By anyone’s standards, 2015 was a year of disruption. Monumental legislation changed how we recognize marriage, how we plan our estates and how we pay taxes. Our standards of risk protection were challenged, as threats — cyber, terrorism, gun violence — became alarmingly frequent. And demographics continued to shift, changing the landscape of the workplace and redefining consumer culture.
Here, in no particular order, are the stories we think had the biggest impact on the insurance industry this year. Read, reflect and share your own “story of the year” in the comments section below.
No. 1: A death sentence from the DOL
Perhaps the most important — and potentially damaging — piece of legislation that came to light in 2015 is one that affects the insurance industry: the Department of Labor’s proposed fiduciary rule.
Insurance broker/dealers have the most to lose from the DOL fiduciary rule because of their dependence on commissions, proprietary products and individual retirement accounts. It remains to be seen whether the final rule will factor in any of the tremendous volume of industry criticism (and, to a lesser extent, support) registered during several formal comment windows and in-person hearings; whether advisors will still be able to sell to qualified retirement plan clients on commission or other forms of variable compensation; or whether a given segment of advisors will have to start papering best interest contracts. Things should finally become clear as 2016 progresses.
“If you don’t want to be a fiduciary, then you’ll have work for free under the DOL proposal,” said Magenta Ishak, a vice president of political affairs at NAIFA. If the current legislation happens to pass, the industry may see a mass exodus of advisors and a forever-changed insurance and financial planning industry.
— Emily Holbrook
No. 2: Advisor perks come under scrutiny
Last spring, Sen. Warren sent letters to 15 of the country’s largest annuity providers because she didn’t like the perks advisors were getting in the form of cruises, international travel, iPads, cash, stock options, even diamond-encrusted ‘NFL Super Bowl Style’ rings.
According to Warren, the annuity providers wined and dined advisors to “entice sales of their products.”
In her letter, the Senator wrote, “Annuity agents that are more interested in earning perks than in acting in their clients’ best interest can place Americans’ savings and retirement security at risk.”
According to Warren, “The questionable practices identified in these letters highlight the need for a strong conflict-of-interest rule from the U.S. Department of Labor (DOL) to protect retirees by requiring advisors to act in their clients’ best interests.”
What impact Warren’s latest crusade will have on future compensation for advisors remains open for debate, but the powerful legislator has President Obama and DOL chief Thomas Perez in her corner. This is one to watch.
— Daniel Williams
No. 3: Hackers hit health care giants
In March of this year, The Washington Post noted that, according to HHS data, more than 120 million health records had been threatened by data breaches since 2009. This enormous number — which would equate to a third of the U.S. population if these were all separate individuals, with no one being impacted by more than one breach — could in fact be just the tip of the iceberg. More than retail outlets or banks, insurers and other health organizations are becoming top targets for cyber breaches because the data they maintain is so valuable on black markets. Hacked health records can sell for more than $10 each, as Allison Bell reported in February, and sometimes for as much as $1,300 each.
The most notable breach, of course, was the Anthem hack in February 2015, in which 80 million health records were compromised. This was followed by attacks at Premera and UCLA Health System. In the weeks and months to come, there will be others. And it’s not just health insurers that need to be on guard. Any organization that stores or transfers sensitive information could be a target. Doug French, managing principal of the Insurance and Actuarial Services at Ernst & Young, has called data security the No. 1 emerging risk in the world. This is one story that is not finished yet. It will only continue to get more sophisticated and more threatening.
— Nichole Morford
No. 4: Insurers get creative in a low yield environment
Much has been written about U.S. life insurers’ years-long wait for a rise in short-term interest rates. That move came at long last on December 16, when the Federal Reserve ratcheted up its benchmark Federal Funds rate by 25 basis points.
Less widely explored among industry-watchers is how life insurers have adapted to historically low rates to boost investment yields, cash flow and, ultimately, profits. The savvier ones, it’s clear now, have revamped their asset allocation strategies.
That’s mostly entailed diversifying their portfolios beyond their traditional holdings — cash and investment-grade corporate bonds — by investing in illiquid assets to increase returns. The companies have been especially keen to invest in commercial mortgage loans.
According to market research firm Conning, between 2010 and 2014, allocations to mortgages increased to 11.3 percent from 10.1 percent of investable assets. Allocations to commercial mortgage-backed securities (CMBS) increased to 5.1 percent of total bonds in 2014 from 4.8 percent in 2010, achieving a peak of 6.0 percent in 2011.
U.S. life insurers have also been addressing continuing income needs by adding Triple-B corporate credit exposure and emerging market debt to their portfolios; and by boosting holdings of asset-backed securities, which rose to 6.7 percent in 2014 from 5.6 percent of bonds in 2010.
The portfolio makeover has, at least by one measure, yielded positive results. The life industry’s investable assets increased by 4.0 percent or $130 billion between 2013 and 2014, attaining $3.4 trillion, Conning shows. The rise exceeded the 2.1 percent annual growth rate in assets for the one-year period.
For agents and advisors, what these moves will mean for their practices, particularly in terms of product pricing and features, remains a question mark. Much may depend on further increases in both short- and long-term interest rates — and whether they continue to rise in predictable fashion or take an unexpected turn for which insurers are ill-prepared.
— Warren Hersch
No. 5: PPACA risk corridors program comes up short
When Patient Protection and Affordable Care Act drafters created the PPACA risk corridors program, they thought they were doing health insurers a favor. The program was supposed to use cash from PPACA exchange plan issuers that did great in 2014, 2015 and 2016 to help the stragglers.
Suddenly, in May, a rating agency analyst warned that the program might take in only enough cash to pay 10 percent of the 2014 obligations. In July, the head of the Center for Consumer Information & Insurance Oversight, the federal agency that oversees the exchange system, told state regulators to assume when looking at 2016 rate filings that the risk corridors program would work. In October, CCIIO told insurers that the program could pay only about 13 percent of the 2014 obligations.
Congress has repeatedly refused to let program managers use any sources of cash other than exchange plan issuers’ payments to meet obligations.
The surprise shortfall announcement raises questions about why CCIIO failed to see the problem coming. The story also raises questions about whether health insurers can count on the U.S. government to function well enough to keep any promises, or apparent promises, it makes to program vendors.
— Allison Bell
No. 6: SCOTUS makes history for same-sex couples (& estate planners)
In June, the United States Supreme Court made the monumental decision of legalizing same-sex marriage in the U.S. It was a decision that would become a landmark ruling for equal rights. Although many same-sex couple already live together in partnership, there are new, important tax implications same-sex clients now face once married.
Insurance agents have the ability to guide their clients in the right direction. Topics such as estate planning, income tax, Social Security and life insurance all mean something different to same-sex clients than they did before. Clients who had a solid financial plan in place before the ruling may need to make changes now that there is another person they can legally plan for in those decisions.
The SCOTUS decision on legalizing same-sex marriage was not only a monumental moment for the U.S., but also an important topic for insurance agents in 2015. It will continue to have implications well into 2016.
— Carley Meiners
No. 7: The millennial invasion
In January, Pew Research wrote that the projected number of millennials (75.3 million) would surpass baby boomers (74.9 million) as the nation’s largest living generation. The news helped set the tone for a year that was all about this up-and-coming demographic.
A recent article published here on LifeHealthPro.com notes that millennials are beginning to have an important impact on the workplace: “While ‘taking over’ might be an exaggeration, it’s not too far from the truth,” wrote Rod Rishel, who also states that, according to the Pew Research Center, more than 1 in 3 U.S. workers today is a millennial.
So, yes, millennials are invading the workplace. And while they’re at it, they’re changing the traditional consumer profiles that have remained largely the same for the last several decades. Millennials demand quick information, personalized customer service and high-tech everything. These new needs are already impacting the way that the insurance and financial industries communicate their marketing strategies and do business.
Millennials will continue to be a trending topic and pose challenges — and opportunities — from a business perspective in 2016.
— Lynette Gil