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.