The Fiduciary Rule: A Call To Arms For The Insurance Bill of Rights: Aligning The Insurance Industry with Consumers

On April 6, 2016, the Department of Labor (DOL) released it’s long awaited Fiduciary Rule (links are at the end of this post). And with this Rule finally being implemented after so much time and debate, it is clear that things will never be the same again. While the Fiduciary Rule is limited in the products that it applies to, it is a clear sign that it that the time has arrived for The Insurance Bill of Rights. Please note that the following commentary is based upon my understanding of The DOL’s Ruling with a perspective for the insurance industry.

Depending on the source, the Fiduciary Rule is something that is either long over-due and will be of great service to consumers or it is something that will eventually lead to the collapse of the insurance industry. The truth, as always lies somewhere in the middle.

As William Shakespeare said “”Me thinks he doth protest too much.”; there is the question of why certain entities and individuals are protesting the most. Do they have the most to lose or is there legitimacy to their claims? This is not something that is easily answered, however, it’s important to keep in perspective and consider the source. Yes, there are elements of the Fiduciary Rule that do cause issues and leave unanswered questions.

With that said, there is clearly a trend between the DOL’s Fiduciary Rule, the proposed rule by the SEC, new consumer protection rules for Seniors, the amount of complaints to the Consumer Financial Protection Bureau. “The times they are changing” as Bob Dylan sang. We are entering a new frontier in the insurance industry, one that is long overdue. The adoption of The Insurance Bill of Rights by the Insurance Industry is a foregone conclusion.

It is time for the Insurance Industry to wake up and I’m speaking to insurance agents, insurance wholesalers and insurance companies. 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.

There has been a lot written about what the DOL Fiduciary Rule is, the potential impact, etc., so that will not be covered here. A Google search will provide you with hundreds if not thousand of articles on the DOL Fiduciary Rule covering every detail in all contexts.

I’ll let others speak to the details who are best qualified. The most in-depth looks will be coming out over the next few weeks.

The Key Points of The DOL’s Fiduciary Rule:

Applies to retirement accounts only and not any other form of taxable investment account or other investment purchased with after-tax dollars.
Declared that brokers can no longer earn commissions (and other compensation) from offering conflicted advice to consumers, unless they agree to do so under a “Best Interests Contract (BIC)”. The BIC agreement holds the advice-provider to a fiduciary standard of giving advice in the “best interests of the clients” while earning “reasonable compensation” and providing transparency and disclosure about the products and compensation involved.

The BIC can be added to current agreements rather being a separate contract. The key disclosures are to be provided upon request or through the financial company’s website, not necessarily outright to the client. Companies can still sell high-commission insurance products such as variable annuities, equity indexed annuities and fixed indexed annuities along with proprietary products. Charges must be reasonable Requires financial institutions to adopt policies and procedures to mitigate material conflicts of interest.

Consumers can no longer be forced to waive 100% of their legal rights and accept mandatory arbitration. Consumers may still be required to go to arbitration however they can now file a class action lawsuit against a company that fails to honor it’s aggregate fiduciary obligations. There is a grandfather clause that will allow existing commission arrangements to remain in place after the compliance deadline of April 2017.

The DOL clarified that investment education activities would not trigger a fiduciary duty such as statements made in general marketing materials, as long as a “reasonable person” would not view the statements as an investment recommendation. This includes statements made in “general circulation newsletters, television, radio or public media talk show commentary or remarks at conferences.

The expanded fiduciary definition goes into effect on April 10, 2017 which covers the Best Interest Standard and providing disclosures of conflicts of interest. The Best Interest Contract Exemption (BICE) requirement go into effect on January 1, 2018. Covers advice and recommendations made to ERISA-covered plans and participants in IRAs. This includes HSAs. The BICE Agreement can be applied to existing clients via negative consent, so no new signature is required. However, advice must still satisfy “Best Interest” and “Reasonable Compensation” requirements.

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 who 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 impacted by the Fiduciary Rule and whatever comes next. Acting in the best interest of a client is something the majority of agents strive to do, however, there have been enough agents who don’t act in the best interests of their clients to warrant this type of regulatory change.

Insurance companies are re-thinking their distribution strategies as shown by MetLife and AIG. MetLife recently sold off it’s Premier Client Group (retail distribution entity with approximately 4,000 advisors). American International Group (AIG) sold off their 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 are 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 advisors 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 advisors 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 advisors, 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 (SEC) may finally be spurred to action and move forward with their own fiduciary regulation. SEC Commissioner White has stated that fiduciary reform is in order at the commission, and that the SEC should harmonize the rules for investment advisors 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 as inferred by S&P, is on the insurance companies to design better products. This is huge shift in the annuity marketplace (and the life insurance marketplace) with a move towards simpler products with lower fees and increased transparency.

What Can Insurance Agents, Insurance Brokers and Insurance Companies Do?

Re-think the entire sales and policy management process. Follow the Best Practices outlined in The Insurance Bill of Rights which  requires Insurance Agents and other members of the Insurance Insurance to place their clients (Insurance Consumers) Best Interests first to the best of their ability. The Insurance Bill of Rights focuses on common sense, thorough communication and providing quality service in a way that benefits everyone. Following The Insurance Bill of Rights is a win for everyone.

Advisors will also be able to continue to sell commissioned products if a Best Interest Contract Exemption (BICE) is signed by the client and the advisor’s firm. The form, which can be signed at the point of sale not earlier, commits the advisor to put their client’s best interest first so long as they disclose conflicts of interest, receive “only reasonable compensation”, avoid misleading statements about fees and conflicts of interest
and prohibit financial incentives for advisors that act contrary to a client’s best interest

The DOL Rule is probably far from perfect, however at it’s core it is designed to bring everyone onto the same side of the table. Better products for consumers will translate into more sales in the future as they will provide better value. In the long run, quality does win. The trend is clear when you look at the trend in mutual funds and exchange traded funds (ETF’s) – years ago, almost all mutual funds had significant first year loads (commissions), then the trend was to level charges and/or back-end charges leading to ETF”s which are similar to mutual funds with significantly lower expense charges. These lower fees did not stand in the way of greater investments in more products.

Unsurprisingly, consumers like lower fees and charges. Why wouldn’t it be the same for insurance products?

The Bottom Line:

Insurance Agents, Insurance Brokers and Insurance Companies can be the leaders in providing Insurance Consumers with an Insurance Consumer Bill of Rights and following it or they 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 – insurance companies, insurance agents and insurance consumers when firms must fairly disclose fees, compensation and material conflicts of interest associated with their recommendations and not incentivize their advisors to act contrary to their clients’ interests. (it’s a sad state that such a requirement is necessary)

Will there really be less choices or will it result in some companies leaving and new companies coming in? Hard to know for sure, though my guess would be that it will simply be new companies and products coming in, just like ETF’s displaced a number of mutual funds.

The future is up 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 Bill of Rights (Expanded Version):

  1. The Right to Have Your Agent Act in Your Best Interest: to the best of their 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.
  2. 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.
  3. The Right To Free Choice: You have the right to receive multiple competitive options and to choose your company, agent & 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.
  4. The Right to Receive an Answer to Any Question: You’re the buyer, you have the right to ask any question and to receive an answer.  The answer should  fully and completely address your question and/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.
  5. The Right to Pay a Fair Premium: 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.
  6. The Right to Be Informed – 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).
  7. The Right to be Treated Fairly and Respectfully: To receive an answer to any question. 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.
  8. The Right to Full Disclosure and Updates: to 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. To 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.
  9. The Right to Quality Service – to have your coverage needs reviewed at any time upon request, whenever a major event would impact coverage and at least annually.  To 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.
  10. The Right to Change or Cancel Your Coverage without any restrictions or hassles.  The right to receive sufficient notice of policy cancellation.
*Please note that as a consumer, it is also strongly advised that you provide complete and accurate information to your agent and insurance company.

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