This year has ushered in a wave of change that will drive disruption in the U.S. insurance industry.
Following a prolonged period of low interest rates, yields on U.S. Treasuries are rising, and there are expectations of up to three rate increases in 2017. The new administration in Washington could revamp federal regulations critical for the industry, while a number of key states could drive an agenda that may not align with Washington’s goals. Risks pertaining to cybersecurity and privacy, coupled with increased adoption of digital technologies, will present exceptional challenges and opportunities in the delivery of insurance products and services.
Against this backdrop of change and disruption, we explore four regulatory scenarios that could affect U.S. insurers in 2017.
Regulatory Standards Evolve Toward Greater Alignment
Multiple regulatory influences at the state, federal and international levels that have contributed to uncertainty on capital requirements may now, for the first time, begin to align.
The January 2017 covered agreement by the U.S. and European Union (EU) will not require U.S. insurers to comply with the EU Solvency II regulations, providing a major step toward creating a level playing field for writing business and managing capital.
Also, the Federal Reserve Board’s 2016 proposal on capital requirements for systemically important financial institutions (SIFIs) and depository institutions engaged in insurance activities reflected significant input from the industry and echoes evolving state-based approaches. While the definition and implementation of these standards will take time, calling for continued careful monitoring by companies, there are signs that U.S. and global efforts are removing potential barriers to greater alignment of these standards.
Cyber Threats and Data Privacy Remain Top Risks
Cyber threats and data privacy are consistently noted as top risks by U.S. company executives and are also a key focus for federal and state regulators.
Companies may face challenges to hire and dedicate greater resources to all aspects of securing and monitoring their data and networks under heightened standards of an effective cybersecurity program, while meeting the increased expectations of their boards and state regulators.
Fiduciary Conduct Standards Will Become the New Norm
In a widely-anticipated move, the Department of Labor has proceeded with a filing to the Office of Management and Budget to address conflicts of interest in retirement accounts.
Despite uncertainty around the rule’s future, the precepts of a best interest standard for retirement accounts are likely to remain a focus for regulators. Traditional approaches to suitability could be extended to challenge whether investors receive unbiased advice unaffected by higher product compensation and incentives.
The growing number of retirees will increase regulator attention on fiduciary conduct rules that are expected to help better align the interests of advisers and investors, even if these rules take a different form than currently proposed.
Increase in State-Based Exams and Enforcement
Exams focused on consumer protection measures regarding sales practices and insurance products, such as annuities, long-term care insurance, and Medicare supplements, will likely continue to be a priority for state regulators. Their focus on sales to seniors, sales practices of agents and investment advice provided by recidivist brokers is expected to be high.
As the regulatory exam process becomes more sophisticated by using big data and analytics to pinpoint potential misconduct, companies should increase internal surveillance and develop diagnostic capabilities to identify and address marginal conduct.
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