In the best of times, the insurance industry lives at an interesting crossroad of federal laws and state regulation. Agents and advisors must be aware of licensing requirements, laws and state level regulations that can vary by product and by state. Not only is it a challenge for them to keep it all straight, but lawmakers and regulators can find it difficult as well. Understanding what is happening at the state and federal level is important because staying in compliance is critical to maintaining your license, but it will also help you understand what opportunities could be emerging.
There are a number of legislative priorities currently in play that could have an impact on the insurance industry, and producers, as a chaotic 2020 continues to unfold.
- DOL’s Fiduciary Rule is dead, but Best Interest rules will be in effect on June 1, 2020.
- Retirement Enhancement and Savings Act (RESA) is working its way through Congress.
- Efforts to enact the National Association of Registered Agents and Brokers (NARAB) by the industry will continue.
- Legislation has been re-introduced into Congress to create a long term care “HSA” funded tax-free by a life settlement called a Senior Health Planning Account (SHPA).
But, trumping it all will be the response by the federal government and the states to the Coronavirus outbreak. On the one hand, we are in the midst of a public health calamity that will continue to playout for as long as it takes to develop and then administer a vaccine to the global population over at least the next two years. On the other hand, there is the economic fallout that has America and the world teetering between recession and a global depression. Most immediately the federal government has passed the $2 trillion CARES Act, which is only the first of more economic stimulus packages to come, and then will be followed up with more relief measures and rescue packages over time. The states will also be involved with disaster relief efforts, Medicaid administration for health and long term care with possible use of ACA open enrollments, tax policy and unemployment income deployment, and activist oversight by insurance regulators.
The combination of all this activity will not only impact Americans across all generations, but the business of agents and advisors will fundamentally change in many ways.
Coronavirus Response State Insurance Bulletins making “recommendations” to insurance carriers to give policy owners leeway with their policies during this period of crisis
This has been a rapidly developing situation and response, but as of April 2, 2020, thirty-six state insurance departments had issued bulletins offering guidance to insurance companies on their expectations for how policy owners and sales should be conducted during this unprecedented crisis. Among the guidance offered, common themes emerged instructing carriers to strongly consider extending grace periods for longer periods of time, establishing premium payment plans to avoid lapse, extending due dates for premiums, and waiving late fees and penalties. No department has suggested waiving premium payments, but they are focusing on ways to help policy owners to keep their policies in force in the face of interruptions in their income as well as making allowances for people who are constrained by social distancing needs.
Best Interest Standards effective June 2020 and over a dozen states working on their own interpretations—this could quickly become a mess for the industry.
In 2017, the U.S. Department of Labor proposed what is known as the Fiduciary Rule, which would have required all financial professionals who work with retirement plans or provide retirement planning advice—advisors, broker-dealers, insurance agents—to hold to the fiduciary standard that binds them legally and ethically to put their clients’ interests first. It would have prevented professionals giving retirement advice from concealing any potential conflicts of interest and would have required them to disclose all fees and commissions in simple dollar terms to their clients to ensure full transparency. Originally scheduled to be fully implemented by 2018, the U.S. Fifth Circuit Court of Appeals instead vacated the rule, bringing it to an unceremonious end.
By default, industry fiduciary standards will continue under Best Interest Contract (BIC). This is the 2019 Securities and Exchange Commission (SEC) regulation that attempts to improve safeguards for investors and standardize conduct of broker-dealers and financial advisors.
By June 30, 2020, broker-dealers and financial advisors must be fully compliant:
- Disclosure Obligation: Requires disclosure of material facts about the client relationship and recommendations of the products and services provided.
- Care Obligation: Requires reasonable diligence, care, and skill when making a recommendation to a retail customer. The client must understand potential risks, rewards, and costs associated with the recommendation.
- Conflict-of-Interest Obligation: Requires written policies and procedures reasonably designed to identify and disclose or eliminate conflicts of interest.
- Compliance Obligation: Requires enforcement of policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.
Retirement Enhancement and Savings Act- H.R. 5282 (RESA) would have a very positive impact for insurance and annuity advisors.
Intended to increase retirement savings for American workers through the employer-based system, the bill would modify requirements for tax-favored retirement savings accounts, and employer-provided retirement plans to encourage savings. It would also increase the tax credit for small employer pension plan startup costs and give small employers who start 401(k) automatic enrollment plans a tax credit.
Top goals of RESA include:
- Increase participation and contributions;
- Increase access for small employers;
- Increase education; and,
- Improve annuity selection and management.
National Association of Registered Agents and Brokers (NARAB) has been stalled in the U.S. Senate since 2016.
The establishment of a National Association of Registered Agents and Brokers (NARAB) is a step to help simplify insurance producer licensing in the United States. The NAIC supported the creation of a NARAB as a central clearinghouse allowing an insurance producer licensed in his/her home state to sell, solicit or negotiate in every other state in which the producer intends to do business, provided the producer is licensed for those lines of business in his/her home state and pays the state’s licensing fee. To become a member of NARAB, an insurance producer must be licensed in his/her home state, not have an active license suspension or revocation in place at the time of application, successfully pass a criminal background check and pay membership fees. Membership and participation in NARAB is entirely optional and voluntary; producers are not required to become NARAB members.
In January 2016, the Office of the President released the names of four nominees for membership on the Board of Directors of NARAB. NARAB has not yet been implemented, and the nominees continue waiting to receive confirmation from the U.S. Senate.
H.R. 5958, Senior Health Planning Account Act establishes a tax-free Long Term Care HSA funded by a life settlement
Current law already provides that the proceeds from the sale of life insurance—known as life settlements—are tax-free, but only if the policies are sold after the policy holders are seriously ill, by which time they often no longer own their policies. The Senior Health Planning Account Act builds on current law to provide seniors needed flexibility to plan for future expenses. Under the Act, seniors will be able to roll over their life insurance sale proceeds, tax-free, into Senior Heath Planning Accounts (SHPA), which would be dedicated to paying health care costs for themselves and their spouse. The accounts would be exempt from federal income taxation, similar to existing federal tax programs that encourage younger working Americans to invest in their own health care. SHPAs are expected to result in substantial Medicaid savings because private resources would be used to pay expenses otherwise borne by taxpayers. The SHPA Act is scored to generate substantial tax revenues.
Look for federal and state action that has been developing to still find ways to move forward, efforts to meet the Coronavirus crisis with relief for policy owners will be ongoing for the duration of this crisis, and perhaps the most consequential Presidential election in American history will all have a profound impact on the insurance industry—which in many ways will transform the business forever.