Laws, Regulation Target Insurance Products
Industry lobbyists are tallying long hours tracking regulatory and legislative efforts that threaten to substantially change the sale of insurance products.
Rule changes are advancing on three fronts:
- The Securities and Exchange Commission approved Regulation Best Interest, a standard of conduct for brokers, by a 3-1 vote.
- Two National Association of Insurance Commissioners’ working groups are inching toward changes to rein in illustrations.
- A Senate bill would require health benefits brokers to disclose their commissions and other incentives they receive.
SEC Rule: Bold Or Feckless?
Regulation Best Interest, a three-part rulemaking package aimed to establish a standard of conduct for broker-dealers, will better protect investors, the SEC said.
The newly adopted rule comes just one year after the Department of Labor’s fiduciary rule was vacated.
The timing is about all the two pieces of legislation have in common. The final version of Reg BI is a whopping 771-page tome, noticeably longer than the proposal, of precedence, interpretation and justification for omissions and changes.
Takeaways from the legislation:
1. There’s still no definition of “best interest” — Noticeably missing from the proposed rule, the SEC has chosen not to include a definition of the phrase in its final rule, either.
2. Title reform dropped — the final rule omitted a section of the proposed rule restricting the use of adviser/advisor.
3. Maintains distinction — while the changes embrace some of the fundamentals of a fiduciary standard for broker-dealers, the rule maintains separate standards for investment advisors and broker-dealers.
Since the defeat of the DOL rule, states such as New York and Nevada have enacted their own fiduciary rules. The SEC declined to say during the vote if the federal Reg BI rule would preempt those enacted by state legislatures, pointing to judicial proceedings to determine the future of the state-enacted laws.
For firms worried about transitioning to a Reg BI-compliant world, SEC Chairman Jay Clayton said in his opening remarks of the vote, the SEC will establish committees to assist firms with the implementation of the adopted rules.
Illustrations An Issue
When the NAIC created Actuarial Guideline 49 in 2015, insurers were not offering indexed universal life with “multipliers” and “bonuses.” Critics say these options were quickly created to get around AG 49.
AG 49 was developed to provide insurance carriers a more uniform method for calculating maximum illustrated rates on IUL products and to help consumers better understand indexed life insurance product illustrations.
AG 49 states that: “If an insurer engages in a hedging program for index-based interest, the assumed earned interest rate underlying the disciplined current scale shall not exceed 145% of the annual net investment earnings rate.”
The multipliers and bonuses are just the natural “innovation” of the industry, said Scott R. Harrison, who represents insurers such as Lincoln Financial and Pacific Life, during a recent conference call. That prompted a sharp response from Birny Birnbaum, executive director of the Center for Economic Justice.
“Since AG 49, we’ve now seen products developed specifically for the purpose of juicing the illustrations,” he said. “That’s not what I call being ‘innovative.’ That’s what I call ‘gaming the system.’”
The IUL Illustration Subgroup accepted comments on four questions through June 28. Regulators hinted that opening the overall life insurance illustration model law is on the table, which would likely be a lengthy and acrimonious process.
A second subgroup — the Annuity Disclosure Working Group — is concerned that consumers are being misled by unrealistic indexed annuity illustrations. It is studying a proposal to double the time indexes must be in existence to be used in annuity illustrations from 10 to 20 years.
The index illustration issue rose in importance as many insurers developed their own proprietary indices in recent years to respond to the popularity of indexed annuities with cautious clients. These indices rely on other indexes to create a hypothetical historical record of return.
Industry representatives say the 20-year requirement would eliminate about 70% of the indexes being used.
“It’s not clear to us how we would manage that disruption,” said Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, during a June conference call.
The working groups are up against a deadline with the NAIC Summer Meeting set to begin Aug. 3 in New York City.
‘Really Appalling’
Health insurance broker commissions have been disappearing since the Affordable Care Act went into effect. But apparently that’s not enough to satisfy lawmakers. Now a Senate bill includes a provision that would require health benefits brokers to disclose their commissions and other incentives they receive from the insurance industry.
The Lower Health Care Costs Act was introduced by Sen. Lamar Alexander, R-Tenn., and Sen. Patty Murray, D-Wash. The bill takes aim at a number of issues, including surprise medical bills, high drug prices and public health problems. Buried in the bill is a requirement that health benefits brokers reveal fees and other enticements they receive from the insurance industry.
Representatives of two health agents associations said they are in favor of transparency, but questioned how forcing brokers to do even more disclosure would bring down the cost of health care.
“It’s really appalling because our members have been fighting to get paid,” said Ronnell Nolan, CEO of Health Agents for America. “And that bill is important. Lowering health care costs is what we want for our clients. But how can anybody point the arrow toward our members and say we’re part of the problem? We’re not part of the problem. Agents have been losing money since the passage of the ACA.”
She cited research from Louisiana Insurance Commissioner James Donelon that showed broker commissions made up about 5% of insurance carriers’ total spending prior to the ACA. “And we know it’s gone way down since then,” she added.
Nolan said her group is asking Alexander to remove that provision from the bill.
The National Association of Health Underwriters has not taken an official position on the bill, but the association “is definitely in favor of transparency of costs on all levels, including broker compensation,” said Marcy Buckner, vice president of government affairs. However, she added, NAHU is concerned that the provision duplicates broker compensation disclosures that are already in effect.
“Our members are questioning what else is possible for them to be required to disclose. They are already subject to disclosure in the group market for groups of more than 100 — the Form 5500 requirement. Also, often when they’re working with the larger groups, plan agreements are pages and pages long and include everything that goes into that plan detail. Compensation disclosure is part of that. And certain states have required disclosures.”
Despite the disclosure provision, Buckner said, NAHU is positive about some aspects of the bill. The bill takes aim at surprise medical costs and high drug prices, which she said will bring down health care costs for consumers.