DOL rule could slow insurance sales for independent channel

The Department of Labor's new fiduciary rule will could depress sales for brokers and agents by forcing a consolidation of the independent channel's players, a new report warns.

Global investment management firm Conning & Co. discloses this finding in "LifeAnnuity Distribution & Marketing Annual: Confronting a Distribution Challenge, 2016 Edition." The study examines the implications of the DOL fiduciary rule on distribution, including the rule's impact on insurers and how they might respond.

Part of Conning's "Strategic Study Series," the report bases its findings on statutory data and a proprietary analysis of individual life and annuity sales by product and channel from 2011 through 2015. Conning also provides a product-level sales forecast through 2018.

"The new [fiduciary] rule is likely to decrease distributor revenue, potentially accelerate distributor consolidation, and increase insurer competition for distributor shelf space," the report states. "Life-annuity insurers may [also] face a dynamic and confusing distribution landscape… Navigating that landscape, while minimizing any negative sales impact, will be crucial."

The report notes the rule will not affect all insurers evenly.

Robo-advisors continue to attract funding and form partnerships with traditional bricks and mortar distributors. The DOL rule could "accelerate that development over the coming years" and "reinforce" the need for regulatory standards governing automated investment advisory services.

The study adds that small and mid-sized insurers are "closing the gap" with large carriers in respect to social media usage. The report also flags growth opportunities for insurers to promote their products through mobile apps.

"We continue to find a strong preference for distributor apps over consumer apps" among the top 25 life-annuity insurers, the report states. "That said, announcements by some large insurers involved in the retirement plan markets may indicate the growing use of mobile apps as a feature to attract plan sponsors and plan members."

Eye on Expenses

Based on statutory data, the study adds, life-annuity insurers reported a slight increase in advertising expenses in 2015 from 2014. As in prior years, 10 insurers identified in the report "accounted for the majority" of insurers' advertising expenses.

While smaller in volume than annuities, individual life insurance sales (defined as first-year direct premiums plus single premiums but excluding renewal premiums) remains the "foundation for many companies," the report notes. In 2015, of the 463 insurers that reported individual life sales, 105 did not report individual annuity sales.

The study adds that low interest rates continue to dampen sales of permanent life products. The one exception: whole life.

"Sales have been struggling in recent years, partly due to historically low interest rates, which affect crediting rates, and partly due to changes in the estate tax that reduce the need for cash value life insurance," the report states. "[I]n a year of market volatility and low interest rates, consumers may view the simplicity of whole life, combined with the potential to earn dividends on participating policies, as a positive. This led to an increase in whole life sales."

Among the report's other findings:

Insurers efforts to position indexed universal life as less volatile than variable life, but with greater upside potential than traditional UL, have not sufficiently offset higher cost of insurance (COI) charges. As a result, UL sales remain flat.
The broker/independent agent channel, which has traditionally generated the majority of life insurance sales, increased its sales across all products. But the report cautions that sales in this channel could slow if the DOL rule accelerates distributor consolidation.
The captive/career channel, while second in terms of sales, experienced a stronger sales increase in 2015 than the broker/independent channel.
Unlike life insurance sales, annuity sales in the broker/independent channel in 2015 experienced a decrease in sales. Three other channels experienced an increase in annuity sales in 2015.
Individual annuity sales increased slightly in 2015. Based on preliminary statutory data, variable annuity and fixed annuity sales decreased while indexed annuity sales increased. The different results mirror prevailing market conditions.

"Insurers continue to be reluctant to write large amounts of VA business due to the risks generated by the equity market-linked guarantees," the report states. "The prolonged low interest rate environment continued to drive consumer demand for indexed annuities. At the same time, low interest rates reduce demand for fixed annuities."

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