NEW YORK & CHICAGO--(BUSINESS WIRE)--A US Department of Labor (DOL) proposal promoting new best interest standards that provide protections primarily to individual and small business investors related to retirement accounts and annuities could affect US individual annuity sales, according to Fitch Ratings.
The proposal, expected to be finalized imminently, is viewed as credit neutral to US life insurers. Fitch 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 US life insurers would be a credit negative. Fitch expects the bulk of the final DOL regulations will remain largely as proposed, with some more minor changes in procedure likely.
Fitch 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. The DOL regulations ultimately aim to reduce potential conflicts of interest between selling agents and the retail investor and to broaden the scope of individuals covered under the Employee Retirement Income Security Act of 1974 (ERISA).
Under the new DOL proposal, a best interest fiduciary standard would apply to retirement plans with less than 100 participants or $100 million in plan assets, an individual plan participant or an IRA owner. As a fiduciary, an advisor is prevented from receiving commissions on product sales unless the advisor commits to following a best interest fiduciary standard and to adhering to certain compliance policies, procedures and disclosures of fees and potential conflicts (known as the Best Interest Contract, or BIC). As the new proposal carves out retirement plans with more than 100 participants or plans with at least $100 million in assets (which have fiduciaries with financial expertise), the employer-sponsored group business for midsized or large companies will not be affected under the new proposal.
A notable exemption for life insurers currently under ERISA is the Prohibited Transaction Exemption (PTE) 84-24, which allows fiduciary insurance advisors to receive commissions for selling insurance products to plans, participants and IRAs. In its current form, insurance products include all annuity contracts, regardless of whether the product is considered a security under federal securities law.
The new DOL proposal would effectively limit insurance product sales to IRAs to fixed annuity contracts as 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 described above. This 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 (FIA). 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.
The new 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. 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, 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.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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