Deloitte experts discuss Labor fiduciary proposal, principle-based reserving for life insurers

The Labor Department's proposed fiduciary rule has reached the White House's Office of Management and Budget, and professionals who provide retirement advice are now awaiting the final version. Meanwhile, states are considering legislation to allow reserve calculations that could benefit life insurers' solvency. Deloitte experts explores these issues' effects on the life insurance and annuity industries in a report and in a recent interview with SmartBrief.

Uncertainty exists around the effective date and implementation schedule of the Labor Department's proposed rule, although major provisions are expected to take effect this year, says George Hanley, leader of Deloitte Advisory's U.S. regulatory and compliance group.

"Companies will need to develop a 'playbook' for all affected areas and be prepared to implement [that] playbook when the rule becomes effective," he says.

Insurers need to thoroughly understand the proposal and its likely effects on annuities, retirement plans, mutual funds and other products, as well as distribution, operations and IT, Hanley says. They also need to have the proper legal and compliance policies, procedures and training in place, he says.

The proposed rule would require professionals offering retirement advice to act in clients' best interest, and it could have a strong impact on variable annuities, which are commonly included in individual retirement accounts, says Andrew Mais, a senior manager with the Deloitte Center for Financial Services.

"The impartial conduct standards will carry an obligation that the compensation paid for such products is reasonable, which may impact how products, including annuities, are priced and agents are compensated," Mais says.

Another regulatory issue for the life insurance industry this year is principle-based reserving, which is increasingly being considered at the state level. The calculation, as opposed to the current static formula, is intended to lower reserves for products where they are too high, and vice versa.

Principle-based reserving is a central part of the Solvency Modernization Initiative of the National Association of Insurance Commissioners, which in an initial vote found a supermajority of states favored the approach. The likelihood is high that enough states will approve principle-based reserving in time for full implementation by Jan. 1, Mais says. California, which was originally opposed, has since approved legislation for principle-based reserving, and New York's opposition "has seemed muted," he says.

Principle-based reserving is meant to be more accurate and flexible in reflecting economic conditions and the risk of life insurers' products, and it also could allow for potentially more complex products to hit the market, Mais says.

"All this should mean improved solvency protection for insurers," he says. "Strong insurers are a plus for the economic system. Inasmuch as effective regulation reduces the chances of significant material distress for a financial institution, it may be considered as helping to reduce systemic risk."