With the Department of Labor’s much anticipated conflict-of-interest or fiduciary standards now finalized, industry stakeholders are offering varying assessments on the regulatory impact. Among the prognosticators: Fitch Ratings.
The international credit ratings agency stated in a comment letter issued shortly before publication of the finalized regulations that it expects changes to product offerings, distribution strategies and compensation structures. The new rules, Fitch asserts, will also lead to increased operational costs for insurers and advisors endeavoring to comply with the new standard.
To gain greater insight into Fitch’s assessment, LifeHealthPro Senior Editor Warren S. Hersch spoke with Doug Meyer, the organization’s managing director for life insurance. As the interview took place before the regulations were finalized, it did not touch on fixed index annuities, which the best interest contract standards now also encompass.
The inclusion of fixed index annuity writers in the BIC, Fitch wrote in a subsequent April 7 comment letter, will be “more onerous” for FIA writers than for VA writers, who have already devoted “considerable time and effort.” The April 7 letter adds that the lower-than-anticipated burden for VA writers should diminish the negative impact on VA sales relative to initial expectations.”
“However, Fitch believes that, over the longer term, both FIA and VA writers will be able to adapt to the new standards due to the relative attractiveness of these products in a low interest rate environment,” Fitch states in the comment. “Additionally, the longer phase-in period [of the regulations] may lessen the disruption to the sales process that was [earlier] envisioned and may dampen the impact of the unexpected inclusion of FIAs.”
These caveats aside, Fitch’s view of the final regulations’ broader impact dovetails with its earlier assessment. The following are excerpts of the LifeHealthPro interview.
Warren S. Hersch: Your comment letter tags the DOL fiduciary proposal as credit-neutral for life insurers in the short run, but potentially credit-negative long-term. Why the diverging forecasts?
Doug Meyer: Near-term, we foresee a decline in sales of variable annuity products over some period of time. That could negatively or positively impact the credit profiles of individual VA carriers — hence the credit-neutral rating. The broader application of the fiduciary standard — not just in respect to variable annuities, but also other insurance and retirement products — is a greater concern for us, which is why see the long-term impact as credit-negative.
Hersch: The report suggests that the regulations could drive changes in product offerings. So should we expect, for example, a revamping of variable annuities to provide more of a fee-like compensation structure, along the lines of, say, Jefferson National’s Monument Advisor, which comes with a flat monthly fee?
Meyer: Yes, but I should add that fee-based variable annuities have gained much traction in the industry to date. Fee-based annuities still represents a very small segment of the market — less than 5 percent of sales.
Hersch: Why is that?
Meyer: These products provide in effect a levelized commission, and thus an ongoing stream of income, as opposed to a larger, up-front commission on the sale. For many advisors, levelized comp is still not an attractive option.
Hersch: I understand the commission-based agent or advisor has historically not found the flat commission or fee attractive. But to the extent that the DOL’s fiduciary drive more advisors to go fee-based, then perhaps there might be an uptick in these products, yes?
Meyer: It’s reasonable to expect that the share of sales by fee-based advisors will go up, but I don’t think that would necessarily offset the potential reduction of commission-based sales.
Hersch: Duly noted. The Fitch memo also references expected changes in industry distribution strategies. Can you elaborate as to what you foresee?