The Rapid Evolution of Consumer Protection Regulation
Doug French | December 11, 2015
(Editor’s note: During the summer of 2015, EY interviewed executives at approximately 20 leading US insurance manufacturers, distributors and reinsurers as part of an ongoing effort to understand how the life insurance and annuity industry can surmount current challenges and move forward. The objective was to understand the views and concerns in the eyes of industry executives and stakeholders and to outline the industry opportunities and challenges from the perspectives of customers, distributors and manufacturers. The interviews focused on the global economy, innovation, distribution, talent issues and consumer protection. This is the fourth article in a five part series, where EY will walk through the key findings. You can read the first article here, the second article here, the third article here, and the fourth article here.)
Consumer protection considerations are rapidly evolving. There are many regulatory initiatives underway that are aimed at better educating and protecting insurance customers, though respondents are naturally concerned about the impacts. In doing so, one participant called for the industry to do a better job in promoting a “common-sense” regulatory regime.
The highest-profile initiative is the U.S. Department of Labor’s (DOL) proposed conflict of interest rule, which expands the definition of investment advice and the scope of fiduciary services. The proposed DOL fiduciary rule could change the way annuity business is written, how retirement plan participants are advised and how advisors are compensated. One respondent likened the proposed regulation to “an unstoppable train. The only thing we can do is try and influence the direction.”
Further, the proposed DOL fiduciary rule could cause radical changes in the way companies interact with their distribution partners, with big impacts on the advice model, product disclosure, compensation, and CRM. Many respondents indicated they are expecting advisor compensation to be leveled as a result of the rule, further accelerating the transition to fee-based for advisors.
Some respondents believed the advisory model would become much less attractive. One went so far as to say, “The DOL fiduciary rule in its current form will destroy the annuity business.” The final wording of the DOL conflict of interest rule will ultimately determine its impact, but increased compliance costs are inevitable. In general, most executives see large, “maybe even a massive impact on operations.”
From the perspective of advisors, their increased risk may make them hesitant to provide anything more than generic advice. Further, enhanced compliance monitoring and surveillance procedures will likely increase the time to complete transactions. Under the proposed rule, some advisors may prefer to limit their offering to simpler low-cost products such as passively managed ETFs instead of more complicated products such as annuities.
Advisors may conclude that it’s not worthwhile to focus on the middle market. The bottom line is that increased complexity and higher regulatory hurdles in the process of presenting and recommending some products may lead advisors to sell away from our industry’s solution set.
Looking ahead, some executives believe that because of increased litigation the law firms will benefit more from the proposed DOL fiduciary rule than consumers, whose lives and financial security may not be made better because of the fiduciary requirements of agents. One respondent expressed a common sentiment: “Regulation is making it harder and harder for the middle class to get advice.” Another added, “Consumers without advisors will be hurt and there will be unexpected consequences.”
Several respondents brought up the UK market, which has seen significant regulation aimed at protecting consumers, as an instructive example. Some executives have gone as far as to say that these “best interest” regulations make it unaffordable to sell products to consumers. All the respondents talked about wanting to prevent abuse, but they indicated that regulators have so far failed to define reasonable “windows” or parameters for advice to be given.
Respondents fear a similar effect in the U.S. market, where an unintended consequence of such regulation might mean the middle class would not be served by the financial services industry in the future. One respondent commented, “It will be more challenging, and more limiting in terms of where they would be able to get financial advice.” This is a critical concern, since many annuity leaders eye the large and currently underserved middle market as a future growth engine.
More than one respondent believes consumers need to be protected from themselves, while there is uncertainty about what else they need to be protected from. Respondents indicated that in the long term, whatever regulatory rules get written, technology, consumer demand, and market forces are going to continue the push to 100-percent transparency over time.
As the long-term trend plays out, some respondents are already considering the regulatory scrutiny that may occur as companies adopt advanced data management and analytics tools. Companies will soon have better insight into not only what consumers want, but what they are willing to buy, given the right incentive. That concern is over the horizon for now.
There is also concern around personal privacy and data security. In particular, life insurance agents felt this issue was much more significant, given the data collected through the underwriting process. When it comes to the risk of data breaches, most respondents are of the belief that “no one is safe.” That very much includes governments, which have already been victimized.
The news coverage of security incidents leads to greater consumer interest in the measures companies take to protect their data. That interest varies by age; many executives feel that younger people have already ceded their privacy, while older generations are more concerned and more reluctant to share personal information.
Some executives are wary of a “regulatory freak-out,” which may occur because a large cyber incident “is going to happen eventually and regulators will have to do something.”
What Survey Respondents Say
- “Some [regulations] are set up with good intentions, but in terms of how it actually impacts the day-to-day sale it can make it exceedingly complex.”
- “My impression of what’s happened in the UK is that people have been left on their own, and it hasn’t been good for the lower and middle markets.”
- “Big problem [with consumer protection] is that [regulators] don’t really know what consumers need to be protected from. It could be that sometimes they need to be protected from themselves and their behavioral biases … there is no fundamental, central principle that you can manage to … the details are so important that you still don’t know where you’re going to end up.”
- “[The proposed DOL fiduciary rule]” will end up re-pricing the entire industry, getting rid of commissions, speeding up transition to a fee-based model and breaking down what you are charging for into components.”
- “Data breach is not a question of if it will happen, but when it will happen.”
- “With social media, the next generation that most of our [life insurance] sales will come from in the next five to ten years has already conceded their privacy.”
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP, the global EY organization or the Insurance Technology Association. Doug French is the managing principal of the Insurance and Actuarial Advisory Services practice within Ernst & Young LLP in New York. He can be reached at email@example.com.
- Electronic Chat with Todd Greenbaum
- Martha Notaras: The “Outsider” with an Amazing Inside View
- ProSight Direct Offers “Effortless Insurance for Today’s Professional”
- Electronic Chat with Larissa Tosch
- Martha Notaras Will Join ITA LIVE 2019 as a Keynote Speaker
- Five Things to Consider When Evaluating Your Cyber Risk
- ITA Pro Magazine, January/February 2019
- Major Ransomware Attack Could Hit U.S. with $89B In Economic Damages
- ITA Announces 1st of Three Keynote Speakers at ITA LIVE 2019
- Electronic Chat with Jeroen Morrenhof
- Legacy Systems Are Dead. Really? Don't Count On It.
- Now Accepting Nominations for the 2019 ITA Bridge Awards
- It's time to register for ITA LIVE!
- Registration is Now Open for ITA LIVE 2019!
- What to Expect from a Digital Experience Platform Implementation
- ITA Pro Magazine September Edition is Now Available
- It's National IT Professionals Day
- Save the Date for ITA-LIVE 2019
- OneShield Software and UrbanStat Work Together to Improve Real-Time Analytics and Risk Decision-Making
- ITA LIVE 2019 - SAVE THE DATE!
- Insurance Technology Association Announces New Editor-in-Chief
- August 2018 Edition ITA Pro Magazine is Now Available
- Enterprise Architecture in an Agile World
- Top 10 Tips for Securing Your Mobile Devices and Sensitive Client Data
- Industry Insight: 4 Global Insurance Trends in Digital, Data, Content Services and Security
- Diving Deeper into Prioritizing Your Strategic Digital investments
- Why Content Rules
- How Mass Personalization Will Open the Small Business Benefits Market
- At Year End 2017, Will Your Organization Be Protected from Cyber Risks?
- Do Insurance Bots Dream of Mitigating Risk?
- Conditioned to Respond
- Managing & Mobilizing Insurance Data in a Connected World
- Race to the Finish Line
- New Tools, New Opportunities in Claims
- ITA LIVE: Reaching Insurance Industry Crossroads
- Advice to Insurance IT Leaders: Keep Your Eye on the Ball
- New Date, Venue for ITA LIVE 2017
- Guidewire Makes Major Push to Small and Midtier Market by Acquiring ISCS
- Insurance Disruption is Happening Right Now
- Insurity Adds Strategic Investment Partner, General Atlantic
- Beyond Transformation: The Convergence of Finance, Risk, and Actuarial Functions
- The Rapid Evolution of Consumer Protection Regulation
- Talent Hunt: Finding, Attracting, Retaining Top People
- Insurers Flexing Their Distribution Models
- Technology Driving Disruption in Insurance
- Fear of ‘Next Bubble’ Challenges Life, Annuity Carriers
- Technology Allows Commercial Lines Insurers to Stand Out
- Single Sign-on Viewed as Biggest Tech Challenge for Agencies
- ISCS Observes 20th Anniversary; Scurto Predicts Major Changes Ahead
- Policyholders and Their First Impressions
- Progressive Making Progress on the UBI Front
- High and Dry: Insurers Search for Disaster Recovery Plans
- Insurers Sign The (Un)Dotted Line
- Reflections of a Retired Insurance CIO
- Mobile Device Management Just One Answer to BYOD Issue
- Lessons from GEICO and Progressive on Winning the Critical Buying Stage
- You Are a Target for a Cyber Attack
- Web-based Systems are the Next Evolution in Claims Technology
- Gaining a “Wow” Experience from Web Users
- Time to Shift from Business/IT Alignment to Business/IT Alliance
- Healthcare Insurers Changing to Consumer Model
- Organization is the Key for Selecting Software Vendors
- Analysts Expound on the Needs of the Mid-tier Insurance Market
- Finding the Cure for Obamacare’s Website
- New Software Solutions Benefit Insurers on the Inside and Outside
- Products, Market Impede Investment in Systems for Life Insurers
- Combatting Cyber Threats: Predict, Prevent, Persist
- The Future of Telematics Heads Beyond Insurance
- The Shame in Cyber Security Lapses
- Building Policy Administration Systems for the Future
- Insurers Look Into The Eyes of Their Policyholders
- It’s a New Dawn for the ITA
INSURANCE IT NEWS
- Unique partnership between VMSolution and FRISS enables fast claims process
- Roost Joins the IoT Insurance Observatory
- Appalachian Underwriters launches world-class billing and payments offering (through Input 1)
- National Life Transforms Customer Experience Program with Cognizant
- Insurers Driving Real, Measurable Value from Digital Investments
- Insurers Embracing Digital Claims Payments, Says Novarica
- Majesco and DataRobot Partner to Bring Integrated AI/Machine Learning with Majesco Solutions to Customers and the Insurance Industry
- Stonetrust Commercial Insurance Selects Insurity’s Cloud-hosted ‘Workers’ CompXPress Suite’ to Improve Operations and Customer Experience
The Email Chat is a regular feature of the ITA Pro magazine and website. We send a series of questions to an insurance IT leader in search of thought-provoking responses on important issues facing the insurance industry.
ITA LIVE 2019
The tide is up! It's time to register for ITA LIVE 2019, our annual educational and networking conference! Our theme is "The InsurTech Revolution: Cutting Through the Hype." and we'll be bringing in a torrent of industry thought leaders, amazing insight and wonderful perspectives on the world of insurtech and its impact on the insurance landscape.
ITA LIVE 2019 will present real-life examples of true startup technologies that are helping insurers gain real advantage -- and a competitive edge -- in the marketplace. We’ll highlight the more successful InsurTech partnerships, while offering case studies that demonstrate exciting innovation and cutting-edge techniques impacting all aspects of the insurance ecosystem.
Ride the wave to LIVE 2019. Sign up today! We look forward to seeing you in May, 2019!
BLOGS AND COLUMNS
You have surely heard it said that small businesses are the growth engine for America. Today, the phrase has a special ring to it for benefits... READ MORE
With stagnant growth and lingering low interest rates, the life insurance industry faces a challenging future... READ MORE
Finding insurance carriers willing to write commercial lines risks has always been a challenge for producers... READ MORE
As Guidewire Software prepares for the start of Connections, its 11th annual user conference that begins on Nov. 2, Brian Desmond, chief marketing... READ MORE