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The Rapid Evolution of Consumer Protection Regulation

(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 

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