select factors or manipulate the guaranteed cash
value interest rate in an effort to minimize "closing costs." Ultimately, you
could develop a product with negative "closing costs." Worse yet, you could
create a product that looked attractive according to the Barnes Standard [TM] but offered
terrible consumer value.
The Barnes Standard [TM] is a joke, but the people who are coughing up $50-$100 for
this misleading information aren't laughing.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=6752)
Date:
January 08, 1999 10:20 AM
Author: Midwest ASA
Subject: Should the profession debunk the Barnes Standard (TM)?
From most of the responses in this thread, it is obvious that the Barnes Standard(TM)
has no support among actuaries. Should someone in the profession debunk the Barnes
Standard or at least show its limitations? Glenn Daily seems to be the point person on
this issue currently. Is there some way the profession itself can tackle the issue in a
meaningful way? I don't like the idea of people being taken for $50-100 by agents who are
essentially impersonating actuaries. In addition to the upfront fee, the people are also
very likely buying products with a high present value of underperformance.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=6753)
Date:
January 14, 1999 06:01 PM
Author: Sick and Tired (of.this."bs")
Subject: TimeWaster
What a colossal waste of resources! In my opinion, the Barnes Standard is not worth the
paper it's printed on.
I wish the industry could come to some kind of consensus; maybe even the Society could
take some kind of position. You're exactly right, this guy is trying to pretend he's an
actuary. I've even seen quotes from financial advisors using the Barnes Standard that say
they are serving as the "actuary" for the consumer or something to that effect.
At the very least, if you're reading this and you work for a life insurance company, do
us all a favor and print out this thread and forward it to one of your pricing actuaries.
Let them investigate the issue themselves, but let's not continue to blindly
"endorse" the Barnes Standard by just filling in the blanks on the survey.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=7184)
Date:
February 10, 1999 11:46 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Barnes sightings
* According to a VUL product survey in the Nov 1998 issue of Dow Jones Investment
Advisor, Ameritas (low-load only) and Lincoln National were the only two companies that
answered "yes" to the "Uses Barnes Standard" question. A Manulife
actuary was quoted as being "neutral."
* At moneycentral.msn.com, there's a section on steps to take in buying life insurance.
One of those steps, apparently, is to evaluate policies using the Barnes Standard. That
section is sponsored by John Hancock.
* As reported in the January 1999 issue of Dow Jones Investment Advisor, Barnes isn't
interested in accepting my challenge.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=8433)
Date:
February 10, 1999 11:37 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Decision rule
One problem is that the Barnes Standard is a moving target, and it's not clear (at
least to me) what the decision rule is for choosing Policy A over Policy B. In his CCH
Retirement Planning article, Charles Haines says that you shouldn't necessarily choose the
policy with the lower "acquisition charges" (or "closing costs").
The most common decision rule seems to be that you should choose the policy with the
lower guaranteed premium. In Barnes's technical language, a high guaranteed premium means
a Fat insurer and a low guaranteed premium means a Thin insurer. (This is explained in The
Mortality Mortgage.) Thin is good. Fat is bad.
Haines's article seems to agree with this rule, although he also says that if you don't
want to focus on just the guarantees, you can also take the dividends into account.
So when you get past the mumbo-jumbo of gross and net principal, term, rate, and
closing costs, you're in the same position that you would be in if you just compared the
guaranteed and illustrated values -- without wasting an actuary's time to fill out the
questionnaire and without spending any money to have Barnes prepare an evaluation.
I'll post a numerical example at my website next week.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=8432)
Date: March 04, 1999 10:46 PM
Author: Glenn Daily (gdaily@glenndaily.com)
Subject: Numerical example
I've posted a numerical example at www.glenndaily.com/barnes3.htm.
Other news:
The March 1999 issue of Dow Jones Investment Advisor contains a letter to the editor
from Scott J. Witt, a Northwestern Mutual actuary. The last two paragraphs:
"The Barnes Standard is doomed to failure -- not because of an industry conspiracy
to keep Barnes from uncovering the truth about life insurance pricing, but because it is
worthless at best and misleading at worst.
Anyone who relies on the Barnes Standard does so at his or her own peril."
That same DJIA issue also contains a survey of survivorship life insurance products.
Unlike the VUL survey a few months ago, this survey does not ask if companies use the
Barnes Standard.
(http://205.243.101.35/forums/Index.cfm?CFApp=1&Message_ID=9475)
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