The insurance industry enters 2014 with even less certainty than it did 2013, as the transition to a stronger federal role in overseeing company balance sheets as well as markets continues. The new year will be a critical one for the industry as the rollout of the new healthcare law continues, some insurance companies come under federal oversight for the first time, and the Federal Reserve begins to transition away from its current below-market interest rate policy.
Both the healthcare law rollout and the transition to market interest rates pose managerial, financial and market risks for the industry. Moreover, there is industry concern that federal regulators do not understand the differences between the banking and insurance industries and may impose “bank-centric” rules on the industry that are inappropriate. At the same time, federal regulators are taking a hard look at the standards currently used to govern the sale of investment products marketed by insurers, with agents especially working to ensure that final rules adopted by the agencies don’t pose too great a compliance risk for them to continue in that business.
As if those issues aren’t enough, the insurance industry is deeply concerned that state regulators are being punitive in their pursuit of fines and millions of dollars in unclaimed insurance policies, and that the solvency of some smaller companies may be at risk because of the aggressiveness of state regulators in ensuring compliance with unclaimed property laws. Finally, while action this year is unlikely, there are proposals on the table that would limit inside buildup of insurance policies and cap the amount of money investors can put in tax-advantaged retirement accounts.
1. Changes to Healthcare.gov
Getting “Obamacare” off the front pages is Job No. 1 for the Obama administration and especially Health and Human Services Secretary Kathleen Sebelius. The rocky rollout of the federal healthcare exchange has the potential to be the Waterloo for President Barack Obama. Getting the balky website to work would put the president’s domestic agenda back on track. It would also provide the certainty health insurance carriers and agents crave as the lynchpin for sale of their products.
Image: Health and Human Services Secretary Kathleen Sebelius testifies on Capitol Hill in Washington, Wednesday, Oct. 30, 2013, before the House Energy and Commerce Committee hearing on the difficulties plaguing the implementation of the Affordable Care Act. The Obama Administration claims the botched rollout was the result of contractors failing to live up to expectations – not bad management at HHS. (AP Photo/J. Scott Applewhite, File)
2. Rising interest rates
The Federal Reserve Board appears poised to raise interest rates. It will create a tricky transition for life insurers, but doing so in a way that does not disrupt the economy and provides a transition to a more stable economic environment would add to the considerable legacy of current Fed chairman Ben Bernanke, and/or get the tenure of incoming chairman Janet Yellen started off on the right foot. In a recent report, Moody’s Investors Services said that, based on the prices paid on credit default swaps used to insure debt offerings of U.S. insurers, investors are wary about the ability of insurers to deal with the transition. Furthermore, in 2013 two insurance companies with life operations were designated for federal oversight, and another may be designated for federal oversight in 2014. Actual consolidated regulation of these so-called systemically-important institutions is not scheduled to start until 2015, but the transition to a federal role in insurance regulation, something that has not happened for 150 years, is now underway. The industry will be watching closely to see what forms federal regulation will morph into over the next few years. A major concern is that federal regulators do not understand the insurance business, and are going about overseeing it in the wrong way.
Image: Janet Yellen, of California, President Barack Obama's nominee to become Federal Reserve Board chair, testifies on Capitol Hill in Washington, Thursday Nov. 14, 2013, before the Senate Banking Committee hearing on her nomination to succeed Ben Bernanke. (AP Photo/Jacquelyn Martin)
3. A new fiduciary standard
Updating the fiduciary standard used to sell investment products is on the agenda of both the Department of Labor and the Securities and Exchange Commission. It had been expected that both the DOL and SEC would come out with their proposals, aimed at updating the standard and to increase uniformity and tighten compliance, by early next year. However, industry officials the week of Dec. 1 said the SEC, under new chairman Mary Jo White, has apparently agreed to let the DOL go first, and Thomas Perez, the new DOL secretary, has decided to revisit the DOL’s reproposal “from the ground up” in order to gain industry support for the rule. That could hold up release of a re-proposal until August, industry officials say. One official said that this meant that the SEC’s release of a fiduciary rule proposal would be “further back in the queue” from the many rules mandated under Dodd-Frank.
Image: Vice President Joe Biden swears-in Thomas Perez as the 26th Labor Secretary during a ceremony at the Labor Department in Washington, Wednesday, Sept. 4, 2013. Witnessing the ceremony is Perez's wife, Ann Marie Staudenmaier, and son Rafael Perez holding the Bible. (AP Photo/Manuel Balce Ceneta)
4. Another round of unclaimed property probes
Large insurance companies have paid large fines and been forced to turn over millions of dollars to the states based on allegations that they have not complied with unclaimed property laws. Now the probe is shifting to medium- and small-sized life carriers. Some state regulators say enough is enough, noting that the time has come for regulators to develop guidance aimed at ensuring what the industry calls “fair and uniform” settlement practices. The rift has been reflected in the differing views of Jim Donelon, Louisiana commissioner and outing NAIC president, and Andrew Hamm, North Dakota commissioner and incoming NAIC president. Whether to charge the NAIC “A” Committee with the responsibility to consider providing guidance on the uniform use of the Death Master File for life insurers as a priority could well come up at the NAIC’s winter meeting in Washington the week of Dec. 18th.
Image: (AP Photo/Remy de la Mauviniere)
5. Tax reform
President Obama’s budget for fiscal 2014 and proposals being crafted in both the House and Senate that would simplify and reform U.S. tax policy are being carefully monitored for their potential impact on the tax-advantaged status at the core of the attractiveness of insurance products. Some proposals being considered by the tax panels include capping tax-advantaged retirement accounts at the $3 million level and limiting inside buildup. Other proposals, included in the administration’s 2014 budget, would subject the dividend received deduction (DRD) for general account dividends to the same flat proration percentage that applies to non-life companies under current law (15 percent). Still another would base the DRD for separate account dividends on the proration of reserves to total assets of the account.
President Barack Obama, speaks during the annual 2013 Christmas in Washington presentation at the National Building Museum in Washington, Sunday, Dec. 15, 2013. (AP Photo/Manuel Balce Ceneta)