If there is any word that describes the state of the life insurance industry now that Congress has departed for the next six weeks, it is uncertainty. Indeed, the greatest uncertainty in recent memory.
And, given the current gridlock in Congress, and the likelihood it will get worse next year, the notion that the uncertainty will be swept away within a reasonable period of time is a pipe dream.
While the Gramm-Leach-Bliley bill of November 1999 removed a decade-old threat of intense competition from the bank industry in key products such as variable annuities, the current uncertainty hovering over the industry is far more comprehensive.
It involves the economy, tax policy, regulatory policy, and the involvement through new legislation of the federal government in solvency and international trade issues.
Equally important, the standard of care that agents must use in selling investment products going forward is very much up in the air.
The Securities and Exchange Commission now has five months to complete a study of gaps in current regulation and whether a uniform fiduciary standard should be required in the sale of investment products (even the limited number of products sold by agents through broker-dealers.)
The provision in the law dealing with the issue then gives the agency the clear power to draft a new standard-of-care rule based on the findings of the report.
At the same time, in public comments, agency chairman Mary Schapiro made clear she will not allow the notice-and-comment process to be used to water down the intent of the financial services reform law.
The SEC would follow the new law “to the letter” when writing its rules, she has said. “The regulatory process is not designed to re-debate issues that Congress has resolved,” she said.
Also, the decision of Congress to depart on Sept. 30 without clarifying the future of the estate tax, or dealing with $3 trillion in tax cuts that expire at the end of the year, only further muddies the waters for the industry.
If not dealt with by the end of the year, tax rates will rise on income, estates, capital gains and dividends, amongst other provisions.
Meanwhile, October began with the first meeting of the Financial Stability Oversight Council established by the Dodd-Frank financial services reform act. This group will be responsible for protecting the U.S. financial sector from the failures of major companies that could pose systemic risk.
As John Huff, Missouri director of insurance, stated at the opening meeting of the FSOC, the group will be dealing with a number of issues that have created systemic risk for insurers and amplified the risk profile of certain insurers. These include unregulated or under-regulated products and financial institutions; overreliance on credit ratings; a lack of transparency in certain financial markets; and overly leveraged companies.
Meanwhile, Undersecretary of the Treasury Neal Wolin recently noted in Congressional testimony that the Treasury Department is moving quickly to create a Federal Insurance Office, with existing staff laying the groundwork while the department conducts a public search for a director. He also said that Treasury will make every effort to ensure a collaborative relationship with the NAIC.”
And, adding to the mix, the insurance agents’ role in selling healthcare products going forward is also unclear.
The NAIC and the Department of Health and Human Services has not yet determined whether the 20 to 25 percent of health insurance premiums designated for administrative costs will include agent commissions, or whether that cost will be dealt with separately.
Moreover, the agents’ commissions component is just one of many rules that must be crafted to deal with health insurance. Insurers and agents must deal with these issues as underwriters and sellers of these products, but also as employers.
In other words, these are interesting–and challenging–times for the industry. And, how it will evolve is very unclear.