Vertex animations

#1 While yes it's possible, i havent done it or seen it used too often. I know that the latest Splinter Cell game was making a deal of it because they allowed to have lots of little details like muscles contracting when climbing across a pole or whatnot.
So it's doable, but i couldnt tell you a good way to approach it. :/

#2 Make a good enough rig and you wouldn't need to worry about animating vertex positions by hand, you can let the skeletal system drive it all, from acting like bones for say arms and legs to subtle muscle movements for facial animation. Best of all with an engine that has an animation system like Torques you can really push this to the extreme and do a lot of great and reusable work with very little effort needed.

Personally speaking I rarely see a need to do a specific vertex level animation and when I do like I said, make a competent rig that accomplishes this goal.