New DOL rule will force insurers to adapt

(Washington) – The Department of Labor's new market conduct rule will have a long-term impact on insurers and agents in the life insurance business, according to a new report by Standard & Poor's.

It specifically eyed variable and fixed index annuities, which S&P analysts project is a $190 billion annual business for insurers, because the new rule focuses on business as conducted in the U.S. when it comes to "qualified money" or retirement assets.

S&P said it believes the new rules "could meaningfully affect sales of variable annuities and fixed index annuities in the near term."

The financial services company also said it will not change any ratings for insurers immediately, since the rule starts to come into effect in April 2017, but it will be eyeing potential solvency implications for insurers depending on how they "respond and adapt" to this new regulatory landscape.

"We will assess the 'new normal' sales levels on absolute and relative bases," S&P said. "If companies are unable to adapt quickly and their relative market positions deteriorate, we could view their overall competitive position negatively," the analysts said.

Multiple channels currently distribute annuities, including career agents, banks, independent marketing organizations, and large brokers, among others, according to the report.

However, some insurance companies sell nearly exclusively through a single channel, the report said. "We believe that insurers with access to multiple distribution channels may be better positioned to adapt more quickly if the rule changes affect only certain channels," the S&P analysts mention in the report.

"We believe that insurers with access to multiple distribution channels may be better positioned to adapt more quickly if the rule changes affect only certain channels."

S&P also said that those firms with positions in the robo-advising distribution channel, which costs less to administer from an advisor's standpoint, is likely to become more prevalent.

"In addition, simpler products (with lower fees) are likely to increase in popularity," the S&P analysts said.

S&P said this could be a competitive advantage for some companies and, longer term, may fit well strategically with "robo" advising platforms, which are likely expected to grow.

Moreover, S&P cautioned, a requirement for more transparency regarding compensation is likely to reduce sales of higher-compensation products.

"Certain more-complex annuities have typically carried higher commissions partly to compensate the agent for the more time-consuming sales process," the analysts said. "We would view the emergence of more simple products favorably if they lowered insurers' risk profiles."

S&P said it anticipates potential rating implications in the next couple of years based on how life insurers respond and adapt to this new regulatory landscape "while maintaining their current competitive positions, profitability, and financial risk profiles."

S&P will pay particular attention to the profitability impact on sales of VAs and FIAs because of the higher costs that it projects will be associated with selling them. These higher costs are likely to stem from compliance and potential litigation liability, which could lead to weaker profit margins on sales without changes in pricing and/or product design.

"We may ultimately revise our view of a company's operating performance if return metrics change," the report said.

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