Understanding the Regulatory Landscape In Life Insurance
A Closer Look at the Impact on the Life Insurance Industry and how technology is the solution to navigating compliance
No Human Can Tackle Compliance Alone
The life insurance industry, historically characterized by its complexity, is facing a new era of regulatory scrutiny aimed at enhancing transparency, accountability, and the overall best interest of the consumer. This shift is largely driven by the SEC's Regulation Best Interest (Reg BI) and the Investment Adviser (IA) fiduciary standard, as well as increased attention from FINRA on how financial products, including life insurance policies, are recommended by agents and advisors. FINRA and the SEC have stepped up their enforcement efforts in recent days especially so that activity should increasingly lead to behavior that looks more like the kind of behavior long demanded of fiduciaries. However, meeting new fiduciary standards requires both time and technology, yet when it comes to the life insurance industry, there’s very little of both. Fortunately, innovative new technologies are helping agents and advisors save time and build more tailored life insurance portfolios based on goals and an investment profile, meeting and surpassing compliance standards that are impossible for any human to navigate alone. Let's delve deeper into the specifics of these regulatory changes and explore their implications for the industry, supplemented by insights from our experts on the front lines.
The Shift Towards Greater Transparency and Consumer Protection with Reg BI
Introduced by the SEC, Reg BI establishes a clear standard that broker-dealers and their representatives must act in the best interest of their clients, avoiding conflicts of interest. Agents and advisors must be able to show that they considered reasonably available alternatives to the products that were actually recommended, including the ability to document that these alternatives were considered. Recommendations cannot be pegged to individual products or house products under the new regime. This regulation is a significant departure from the previous suitability standard, requiring a more rigorous process to ensure that recommendations, including those related to life insurance products, align with the client's financial needs and objectives.
Meeting new Reg BI standards are drawn from three key fiduciary principles. The first requires advisors, agents and other financial professionals to understand the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions. New standards establish an ongoing monitoring obligation, requiring continued analysis after purchase of the investment and over the course of the relationship. The second standard requires that recommendations or advice must be based on a reasonable understanding of the specific retail investor’s investment profile. The third is based on the understanding of the first two elements, having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor’s best interest.
Regulators will expect firms to have a process for reasonably evaluating available alternatives. The broker standard of conduct implemented in 2020 prohibits brokers from putting their revenue interests ahead of their customers’ interests in investment returns—a practice that drove some irresponsible sales of IUL policies in the previous zero-interest rate environment. New technology innovations in data and analytics can help create the process of evaluating available alternatives and guaranteeing objectivity in life insurance recommendations, streamlining tasks that otherwise would be extremely difficult to do manually, and to ensure consistency across the representatives within a firm. They also allow you to integrate the client’s investment profile into the algorithm to design for more objective recommendations.
Recent Regulatory Examples Signaling Increasing Scrutiny
Although Reg BI was introduced in 2020, FINRA recently announced that Regulation Best Interest will continue to be a “priority area” this year, particularly cases involving failures to disclose certain conflicts. The problem is the workload required before brokerages and advisors establish a standard of care, which has meant many efforts to date remain perfunctory. Firms and practices continue to explore their options as they also look to understand the standard of care that will actually be prosecuted, with the latest iteration of a Reg BI study shows brokers are falling short on offering customers reasonably available alternatives to recommendations and mitigating conflicts of interest.
The study also found that many brokers are still incentivizing their registered representatives to sell complex products—ignoring lower-cost and lower-risk investments when recommending. Point-of-sale disclosures continue to be minimal at best, showing how difficult it is for many brokers to move beyond a product-sales mindset to a more holistic approach. Recently FINRA suspended a broker for 15 months for recommending unsuitable trades in four accounts held by three customers, whose trading resulted in high turnover rates and cost-to-equity ratios. In another case, LPLA was penalized for securities violations when the company failed to properly supervise transactions and recommendations, sending out inaccurate information to its customers. Last year, FINRA imposed $185,000 in financial penalties on five brokerages for compliance failures. The tougher standards also extend to the regulator’s new expungement guidelines, with a FINRA arbitration panel recently denying a broker’s request to clear an old customer complaint.
Impact on the Life Insurance Industry & How Optifino Helps
The implications of these regulatory changes for the life insurance industry are profound and multifaceted, especially since (until Optifino) there has been no tool that evaluates reasonable alternatives, establishes objectivity in recommendations, integrates the client investment profile into the recommendation, and understands the potential risks and outcomes of any policy. However, new technological advances in data processing and analytics—specifically when it comes to AI—empowers agents and advisors to undertake comprehensive analysis of available life insurance products. No human alone is able to weigh all the factors involved with making a recommendation, such as cost, coverage, and risks to ascertain which products truly serve the client's best interest. Optifino enables the agent and advisor to do so, which is why we aim to become the standard for objective and holistic recommendations in high-end permanent life insurance.
Our advanced algorithm integrates the client investment profile to create a comprehensive analysis of the marketplace, and then visualizes the potential risks and outcomes of the different products best suited for their investment profile. Additionally, our platform makes it easy for advisors and agents to meet the need for enhanced documentation with an automated presentation builder, supporting and justifying their recommendation for their client’s specific financial situation and goals. The Optifino platform helps streamline the entire recommendation process, helping agents and advisors get back valuable time that can be used to focus on education and demonstrate their value beyond product sales. We provide an annual review of client policies after the purchase of the investment and over the course of the relationship, meeting new monitoring obligations.
In this rapidly changing regulatory environment, Optifino emerges as an indispensable tool for life insurance agents and advisors. Our platform is designed to ensure that the chosen policy aligns with their best interest. By using a platform that prioritizes the client's best interest and complies with regulatory standards, professionals can build stronger, trust-based relationships with their clients.