As if the finalized Department of Labor fiduciary rule is not enough of a challenge for the annuities market to tackle, several other regulatory and compliance issues are still important for carriers, producers and independent marketing organizations to focus on this year.
Kevin Mechtley, consultant with First Consulting and Administration, outlined compliance issues likely to be faced by annuities providers this year during a webcast in conjunction with the National Association for Fixed Annuities (NAFA). Mechtley based his David-Letterman-style top 10 list on interviews with regulators and carrier compliance experts.
Continue reading to find out the top 10 regulatory and compliance issues annuity providers will face in 2016.
Suitability remains an ambiguous term, which makes it difficult to comply with. Carriers have different suitability standards and rules. Broker-dealers have different suitability standards in their reviews. Regulators perceive suitability differently from state to state. Some regulators are uncomfortable with automated supervision systems or shifts in supervision to IMOs because of perceived conflicts of interest. And product innovation further muddies the waters.
“Suitability remains a bit of a moving target,” said Mechtley. “What regulators don’t like is using product innovation as a crutch to make the sale suitable.”
To make matters even less clear, the new DOL fiduciary rule will not supplant existing state laws on suitability. Carriers and producers will have to figure out how to comply with both rules. However, the DOL rule will only apply to qualified money while non-qualified money will remain under state suitability rules, creating confusing scenarios in which advisors and carriers will have to wear two sets of compliance hats.
Technology advancements have led to automated procedures that are changing the industry, but further innovations like big data, electronic processing, wearable technologies, the Internet and social media will continue to foster change in the industry.
Mechtley said carriers and IMOs fall into three basic technology adoption categories:
The “innovators” who are investing heavily in technology and innovation and aren’t content to wait and see where the industry is going. They are leading the industry to its destination.
The “fast followers” who want to go where the innovators are going, but they don’t want to be first. They want to learn from the innovators’ successes and failures and then only adopt the successes.
Finally, there are the “slow adopters” who will wait until a majority of the industry adopts technologies before they make a decision.
Fixed annuity providers are likely to be fast followers or slow adopters, said Mechtley.
“I believe many companies are willing to sit back and wait and see what other companies and competitors are doing and how ongoing litigation unfolds,” said Mechtley. “Eventually companies are going to have to make changes, but I don’t expect many fixed annuity companies to be the earliest adopters.”
Technology like analytics could lead to competitive differentiation during the next two decades, especially as millennials and young customers increasingly seek online options for purchasing insurance. But technology will also give rise to new compliance challenges, such as privacy issues, cybersecurity breaches and increased disclosures.
8. Regulator concerns
Regulators are concerned with annuity advertising, carrier supervision of IMO activity and lack of monitoring of super agents.
“In the regulator’s eyes, not all agents are created equal,” said Mechtley.
Regulators consider it their job to protect individual consumers, so one complaint with merit is enough to land producers, IMOs and carriers in hot water even if the rest of their business is squeaky clean.
7. Generic advertising
Advertisements with no carrier name are a rising concern for regulators. The Wild West mentality of just a few years ago where everything and anything was acceptable is gone.
Now, carriers are very sensitive about advertising that could get them in trouble, said Mechtley, and many require that all advertising that names or references the carrier be reviewed for compliance.
6. Carrier compliance officer concerns
Carrier compliance officers mention problems with surrogate agents, cross-border sales, pretext issues and unapproved advertising as their primary concerns.
Mechtley said there is value in working with these officers to help prevent front- and back-end problems with compliance.
“It’s a relationship business after all, and that’s not just between agents, lead generators, IMO principals and carrier VPs, but also between those business units looking out for your best interests.”
5. Advertising compliance
Advertising is always a hot-button issue when it comes to compliance, and regulators are still concerned about advertising that could be misleading to annuity novices.
Mechtley listed several tactics annuity providers should steer clear of in their advertising to avoid compliance issues, including unfair comparisons, absolutes, scare tactics, unsubstantiated terms, confusing the advertisement with government approval, implying licensing beyond actual authority, and out of date statistics and testimonials.
To stay on the right side of compliance with advertising, endeavor to be truthful and provide accurate and understandable disclosures where necessary. Use timely statistics, and obtain and keep an approval record for all testimonials. Always disclose that insurance products may be offered for sale when you use a call-to-action. Be mindful of state inducement laws.
In short, ask yourself if an annuities novice could be misled by the ad, and if the answer is yes, don’t run it, according to Mechtley.
4. Product innovation
The fixed index annuities of today barely resemble “old-fashioned” annuities from the early 2000s, said Mechtley. Product innovations have substantially changed annuity products during the past decade, however the rules governing them have more or less stayed the same.
Exotic indices are one area that have become popular because they tell a good story to customers.