The potential casualty list from the Labor Department’s impending fiduciary regulation just got a little longer.
Specifically, ratings agency Fitch says that the rule could affect U.S. individual annuity sales.
While Fitch said the regulation’s effect is viewed as credit neutral to U.S. life insurers, and it does not expect the potential reduction in revenue to negatively affect the industry’s overall credit profile, longer term, the potential adoption of such a fiduciary standard applied to a broader set of products sold by U.S. life insurers would be a credit negative, according to the report. Fitch said it expects the bulk of the final DOL regulation will remain largely as proposed, with some more minor changes in procedure likely.
However, Fitch says it expects the new regulations could:
- have a material negative impact on the sale of certain annuity products;
- drive changes in product offerings, distribution strategies and
compensation structures; and - lead to increased operational costs to comply with the new standard.
BIC ‘Bet’
Fitch notes that since the application of the Best Interest Contract (BIC) exemption under the current proposal carves out retirement plans with more than 100 participants or plans with at least $100 million in assets, it believes the employer-sponsored group business for midsized or large companies will not be affected under the new proposal.
However, it notes that the DOL proposal would effectively limit insurance product sales to IRAs to fixed annuity contracts, since variable annuity contracts are considered a security under federal securities law and would no longer be exempt under PTE 84-24. “Therefore, variable annuities would be subject to the more onerous requirements of the BIC,” and thus Fitch said that the proposed change would have significant implications for annuity writers as it could negatively affect sales of variable annuities into qualified plans and could positively affect sales of fixed annuities and fixed indexed annuities (FIAs). Fitch notes that the FIA market in particular has grown significantly in recent years due to the relative attractiveness of the product in a low interest rate environment.
Fitch also notes that the DOL proposal also includes changes to the compensation paid by insurance companies to advisors for the sale of insurance products. “Insurance companies would need to alter their payment structures to comply, which could include the development of new products that would continue to remain exempt under the new regulations,” observes Fitch. “The DOL proposal would increase the risk of litigation to insurance agents and insurance companies which may, in turn, increase compliance costs related to the monitoring and enforcement of the new regulation.”
Finally, the report notes that increased reporting and procedural obligations will result in increased distribution costs through certain insurance agent and broker channels.
Additional information is available on www.fitchratings.com.
