By Maria Wood
There is certainly no shortage of regulation in the insurance business. On both the state and federal level, the industry is tightly watched and subject to myriad laws and new ones being proposed. This year brought about an alphabet soup concoction (PPACA, MLR, FIO, to name a few) of regulations and proposals either enacted or being contemplated for enactment.
How these laws and proposals will impact advisors on the ground level is the subject of much debate between regulators and industry advocacy groups. And that debate is expected to continue, especially given the slow pace of decision-making in Washington, D.C. and the upcoming presidential election.
With so many regulations being bandied about, it’s difficult to cover all of them. Some deal with capital reserve requirements for carriers. Yet others could alter how Main Street advisors and agents run their business and procure their revenues.
Here are just three that have had or could have the most impact on advisors working in the trenches. It is by no means a definitive list, and debate will surely on continue on these issues and many more in the months ahead. Stay tuned (and read LifeHealthPro.com daily for updates).
When the Dodd-Frank Act was signed into law in July 2010, it charged that the SEC address the issue of whether the fiduciary standard should be applied across the board to both broker-dealers and their representatives as well as investment advisors and their reps. As it stands now, only investment advisors fall under the fiduciary standard, which requires that they act in "the best interest of their clients," says Gary Sanders, vice president, securities and state government affairs for the National Association of Insurance and Financial Advisors (NAIFA) in Falls Church, Va.
Broker-dealers, meanwhile, are subject to suitability guidelines, which are intended to ensure that the products they sell are suitable for their clients’ needs.
"It seems to have become commonplace in the media that the fiduciary standard is the higher standard," Sanders says. "We’ve never accepted that distinction. We think the suitability standard is a vibrant and vigorous standard for consumer protection and in some ways we think the suitability standard imposes much greater and stricter requirements of the people that are under that standard because of all the rules and compliance requirements that reps and broker-dealers have to go through on a daily basis."
All NAIFA members are insurance-licensed and about two-thirds have a securities license, meaning they can be registered reps of broker-dealers. A large percentage, Sanders notes, serve clients in the middle income bracket, with household incomes of less than $100,000.
Critics of the move to put broker-dealers and insurance agents under the same fiduciary standard as investment advisors say it fails to take into account the difference between how those camps operate their businesses and, most importantly, are paid.
Investment advisors typically are remunerated under a fee structure for managing assets on an ongoing basis (thus the guideline to act in the best interest of the client). Consequently, they must manage large accounts to support their business model.
Insurance agents, meanwhile, are paid a commission for selling a contract that may stretch for a decade. Although the agent services the contract while it’s in effect and usually has an ongoing relationship with a client, they do not oversee client portfolios on a daily basis the way an investment advisor would.
Therefore, having broker-dealers and insurance agents work under the fiduciary standard would result in higher fees, thereby making their services out of reach for the middle market they currently serve, Sanders contends.
"It’s going to leave a lot of the people they are currently serving out in the cold without any access to advice or service. That’s our big concern," Sanders says.
"We think the suitability standard is a vibrant and vigorous standard for consumer protection." -Gary Sanders, NAIFA
Kim O’Brien, president and CEO of the National Association for Fixed Annuities (NAFA) in Milwaukee, agrees that imposing the fiduciary standard on insurance agents who sell fixed annuities is a "square-peg, round-hole situation. It’s not a standard that really works in the selling of fixed annuities."
Forcing a change from the current transaction- and commission-based model for selling fixed annuities to the fiduciary standard could cause agents to abandon the product, O’Brien warns.
Further, she notes that broker-dealers are already subject to the suitability requirements of FINRA, which provides more than adequate consumer protection.
"The beauty of the suitability standard is that it looks at each sale twice before it’s completed," O’Brien says. "The producer or the broker-dealer has to do it and then the insurance company."
If a sale is deemed unsuitable, the insurance company is held accountable. "The insurance company is dealing with thousands of consumers so if they are being audited for a single sale they are going to have to make sure every sale is suitable," O’Brien says. "That is a huge benefit to consumers and I think that is an appropriate standard for that annuity sale."
Securities and Exchange Commission chairman Mary Schapiro has stated that any change in the rule will likely not be complete until sometime in 2012. According to Sanders, Schapiro has also indicated in her comments that any new rule will differentiate between broker-dealers and investment advisors, a stance that leaves him somewhat hopeful.
"I am guardedly optimistic that what they propose is going to take into account that there are different business models out there and I’m hoping but I’m not entirely confident that it’s going to be a proposal that we think will enable our members to continue to serve their clients in the way they are serving them now," Sanders says.
O’Brien declines to venture a prediction on the outcome, but says industry groups like NAFA and NAIFA must continue to lobby lawmakers on the issue. "Our job is to educate, inform and make sure they understand that the consumer is better protected with the suitability model and making sure that is the model that stays in place."
The Federal Office of Insurance: Is it necessary?
Much debate has swirled around the newly established Federal Office of Insurance (FIO), a branch of the Treasury Department. Some industry insiders say it’s a positive move that will give the U.S. a presence on the international insurance stage, shore up cracks in state regulations and boost modernization and transparency in the industry. Others see it as an unwelcome intrusion on the traditional oversight of insurance matters by the individual states.
For its part, NAIFA is not opposed to the FIO, although it supports the right of states to continue to promulgate insurance regulations.
In a comment letter, NAIFA president Robert Miller stated: "We believe there are areas where the status quo must change. We believe that the FIO can play an important part in efforts to educate, coordinate, modernize and reform regulations."
Specifically, NAIFA is in favor of NARAB II, which would permit insurance producers licensed to practice in several states to comply with a single-set of non-resident licensing and continuing education standards. It also supports the NAIC Suitability in Annuities Transaction Model Regulation, which has been enacted in several states.
O’Brien says one of the FIO’s main charges is to study ways to improve consumer protection, "which is always good." However, she’s concerned the agency might overreach and meddle in actual product design and mandate onerous disclosure rules.
"That kind of conversation concerns us because what ends up [happening] is the consumer loses because they have less choice. They have more costs in the products they are purchasing," O’Brien says.
Better to have the individual states regulate insurance in their jurisdictions, O’Brien contends. That way, insurance companies and regulators are forced to work together to devise products that benefit the companies and consumers in that state.
"When you take it out of the state, there is not that motivation," O’Brien says. "The business may be 5,000 miles away from D.C. We also know D.C. can get quite insular. You can’t do that in the state. The people hold you a lot more accountable and there is a much brighter spotlight on the insurance commissioner in Maryland or Michigan."
Not that everything on the state level works smoothly. O’Brien says that several states "have gone rogue a bit." (She mentions Florida, Utah and Nevada by name.) In several states, the securities departments are "digging into the insurance side of the regulatory jurisdiction" and levying more regulation on insurance products, like annuities and life insurance.
"We believe more education is needed and we are going to work to do that," O’Brien says. "There are certain states we need to focus on and work with so the products aren’t regulated to the point of being uncompetitive."
"That kind of conversation concerns us because what ends up [happening] is the consumer loses because they have less choice." Kim O’Brien, NAFA
Medical Loss Ratio: The law of unintended consequences?
For agents and brokers who provide health insurance, the medical loss ratio (MLR) provision of the Patient Protection and Affordable Care Act (PPACA) has had the "most immediate detrimental effect," according to Jessica Waltman, senior vice president, government affairs, for the National Association of Health Underwriters (NAHU) in Washington, D.C.
Intended as consumer protection, the MLR provision mandates between 80 percent and 85 percent of premiums paid to carriers goes to healthcare. Yet by limiting the remaining 20 percent to administrative costs, which includes agent commissions, the MLR has severely squeezed the revenues of agents and brokers, Waltman says.
Since the provision went into effect in January of last year, many brokers and agents have reported a drop in overall business income of up 50 percent, Waltman says. "They are busier than ever, but they are having to cut back what they can provide to their clients," she says.
Despite lobbying from NAIC, the Department of Health and Human Services has held firm on the MLR rule. States can apply for an adjustment of the MLR rule, but that only applies to the more volatile individual marketplace, not the group marketplace where most Americans get their health coverage, Waltman points out.
Applying for the adjustment is a lengthy and cumbersome process and most applications have been rejected, she adds. There are several legislative initiatives afoot to amend the MLR rule to exclude agent commissions, but in the meantime, health insurance agents and brokers can expect to take more hits to their revenues in the year ahead, Waltman says.
What makes the MLR rule even more impactful is that it is in effect at a time when the health insurance industry is having to deal with a slew of new compliance regulations and changes in how it operates (the Patient Protection and Affordable Care Act, the essential health benefits standards as well as the establishment of state and federal exchanges), thereby necessitating the advice and guidance an agent can provide to companies and individuals, Waltman says. (It should be noted that the Supreme Court will review the constitutionality of PPACA next month.)
"On one hand you have all these new regulations coming down the pike and the law is taking away the one entity that is professionally licensed and trained and available in the current private marketplace to help them," Waltman says.
"On one hand you have all these new regulations coming down the pike and the law is taking away the one entity that is professionally licensed and trained and available in the current private marketplace to help them." -Jessica Waltman, NAHU
Additional reporting for this article was done by Michael K. Stanley, Elizabeth Festa and Arthur D. Postal.
Florida to HHS: The MLR is killing us
By Elizabeth Festa
The State of Florida continues to carry the banner of health insurance agents on the medical loss ratio (MLR) issue, asking federal health regulators to review its decision not to make adjustments to the rule, as it has in some smaller states.
In a Dec. 30 letter to the U.S. Department of Health and Human Services (HHS), Florida’s Office of Insurance Regulation (FOIR) said that the provision of the healthcare insurance reform law limiting administrative costs to 20 percent of premiums is harming the Florida insurance market.
The letter objects to HHS’s Dec. 15 letter rejecting the state’s demand for an exemption from the MLR provision of the healthcare law, the Patient Protection and Affordable Care Act (PPACA, and asks HHS to reconsider.
Florida’s insurance commissioner is Kevin McCarty, who is now the president of the National Association of Insurance Commissioners. In the letter, McCarty said that, "Failure to obtain the requested adjustment will cause permanent, irreparable harm to our market and the distribution channel for health products and services. Since the passage of the [PPACA],Florida has not received any applications for new entrants into the individual market, and no new issuers appear to be interested in expanding into this market." Further, McCarty portrayed the agents as consumer advocates, saying their role is to assist consumers in gaining pre-certifications for various medical procedures and helping consumers navigate the healthcare delivery system.