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2011: The Hazardous Road Ahead

There is no question about it. Insurance advisors will find 2011 difficult to navigate because of the new laws, regulations and reports that are already on ramp.

Some of the coming developments may prove to be just small bumps in the road, but others have the potential to become gaping potholes. Either way, insurance advisors will need to keep a firm grip on the wheel and be ready for sharp turns-even redirection. Advisors will still be in business and still have opportunities. But they will need to prepare for work in an environment where confusion reigns, where demand for disclosure is growing and where new governmental bodies and powers have the potential to change insurance regulation.

Producers have two choices as they navigate this year: they can see the way ahead as treacherous and lurch from hazard to hazard or they can see opportunity in each challenge and become the designated driver for their clients. But, producers must get their bearings.

The Confusion Factor

 The confusion factor comes from the avalanche of change that is about to occur. For instance, health reform has many consumers feeling afraid of what will happen to their health insurance, or health insurance premiums, in 2011. That means agents will have to work hard to educate, advise and direct. It's not just health care that confuses people. Ongoing discussion about tax legislation is confounding too. For example, even though there is a deal on estate taxes for this year and next, Edward Graves, associate professor of insurance at the American College, Bryn Mawr, Pa., asks what happens with estates that were settled in 2010? Also, what happens after 2012? Will that be another lost year like 2010 was? Similarly, debate over the fiduciary standard is causing confusion among industry professionals. Government interests have proposed making broker/ dealers (B/Ds) and their reps, who now work under suitability standards, subject to the fiduciary standard of care. The Securities and Exchange Commission (SEC) is due to submit its recommendations on the subject this month.

The issues are tangled and insurance advisors are wondering if this may affect them, even if they do not sell securities. Conrad Ciccotello, associate professor and director of the Personal Financial Planning Programs in the Department of Risk and Insurance at Georgia State University, Atlanta, says chaos reigns on this right now. "I don't think anyone gets it all. Will we have federal or state regulations? One standard or two?"

The Community Living Assistance Services and Supports (CLASS) Act has advisors scratching their heads. CLASS is set to go into effect this month, but some interests-including the president's bipartisan deficit reduct ion commi s - sion-have proposed retooling it. So far, CLASS has survived. But since opponents are fixing to challenge it again this year, its status remains a muddle.

The federal government will probably spend much of 2011 starting the CLASS program, points out Jesse Slome, executive director of the American Association for Long Term Care Insurance (AALTCI), Westlake Village, Calif. If the campaign is successful in convincing the public that the government has a great new LTC plan, that will hurt private LTC insurance agents, who must then compete with the government, he predicts. But if it's ineffective, "it will be a ho-hum kind of thing," he says, and that may lead to increased confusion, with people delaying taking any action on LTC until they know more. In general, all the new laws and regulations are "well intentioned," says Ciccotello. But he warns that they may end up restricting supply of insurance products, services and distribution. "If that happens, we won't be getting the consumers' needs met." That will lead to more confusion.

The danger of restricted supply of advisors is a point that insurance advisor trade groups keep making in their fight to have agent commissions excluded from administrative costs in the Medical Loss Ratio (MLR) calculations that take effect in 2011. Interim MLR regulations require large group insurers to spend at least 85 cents of every premium dollar on medical care, not administrative costs, and individual/small group carriers must spend 80 cents per dollar on medical care. If agent commissions are included in administrative expenses, the agent groups say, carriers will try to meet their ratios by cutting agent commissions. Those cuts will, in turn, put health agents out of business or curtail operations so much so that consumers will no longer have access to a health insurance advisor, agents warn. Whether agents will have success overturning the current MLR regulations is yet another source of confusion. It illustrates the difficulty that lies ahead at the agent practice level. What income should agents plan for? What steps should they take?  

More Disclosure

Several new and proposed regulations and laws impose detailed disclosure requirements. At the very least, the compliance will cost advisors time and money, to say nothing of frustration. Take New York's Regulation 194 "Disclosure of Agent Compensation," which went into effect Jan. 1. It requires insurance producers to disclose to the customer not only whether the producer will receive third-party compensation related to the product sale, but also-if the customer asks-the amount of compensation and other details. Very few insurance agents disclose commission details to customers, so this promises to be a hot button issue.

It is true that the New York effort grew out of New York's much-publicized 2004 investigations into the activities of megabrokers on the property/casualty side of the insurance industry. However, the new regulation is worded in such a way as to apply broadly-to insurance agents and brokers, reinsurance intermediaries, excess lines brokers, and others licensed in New York to sell, solicit or negotiate insurance.

That suggests life/health and LTC agents will be affected too. The life/ health industry has remained relatively quiet about this up to now. But as word of Regulation 194 spreads, that will likely change, especially if other states decide to pursue similar regulations. One possible impact of Regulation 194's commission disclosure rules is that carriers might decide to come out with a new product series that pays very low commissions, says AALTCI's Slome. This would not sit well with certain agent groups, such as health insurance agents who are already worrying about seeing their commissions cut due to the MLR regulations or life agents who have watched their commissions gradually decline over the past 10 years. The fiduciary standard could become a disclosure whirlpool for agents. This standard requires reps to put the interests of their clients before their own. It is considered to be more rigorous than the suitability standard, which requires the rep to ensure the product is suitable for the client. If the fiduciary standard were imposed on variable insurance sales, the agents would need to search every product in the line where they are selling in order to comply, says Graves of the American College. That would be a "nightmare" and an "exercise in futility" for agents, he adds. Insurance policies are highly complex products, Graves explains. They have many differentiating factors, making comparisons among them extremely difficult, especially since there are so many insurance products in the market.

Who Will Regulate Insurance?

The year 2011 will see the arrival of many new federal agencies that agents will need to watch. These include the Federal Insurance Office, the Bureau of Consumer Financial Protection, the Center for Medicare and Medicaid Innovation, the Financial Stability Oversight Council, the Independent Payment Advisory Board, and the Office of Financial Research.

As these bodies fill out, one or more of them could develop powers that give them a say over insurance regulation- indirectly, if not directly-that could affect agents as well as carriers. Right now, it's a matter of the camel having its nose under the tent, says Graves.

He cites the Federal Insurance Office (FIO) as an example. This office is charged with monitoring all aspects of the insurance industry (except health, some long-term care and crop insurance), plus regulation of insurers that could contribute to a systemic crisis. "The FIO has no impact right now, so there should be no immediate difference for producers who are marketing insurance products in the next 12 months," Graves says. "But once the body is established and the offices are set up, its power could grow."

Opportunities in Life Insurance

Agents in 2011 will need to bring clarity to their customer confusion, find processes for compliance with expanding disclosure requirements, and provide a watchful eye on new regulatory developments and bodies. Still, experts see opportunities ahead. For instance, Georgia State's Ciccotello believes agents will find the enormous opportunity in selling cash value whole life insurance for wealth preservation and term life insurance for income protection.

"Insurance is back," Ciccotello explains. Consumers are increasingly averse to taking risks and they are concerned about paying higher taxes, he says. That will make those taxadvantaged life products very attractive. Since people find it hard to buy life insurance on their own, and since life insurance ownership is not built into public policy, people who want the advantages of life insurance will continue to need the advice of an "agent who interests them in the product and motivates them to buy."

The fact that the number of agents has been dwindling across the country will help increase demand for agent services, Ciccotello adds. In addition, the fact that many people are currently underinsured for life insurance means the need will be great.

Slome of AALTCI points out that advisors who do little active marketing or professional development may find this environment difficult. But advisors who are committed to the business will do the right thing and flourish, he says. "The cream will rise to the top. It always does."




• Continuing challenges to part or all of health care reform. These will come by way of amendments to the act, lawsuits, state ballot initiatives, early requests for waivers and efforts to amend/repeal the legislation. But others will work hard at implementing the law, such as starting state insurance exchanges.

• Optional federal charter legislation might be back on the agenda in Congress. • Frantic activity at the IRS and at employers, as both work to comply with the new income tax environment.

• Continued fireworks over the estate tax. The deal Congress approved is only for two years.

• Some states will start considering two new model acts developed by the National Conference of Insurance Legislators. One sets rules for life carriers when they offer retained asset accounts; the other governs disclosure to life insurance consumers about alternatives to lapsing or surrendering their policies.

• More state compliance with the annuity suitability requirements in the Harkin amendment to Dodd-Frank. The amendment says that states can regulate indexed annuities if they adopt the annuity suitability standards developed by the National Association of Insurance Commissioners (NAIC) by June 2013. Currently, about 40 states have adopted the standards.



January 1

• The new Federal Insurance Office (FIO), established under Dodd-Frank, begins evaluating how to modernize and improve insurance regulation. Its responsibilities include monitoring all aspects of the insurance industry (except health insurance, some long-term care insurance and crop insurance), and making recommendations to the new Federal Stability Oversight Council (FSOC) about insurers that may pose a risk. The FSOC is tasked with monitoring systemic risk throughout the financial system. One of the most significant aspects of the FIO is a report that it is supposed to produce on modernizing insurance, which is due in January 2012. Many see this report, and this office, as a first step toward federal regulation of insurance.

• Federal subsidies begin, under ACA, for generic prescriptions filled in the Medicare Part D coverage gap, called the "doughnut hole." Also, pharmaceutical manufacturers must now provide a 50 percent discount on brand-name prescriptions filled in the Medicare Part D coverage gap.

• Seniors on Medicare start receiving certain free preventive services, such as annual wellness visits and personalized prevention plans.

• Minimum Medical Loss Ratio (MLR) requirements take effect, as required by the ACA. Under interim regulations of the Department of Health and Human Services (HHS), group and individual health insurers must now spend a certain percentage of policyholder premiums on medical expenses - or pay rebates to consumers if they do not comply. Some states, such as Iowa, are already seeking exemption from the MLR regulations. Some agent trade associations are planning to push for a modification that would effectively exclude agent/broker commissions from the minimum MLR calculations.

• A five-year program that provides a 10 percent Medicare bonus payment for primary care services, and a 10 percent Medicare bonus payment to general surgeons practicing in health professional shortage areas begins.

• The Center for Medicare and Medicaid Innovation (CMMI) is established, as required by the ACA. It will test new payment and delivery system models to reduce costs while maintaining or improving quality.

• Income-related Medicare Part B premiums for 2011-2019 are now frozen at 2010 levels, and the Medicare Part D premium subsidy is now reduced for those with incomes above $85,000/individual and $170,000/couple.

• Private Medicare Advantage plans freeze 2011 payments at 2010 levels and begin phasing in payments that are set at increasingly smaller percentages of Medicare fee-for-service rates. MA plans have other new limits as well.

• The long-term care benefits program starts up. This is a national, voluntary insurance program for employers and self-employed individuals who want to buy into the federal government's new Community Living Assistance Services and Supports (CLASS) plan. Some interests are already pushing for a retooling or repeal of CLASS.

• Tax-free Health Savings Accounts (HSAs) have new limits. Health Reimbursement Accounts or health Flexible Spending Accounts cannot reimburse costs for over-the-counter drugs not prescribed by a doctor, and HSAs or Archer Medical Savings Accounts (MSAs) cannot reimburse these costs on a tax-free basis. Also, taxes on nonqualified distributions from HSAs or Archer MSAs increase to 20 percent of amount used.

• New York's controversial Insurance Regulation 194 takes effect. It requires producers to disclose information about their compensation to consumers.

January 3

• The new U.S. Congress convenes. Although the Bush-era tax rates and new estate tax structure were approved, it was for two years, ensuring further fighting over tax policy. Some have said although they backed the deal for providing certainty, it still leaves some insecurity about what comes next. January 21

• The Securities and Exchange Commission (SEC) reports to Congress, as required by Dodd-Frank, on regulation of broker/dealers and investment advisors when providing investment advice about securities. The SEC will include analysis of whether the fiduciary standard should apply to investment advisors as well as B/Ds. Insurance organizations have been advocating for the current suitability standard and against the fiduciary standard of care, which they say would fundamentally change how insurance is sold.

• Public companies, including public insurance companies, are now subject to the "say on pay" and "golden parachute" provisions of Dodd-Frank



• The president's budget is due. Many observers have been wary about tax policies the new budget might contain. Of particular concern is the inside cash buildup in permanent life insurance policies. This has been a rallying point for many insurance organizations such as the American Council of Life Insurers (ACLI) and the Association for Advanced Life Underwriting (AALU). This was a subject brought up by the president's National Commission on Fiscal Responsibility and Reform.



• Funding begins to be available, via grants to states, to help fund ACA-required establishment of American Health Benefit Exchanges and Small Business Health Options Program Exchanges. (Enrollment in exchanges begins Jan. 1, 2014.)



• The SEC proposes "pay versus performance" rule, as per Dodd- Frank's increased disclosure provisions.



• The new FSOC established under Dodd-Frank submits its first annual report to Congress on the results of its monitoring of systemic risk throughout the financial system.

• The new Office of Financial Research (OFR) created under Dodd- Frank completes setting up its office and systems. As the research arm of the new FSOC, OFR will collect information, including sensitive data, from regulatory agencies, bank holding companies, and nonbank financial companies, and provide periodic reports on its findings.

• New Department of Labor disclosure regulations take effect for defined contribution plan administrators and service providers that are subject to the U.S. Employee Retirement Income Security Act (ERISA). The regulations also apply to fiduciaries and service providers to all pension plans subject to ERISA.

• The new Bureau of Consumer Financial Protection (CFPB) takes on its responsibilities under Dodd-Frank, including writing rules to implement federal consumer financial laws and supervising big banks and nonbank financial services providers for compliance.



• The FIO submits to Congress the new office's first annual report on preemption of inconsistent state insurance measures, as per Dodd-Frank.

• The FIO submits to Congress the new office's first annual report on the insurance industry, as per Dodd-Frank.



• Administrative funding becomes available for the new Independent Payment Advisory Board. The board will develop and submit proposals on reducing the per capita rate of growth in Medicare spending if spending exceeds targeted growth rates. (First recommendations are due Jan. 15, 2014.)


• The Supreme Court begins the 2011-2012 session. Many expect that a challenge to health care reform will make it to the top court. Some have speculated that it could be as early as this session, with cases making their way through at least three states. But the court has already rejected one attempt to move a case straight to the top court, and none of the cases seem to be far enough in the appeals process to be eligible this October.



• The Federal Insurance Office finishes its study for Congress on how to modernize and improve insurance regulation, as per Dodd- Frank. Its report is due in January 2012.


Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected] [email protected].

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