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An Economic Downturn Intensifies Compliance, Market Conduct Issues

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As the economic downturn worsens, agents, management and companies must prepare themselves for the increased likelihood of market conduct and compliance issues arising.

There are several reasons for this, including:

–The strain on consumers due to lost jobs and indebtedness can translate into bad financial decision-making related to life insurance and annuities.

–Consumers also may look at their investments in variable products and begin to question their suitability and the advice they were given about the products.

–As insurance and annuity sales weaken, agents leave the business, creating a situation where their clients may not get appropriate advice and service.

–Finally, as the market for life insurance, annuities and mutual funds cools, agents will work harder than ever to make and keep sales and may be tempted to cut some corners, which can lead potential problems.

Client actions that may cause market conduct issues

Economic circumstances can lead clients to cancel or surrender policies or contracts without fully understanding the implications of their actions. There may be tax implications; for instance, if they have loans on their life insurance policies they may face income tax on their surrender. Clients who are younger than 59 1/2 who make withdrawals from annuities may face a potential tax impact on gains. Clients who surrender or cancel policies may also be undermining their future financial security. Canceling a policy can also create legal issues; for example, when life insurance is a requirement for a mortgage or part of a divorce agreement.

Clients may take loans from policies without realizing the impact on the policy’s survivability. Clients may miss payments, which may trigger automatic loans on cash values which undermine the policy, or they may see their policies’ cash values as needed for other expenses. A client may panic at losses in a variable annuity and withdraw his or her investment without realizing there are other investment options available in the product.

Agents can help clients by providing explanations of the impact of their proposed actions on the client’s financial plans and goals. Agents should advise clients regarding the implications of their desire to cancel or surrender a policy and also suggest alternatives that may help the client maintain the policy or maintain the same coverage with a less costly policy. Agents can help clients reposition their investments in variable products or mutual funds. They should also provide advice on the most effective way to access policy or contract values without incurring penalties or taxation. Agents should know the reason the policy was purchased and should be able to remind the client.

However, the agent must have up-to-date information upon which to base any advice. Agents should avoid giving advice unless their records include a recently updated financial and personal analysis of the client. Agents should try to meet with clients to conduct a review so that their advice is based on a sound foundation. Failure to have a recent, documented client analysis can lead to potentially improper advice.

Often after the panic caused by an economic downturn subsides, the client or his beneficiaries forget that it was the client who made the decision to initiate the surrender, withdrawal, loan, etc. This can lead to accusations that the agent provided improper advice.

To defend against potential future accusations and complaints agents should carefully document the basis for the advice they give clients. The most effective documentation is supported by a recent client review. Agents should prepare a disclosure letter that outlines the impact of the client’s decision and have the client sign the letter acknowledging their understanding of the impact of their actions.

One problem agents may face is that they may not know about actions the client takes because of the speed and ease at which the client can act directly with the company. This suggests that agents must be proactive in reaching out to clients to make themselves available for counsel and advice. Agents should be sensitive to the sense of panic some clients are feeling as they struggle to pay their mortgage and meet their other financial obligations. An agent can head off complaints, lapses and other issues by contacting clients and reassuring them of the soundness of their initial decisions.

Agents should also prepare themselves to discuss the soundness of a company’s financial condition as clients raise questions about the companies whose products they purchased. Agents should have information provided by the company that describes the financial soundness of the company and avoid developing and using their own information unless they get it approved in advance. Company information can also be useful if other agents attempt to replace policies or contracts through scare tactics related to the financial soundness of a particular insurance company.

Companies should also be proactive in attempting to reduce any potential compliance issues by alerting their service center personnel to discuss potential negative consequences of the client’s decisions, such as withdrawals, loans or surrenders. Service centers should attempt to refer clients to an agent who can provide a review for the client. If this is impractical, service center personnel should write scripts that provide full disclosure of the impact of client requests and require that the client acknowledge the disclosure. They should record the client’s verbal acknowledgement and understanding, in case questions arise.

Sadly, clients may seek out reasons for their losses in variable products and index annuities and hold the agent who sold them the product or the company who provided the product as responsible for losses. This can lead to complaints that the agent and companies will need to defend against. Hopefully, the agent will have the documentation to answer any questions regarding the suitability of the product and the disclosures he or she provided to the client.

For companies, the exit from the business of the agent who sold the product can vastly complicate the problem of defending against accusations of improprieties. General agents, agency managers and companies should make every attempt to obtain the client files of any agent that leaves the business and should also reach out to these clients to make available to them someone who can provide counsel and advice.

Lack of contact and information often increases the client’s sense that he or she has been victimized, which increases the likelihood of complaints to the company and regulators.

Agent actions that may cause market conduct issues

Agents, under pressure for production, do not want to lose any sales. Some may fear that if they disclose information that sounds at all negative, they will lose a sale. For some agents, the failure to fully disclose information is not a conscious attempt to mislead, but a hesitancy to risk a potential sale. However, full disclosure of a product’s features, benefits, costs, advantages and disadvantages is required. Agents need to understand that improper sales bring with them heightened risk of complaints, legal actions, fines, sanctions and ultimately loss of selling contracts. General agents and companies need to remind agents of the need for full disclosure and monitor that it is occurring.

Some agents may not be as rigorous regarding underwriting because it might lead to rated policies that in turn could lead to losing a sale. They may not probe consumers’ answers to questions fully and may steer policies to companies that have lower underwriting standards even though the product may not be fully suitable for the consumer. Agents, general agents and companies need to heighten their review of underwriting information, in spite of the potential for a lost sale. The chance of losing a sale is never a good reason to take on the heightened compliance risk inherent in an improper sale.

Agents may be reluctant to deal with clients who are upset and complaining about the impact of the economic downturn. This may cause agents who receive complaints to be slow in alerting the company whose product is involved that they have received a complaint. This may be especially important for companies that treat verbal complaints the same way as written complaints. Delays in responding to complaints can increase the client’s frustration, leading to regulator complaints. General agents and companies should remind agents that they are required to inform the company of any written (and for some companies, verbal) complaints as quickly as possible.

Agents, anxious to make sales, may jump on any sales ideas or sales materials that promise to increase sales. Their sense of urgency may mean they are less sensitive to the appropriateness of a sales idea or that they are unwilling to send sales material to the company to be reviewed. Agents need to realize that the use of unapproved sales materials is a serious market conduct impropriety.

Agents and field managers who are under pressure for production may be less critical about the suitability of a sale than they might normally be. The adage, “when it is hard to get a sale, every sale looks good” means that agents may overlook some aspects of suitability in their desire to make a sale.

Replacements also tend to increase during an economic downturn. Agents, especially those with large books of business, may look for easy sales by replacing older policies. Agents may denigrate the reputation of a company which has been in the news in an effort to convince a consumer to make a replacement. This is, of course, improper and should be avoided. Agents may suggest using cash values to pay for additional coverage without providing full disclosure of the impact of this strategy.

Agents need to resist the temptation to make a potentially unsuitable sale or improper replacement. Every replacement they recommend should be carefully documented including appropriate rationales for the replacement. In the long run, the problems created by improper sales outweigh their short-term benefit. To help agents avoid making mistakes, management and companies should increase their scrutiny of suitability and replacements during an economic downturn.

General agents or agency managers may be less critical of the background of experienced agents who promise they can bring sales to the agency or office. They may also be unwilling to take action on agents whose conduct is not up to par for fear of losing their production. General agents or agency managers will only lose credibility with their agents and administrative staffs if they hire agents with a history or improper conduct or if they allow high producing agents to act improperly. The exceptions to following compliance rules that are made during an economic downturn become standard operating procedures once business returns to normal.

All of these reasons combine to suggest that the risk of compliance problems grows when business slows and the difficulty of making a sale increases. Agents, general agents, agency managers and companies must be careful not to lower their standards as business slows. Their lower standards today will lead to higher compliance risk in the future. General agents, agency managers and companies should increase the monitoring and supervision of compliance and market conduct during times of economic distress, since that is the time when the pressure to cut corners to make sales is greatest.


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