On April 6, 2016, the Department of Labor (DOL) released its long-awaited fiduciary rule. It is clear that things will never be the same. While the fiduciary rule is limited in the products that it applies to, it is a clear sign that the time has arrived for the Insurance Consumer Bill of Rights.
Some complain bitterly about the rule -- William Shakespeare has Queen Gertrude say in Hamlet, "The lady doth protest too much, methinks" -- but there is clearly a trend, with the DOL's fiduciary rule, the proposed rule by the SEC, new consumer protection rules for seniors and the amount of complaints to the Consumer Financial Protection Bureau. To go from Shakespeare to a more modern poet: Bob Dylan sang, "The times they are a-changing."
It is time for the insurance industry to wake up. If the way business is conducted remains as is on products not covered by the fiduciary rule, there will be further regulations and scrutiny thrust upon the insurance world, and there will less opportunity to have a voice at the table.
Insurance Agents, Distribution Systems and Reasonable Compensation:
The traditional agent system has been fading away over the last couple of decades. There are very few companies that still have their own "captive" agents. "Captive" agents are those who primarily represent one specific insurance company such as Northwestern Mutual Life, New York Life, Mass Mutual, State Farm, Farmers, Allstate, etc. and who receive office space and other support from that company.
Most insurance is now sold by agents who represent multiple insurance companies and who try to find the optimal coverage for their clients at the most affordable premiums. Of course, there are agents who are driven by commissions, and those are the ones who are most affected by the fiduciary rule and whatever comes next. Acting in the best interests of a client is something the majority of agents strive to do, but enough agents don't that this type of regulatory change is warranted.
Insurance companies are rethinking their distribution strategies, as shown by MetLife and AIG. MetLife recently sold off its Premier Client Group (retail distribution entity with approximately 4,000 advisers). American International Group (AIG) sold off its broker-dealer operation. And a number of insurance companies have withdrawn from the U.S. variable annuity marketplace over the last few years: Voya (formerly ING), Genworth, SunLife and Fidelity stopped selling MetLife Annuities.
The real concern for insurance companies and agents is that they will no longer be able to sell a product that can't be fully justified as suitable to clients. In other words, selling the annuity with the highest commission and the best incentives will no longer cut it. While the DOL rule only applies to those annuities sold in qualified plans, is it really a stretch of the imagination to consider class action lawsuits against agents who are not following the same practices outside of qualified plans?
And of course there is the issue of reasonable compensation. Reasonable compensation under the BICE is not specifically defined and is certainly open to interpretation. The DOL notes several factors in determining reasonable compensation: market pricing of services and assets, the cost and scope of monitoring and the complexity of the products. There is the interpretation that advisers who have more education (certifications, degrees, licenses, etc.) may be able to justify higher fees or commissions. This is also a good thing as this will encourage advisers to improve their skill set and be of better service to their clients. The Insurance Quality Mark is a great way for agents to show their level of expertise and professionalism.
That Ticking Sound You Hear?
The current distribution system is ineffective with the types of products sold and the accompanying incentives. Agents receive higher compensation for less competitive products, and they receive incentives for making sales targets. This is traditional for sales in any industry. However, as we've seen in the investment community, there are few traditional commissioned stock brokers and investment advisers, while the majority are now fee-based planners. Consumers expect more and are more financially literate. The Internet especially has changed the way financial products are sold. And insurance is part of the financial world.
The Securities Exchange Commission may finally be spurred to move forward with its own fiduciary regulation. SEC Commissioner Mary Jo White has stated that fiduciary reform is in order at the commission, and that the SEC should harmonize the rules for investment advisers and broker-dealers serving retail clients.
And will FINRA (Financial Industry Regulatory Authority), NAIC (National Association of Insurance Commissioners), the CFPB (Consumer Financial Protection Bureau), the U.S. House of Representatives, the U.S. Senate or some other body move forward with their own set of rules and regulations?
The marketing material that I see from many firms is, "We put our customers first." Thomas E. Perez, the secretary of labor, said in an interview: "This is no longer a marketing slogan. It's the law."
The pressure is on annuity companies and insurance companies to design simpler products with lower fees and increased transparency.
Everyone needs to rethink the entire sales and policy management process and follow the best practices outlined in the Insurance Consumer Bill of Rights. It requires insurance agents to place their clients' (insurance consumers) best interests first to the best of their ability. The Insurance Consumer Bill of Rights focuses on common-sense, thorough communication and providing quality service in a way that benefits everyone. Following the Insurance Consumer Bill of Rights is a win for everyone.
The Bottom Line:
Insurance agents, insurance brokers and insurance companies can be the leaders in providing insurance consumers with rights or can be led by follow-ups to the DOL's fiduciary rule. The DOL's fiduciary rule is not the end, it is only the beginning.
Again, it is good business for everyone when firms must fairly disclose fees, compensation and material conflicts of interest associated with their recommendations and not give their advisers incentives to act contrary to their clients' interests. (It's a sad state that such a requirement is necessary.)
The future is up to us. If we start to treat annuities and cash value life insurance as the complex financial vehicles that they are and start to better educate our clients and ourselves and carefully service them, then there will be positive outcomes. If we continue with the current approach, lack of education and disclosure, more contracts will terminate and there will be significant negative consequences for policy/contract owners and their beneficiaries, and agents may very well find themselves as defendants in litigation.
The Insurance Consumer Bill of Rights:
- The Right to Have Your Agent Act in Your Best Interest: to the best of her ability. Keep in mind that agents are not fiduciaries and are agents of the insurance company(ies). An agent recommendation should not be influenced by commissions, bonuses or other incentives (cash or non-cash). An agent should not collect a fee and a commission from the same client for the same work.
- The Right to Receive Customized Coverage Appropriate to Your Needs: An insurance agent should review your potential coverage needs per each line of coverage under consideration and take into account any existing coverage. Any new recommended coverage must fill a need (gap in coverage). Any replacement must be carefully reviewed with all pros and cons considered and presented in writing to the consumer.
- The Right to Free Choice: You have the right to receive multiple competitive options and to choose your company, agent and policy. Agents, brokers and companies must inform you in simple language of your coverage options when you apply for an insurance policy. Different levels of coverage are available, and you have the right to know how each option affects your premium and what your coverage would be in the event of a claim.
- The Right to Receive an Answer to Any Question: You're the buyer, so you have the right to ask any question and to receive an answer. The answer should fully and completely address your question or concern in full and be understandable. If you don't understand something, you as as the buyer have a duty to ask questions, and, if you still don't understand, you shouldn't buy that policy.
- The Right to Pay a Fair Premium: There must be full disclosure on how policy premiums are calculated and the impact of different risk factors specific to the type of coverage proposed. Also, information should be provided on factors that may reduce the premium in the future.
- The Right to Be Informed: You need to receive complete and accurate information in writing – anything said or promised orally must be put in writing. This includes full Information on any recommended insurance company, including name, address, phone number, website and financial strength rating(s).
- The Right to be Treated Fairly and Respectfully: This includes the right to not be pressured. If there is a deadline, the reason must be presented. If an offer is too good to be true, then it most likely is too good to be true. Insurance agents and companies should keep information private and confidential.
- The Right to Full Disclosure and Updates: You must receive notice of any changes in the coverage in easy-to-understand language and any relevant changes in the marketplace. All relevant information and disclosure requirements (required or not) on an insurance product must be presented to the client. You must receive in writing a summary of all surrender charges, length of surrender period and any additional costs for early termination. In any replacement situation, all pros and cons must be submitted in writing.
- The Right to Quality Service – You must be able to have your coverage needs reviewed at any time upon request, whenever a major event would affect coverage and at least annually. The agent must determine if changes have occurred with the client or in the marketplace that would dictate changes to the insurance coverage. This includes prompt assistance on any claims.
- The Right to Change or Cancel Your Coverage: This right must come without any restrictions or hassles.
