Among the industry’s many gripes about the Department of Labor’s conflict of interest rule, one that rises to the top is cost.
Industry estimates peg the cash outlay needed to align company operations with the rule to be in the billions — $11 billion for brokerages alone, if a recent estimate by consulting firm A.T. Kearney proves accurate.
But there’s a flipside to the mountain of money. And that’s this: Companies that outperform with their compliance initiatives are more successful than competitors. Best-of-breed insurers do better financially their peers on key business metrics such as premium revenue, return on equity and the bottom line.
The source of this contention: The Deloitte Center for Financial Services.
In its recently unveiled “2016 Insurance Ethics and Compliance Survey,” the professional services firm interviewed senior executives from 15 of the largest U.S. life and property and casualty insurers, including chief compliance officers (37 percent of the study’s respondents), who rated their companies on key compliance and spending parameters. Deloitte used these responses to classify carriers in terms of their “compliance maturity,” then compared their answers to financial parameters disclosed in the companies’ financial statements.
The report’s conclusion: “Today’s great compliance function,” the authors write, “should be considered an asset to insurers, where investment in the function is associated with increased top and bottom lines, as well as lowered danger of reputational and other risk.”
The growing regulatory burden
Compliance demands on life and property and casualty insurers have increased markedly in recent years. One factor underpinning the rise is ever greater regulatory oversight.
The carriers, once exclusively the concern of state insurance commissioners, are now also overseen by the federal government, including the Federal Insurance Office and the Financial Stability Oversight Council, both outgrowths of the Dodd-Frank Act of 2010. There are also global regulators to contend with, such as the International Association of Insurance Supervisors.
Another factor ratcheting up compliance demands are potentially high penalties for being out of compliance. Case in point: Regulators’ discovery that life insurers were failing to report unclaimed death benefits.
As LifeHealthPro has reported, the carriers referred to the Social Security Administration’s “Death Master File” — a computer database of individuals with Social Security numbers whose deaths were reported to administration — to verify the status of those who received annuity payments. But many were negligent in reporting (as required by state unclaimed property laws) that life insurance policy beneficiaries had failed to claim death benefits of contracts covering insureds who had died.
The result: 10 life insurers paid aggregate fines topping $150 million. This case, among others, has prompted life insurers to invest significantly more in compliance infrastructure, including people, technology and businesses processes, to keep from running afoul of the regulators.
Damaging the brand
The cost of fines isn’t the only issue. Also to consider, Deloitte notes, is “reputational risk” because not following the rules is bad for the brand. And that could prompt clients and advisors to bolt.
“A company’s reputation is paramount for any producer,” says George Hanley, director of financial services risk and regulatory consulting at Deloitte. “They want to be affiliated with companies with outstanding brands, trust and integrity — companies that offer excellent products, and have superior servicing capabilities.
“Reputation is a byproduct of many things, including the corporate culture, ethics and compliance,” he added. “Producers gravitate to companies that enjoy a sterling reputation.”
Complementing companies’ compliance investments are corporate ethics initiatives for executives and managers, from the C-suite on down, to become better attuned to actions that, legal or otherwise, might be pushing the regulatory envelope. These efforts point to an evolution in the compliance officer’s responsibilities and mindset.
In years past, the report notes, it was sufficient to “check all the boxes,” adhering to the letter, if not the spirit, of federal and state regulations. That’s no longer true.
In the wake of the unclaimed benefits scandal, regulators’ expectations as to what constitutes good corporate conduct are rising. Hence the heightened regulatory scrutiny of “standard business practices,” which no longer provide insurers with a “safe harbor” from which to mount a defense.
And there will be few safe harbors for insurers under the Department of Labor’s fiduciary rule, substantive provisions of which take effect in April 2017.
“The DOL fiduciary rule raises the bar substantially on insurers, including their product, sales and compliance divisions,” says Hanley. “Demands to comply with the rule, including the impartial conduct standard, will impact the corporate culture — the solutions insurers offer, advisors’ product recommendations, and how producers document that they’re acting in the best interest of the client.”
Compliance budgets will also be affected. Hanley said some of Deloitte’s clients have pegged initial fiduciary rule compliance costs at up to $10 million. Subsequent add-on investments will be needed to become fully compliant with when the final phase of the rule takes effect in 2018.
Weighing the pros
The expenditures need not be viewed solely as additional costs to the carriers. As Hanley observes, insurers that build highly effective compliance programs are actually “more successful” that competitors who lag in their compliance efforts.
When measured against several financial benchmarks, the Deloitte report notes, these “higher maturity” companies surpass their “lower maturity peers.” This performance difference is observed both at life and property and casualty insurers.
For example, between 2011 and 2015, high maturity life insurers achieved an 8.1 percent average growth rate in total premiums, as compared to 2.5 percent among low maturity companies. Over the same four-year period, life insurers achieved an average 9.6 percent return on equity, as compared to 8.2 percent among low maturity carriers.
Attaining these superior metrics, the report adds, can’t be a middle management affair. The “tone at the top” — holding senior management accountable for establishing and fulfilling balanced performance metrics — has to be set by the company’s CEO. Those chief executives who aspire to catapult their companies from “good to great” also distinguish compliance efforts in terms of:
Implementing appropriate controls with “dynamic” testing.
Establishing a culture of diversity and values.
Empowering chief ethics and compliance officers to “create a competitive edge” for their companies.
Instituting “robust risk assessments” to uncover business risks to the insurer.
These initiatives produce not only superior financial results for high maturity carriers, the report notes, but also tangible gains in:
Annual training on ethics (100 percent of high maturity companies have such training, as compared to 67 percent of low maturity insurers).
Regular updates and communications around codes of conduct (100 percent vs. 87 percent, respectively).
Regular surveys of employees on their organization’s ethics culture (67 percent vs. 50 percent).
The inclusion of ethics issues in employee evaluation and compensation decisions (44 percent vs. 33 percent).
“Companies that invest in compliance and build a highly effective compliance program, one that creates an ethical corporate culture, are achieving greater success in the marketplace,” says Hanley. “There is a definite correlation between investing in compliance and company performance, both in terms of revenue and profitability.”