The Obama administration on April 6 rolled out a series ofnew regulations aimed at raising the standards for retirement investmentadvice, in a closely watched move that could trigger a shift in the way thatlife insurers do business.
The federal government's final fiduciary , which represents the culminationof five years of work at the U.S. Department of Labor, broadens the types offinancial advisers considered fiduciaries and imposes new obligations designedto eliminate potential conflicts of interest in guiding clients towardretirement. Those changes are likely to ripple through the brokerage sector andinto the life industry, forcing companies to alter their business models asadvisers face more incentives to push fee-based products over commission-basedoptions.
The regulations could impact annuities specialists inparticular, analysts said, as language in the final rule appears to clamp downon the more complex financial instruments that have driven earnings at a subsetof companies including AmericanEquity Investment Life Holding Co. and
"This is going to be disruptive," said DeloitteLLP Global Insurance Regulatory Leader Howard Mills, who works with a range ofinsurers on regulatory and policy issues. "These are very significantchanges that will have to be implemented. It will involve a lot of cost, itwill not be easy, and it will impact the products that are ultimately sold."
The life insurance industry has been among the most vocalopponents of the fiduciary rule over the past few years and only grew louder inrecent months as the federal government weighed final revisions to the proposedfiduciary rule that it released in 2015. The finished version, published to theFederal Register in a series of filings totaling more than700 pages, kept its overall structure in place while softening some smallerelements.
The final rule narrowed the administration's definition of afiduciary to exempt certain investment education and other activities,streamlined the process for selling some commission-based products under a newBest Interest Contract exemption and allowed for grandfathering of existinginvestments. The adjustments came in response to the more than 3,000 letters submittedover two formal comment periods, a large portion of which came from lifeinsurers, the White House said in a fact sheet on the rule.
Perhaps most notably, the federal government backed off itsgoal of implementing the rule in just eight months, a timeline that analystssaid would be unprecedented given the scope of the required changes. The rulewill instead go into effect in stages over the next two years, with companiesgiven until January 2018 to reach full compliance. That should ease some of thetechnical and operational burdens of bringing companies in line with the rule.
Yet that is unlikely to appease insurance groups, which warnthat the fiduciary rule will increase the retirement industry's legal exposureand hamper its ability to serve consumers. The standards are also set toextract a financial toll, especially after the federal government added indexedannuities to the list of products that can be sold only by advisers who agreeto meet higher consumer protections. The annuities, which generate returns tiedto a specific index, were a surprise addition to the products covered by thefiduciary rule's BIC exemption.
"Our view, and we think the prevailing view amonginvestors, was that the DOL would not risk this significant a structural changeat this late point in the rule making," FBR analyst Randy Binner said in anote to clients. "But apparently they have."
The change means that advisers would have to first signcontracts holding them accountable as investment advice fiduciaries beforeselling indexed annuities, creating legal exposure expected to cut into thewillingness to offer the products. Indexed annuities were originally left outof the BIC exemption, prompting speculation that the product would become more popularas companies shift away from the variable annuity products that have beenlisted under the BIC exemption throughout much of the rulemaking process.
American Equity Life, which generates more than 90% of itsearnings from indexed annuities, saw its stock drop following the fiduciaryrule's release. The company's shares finished the April 6 trading session15.34% lower.
PrudentialFinancial Inc., AmericanInternational Group Inc. and Lincoln National Corp. are also among the biggest writersof annuities, along with private life insurer Jackson National.
Shares of the three publicly traded giants all posted justslight gains April 6, a day where the S&P 500 rose more than 1%.
After months of increasingly stern language over thefiduciary rule, insurers and trade groups remained noncommittal in theirinitial reactions to the final regulations.
"As we carefully review the final regulation, we willdetermine if necessary revisions have been made to avoid adverse unintendedconsequences for America's savers," the American Council of Life Insurerssaid in a statement.
During a panel discussion held at the NAIC's Spring NationalMeeting prior to the rule's release, retirement industry groups said it couldtake days and even weeks to reach a conclusion on the new standards. ButDeloitte's Mills said his early conversations with insurers indicate the lifeindustry will broadly condemn the fiduciary rule.
"I would have to say that many in the industry feelthat a lot of their concerns were not reflected in this," he said in aninterview.
That could prompt at least one legal , which discussions ahead ofthe rule's finalization indicated would attack the federal government'sprocesses. ACLI spokesman Jack Dolan said in an April 5 email that the group'sanalysis of the rule will focus in particular on whether the Obamaadministration conducted an adequate cost-benefit analysis of its impact onannuities and consumer access to various retirement products.
Multiple lawsuits challenging financial reforms, includingMetLife Inc.'s recentvictory against the Financial Stability Oversight Council, have hinged ontechnical details such as the need to conduct an acceptable cost-benefitanalysis.
The ACLI has reportedlyhired a law firm to advise it on a potential lawsuit, and the U.S. Chamber ofCommerce in recent months also threatened to sue if it believes the law isunworkable. With indexed annuity writers now facing disruption, they could joinin legal action as well.
"We fully expect a legal challenge from [AmericanEquity Life] and other indexed writers," FBR's Binner said.
Insurers will likely also emphasize the impact that thefiduciary rule could have on middle- and low-income individuals' access toretirement investment advice. The new requirements could prompt advisers tonarrow their client focus, especially as they shift away from the commission-basedproducts that could appeal more to people unwilling or unable to pay fees forretirement products.
The potential for restricted access to certain demographicshas also raised concerns among state regulators. The NAIC announced this pastweek that it is planning a series of initiatives focused on improvingretirement security in the U.S., and insurance commissioners said they willclosely examine the fiduciary rule for indications that it could haveunintended consequences for consumers.
"If there are additional costs, it'll have to be paidby the customers," Wisconsin Insurance Commissioner Ted Nickel said."There is a real concern that those folks in the middle- and low-income[tiers] and who want to prepare for their later years be able to do so."