THURSDAY, JULY 1, 2010  

                                                Big “I” Association News




On the Hill
Agents Weigh Impact of Financial Services Reform
Legislation creates Federal Insurance Office and addresses regulation of surplus lines, annuities, reinsurance and fiduciary duty of broker/dealers.

Only three months after the enactment of sweeping health care reform legislation, Congress is now in the process of passing---and the president will soon sign---a far-reaching financial services reform law that is several years in the making. Although negotiations over the final bill did not conclude until Tuesday, insurance agents and brokers are already wondering what the proposal will mean for them.

The comprehensive bill—which weighs in at more than 2,300 pages—is a response to the financial crisis that has gripped the country and will produce profound changes in certain financial sectors. While seismic changes are in store for the banking and securities industries and their regulators, the bill has a far less dramatic effect on the insurance industry. Congressional leaders recognized that the turmoil caused by commercial banks, investment firms and international holding companies did not extend to the insurance world and concluded that similarly expansive action was not warranted in the insurance arena. The bill’s preservation of state insurance regulation is a victory for the Big “I," the National Association of Insurance Commissioners (NAIC) and other proponents of the state system as it allows insurance regulators to continue to effectively ensure that insurers are solvent, that claims are paid and that consumers are protected.

Perhaps the most notable insurance feature of the “Dodd-Frank Wall Street Reform and Consumer Protection Act”—and one that has been discussed in previous editions of IN&V—is the creation of the Federal Insurance Office (FIO). This new non-regulatory insurance office will be housed within the Treasury Department and is primarily tasked with monitoring the industry, issuing reports, advising the Treasury Secretary on insurance matters and working jointly with the U.S. Trade Representative on international insurance negotiations. The full impact of this office remains to be seen, but the bill contains numerous protections and administrative safeguards that will help prevent interference with the work of state regulators and other unintended consequences. The FIO will not have any regulatory authority over the insurance industry, and the Big “I” worked diligently to secure an additional protection that forbids the office from requiring agents and brokers to respond to data and information requests.

The financial services reform bill also uses targeted measures to bring about several much-needed and long-overdue reforms in the surplus lines marketplace. For surplus lines placements that cover risks in multiple jurisdictions, only the licensing, premium tax collection and regulatory requirements of the insured’s home state will apply in the future. The collection and distribution of premium taxes in multi-state surplus lines transactions has long been a complex and nearly impossible task, and the burden of allocation among the states will now be shifted to government officials. These and other reforms (including a simplification of due diligence search requirements) utilize the targeted approach to regulatory modernization that the Big “I” has long supported. They provide an example of how Congress can implement meaningful and significant marketplace improvements without dismantling state insurance regulation or creating an unprecedented regulatory structure at the federal level.

Some of the bill’s other features of interest to insurance agents and brokers are:

Creation of New Entities – The bill establishes the Financial Stability Oversight Council to identify potential systemic risks and respond to emerging threats to the country’s financial system. The 15-member council would be comprised of 10 voting members (primarily federal financial services regulators) and five nonvoting members (including the FIO’s director and a state insurance regulator selected by the NAIC). The proposal also creates the Consumer Financial Protection Bureau, an independent body within the Federal Reserve empowered to establish consumer protections and other rules for institutions offering financial services and products. The bill is clear, however, that the bureau will have no oversight authority over insurance products or providers.

Regulation of Indexed Annuities – A last-minute and somewhat controversial amendment will likely end recent efforts by the Securities and Exchange Commission to regulate equity-indexed annuities as securities and ensure that they will continue to be regulated as insurance products. Indexed annuities provide a guaranteed level of return to buyers—with the possibility of higher returns, depending upon the performance of a stock market index—and were scheduled to come under SEC oversight next year. The amendment allows insurance regulators to maintain control if two conditions are met: (1) the state where the annuity is issued adopts the NAIC’s Suitability in Annuity Transactions Model Regulation and (2) the issuing company adheres to the standards and requirements of the model regulation on a national basis. This amendment—which was not included in either of the bills originally passed by the House or Senate—preserves the authority of insurance regulators over indexed annuities and is a victory for supporters of state insurance oversight.

Fiduciary Duty for Broker-Dealers – As described in greater detail by Dave Evans in a separate IN&V article this week the bill gives the SEC the authority to extend the fiduciary duty that currently applies to investment advisors to broker-dealers who give personalized advice to retail customers. Many observers expect the SEC will use this new authority to establish such a standard, and it could have ramifications for independent agencies that operate in this field.

Reinsurance – The bill includes a series of reinsurance provisions that will give greater meaning and effect to the actions of regulators in jurisdictions where insurers and reinsurers are domiciled. The final proposal gives a reinsurer’s state of domicile sole responsibility for regulating the company’s financial solvency, provided the state is accredited by the NAIC (or has solvency requirements similar to the NAIC standards). It also prohibits other jurisdictions from requiring the submission of financial information beyond that required by the domiciliary state. In addition, a state would be prohibited from denying credit for reinsurance if a ceding insurer’s domiciliary regulator recognizes credit for the ceded risk and is accredited by the NAIC or imposes similar requirements.

Senior Investment Protection Grants – The bill’s intention is to bolster the level of senior investor protections by making financial grants available to states that establish certain suitability requirements in connection with annuity sales and adopt regulations concerning the appropriate use of professional designations.

Reports to Congress – The bill requires the FIO to study and issue separate reports on the reinsurance marketplace and on ways that Congress can improve insurance regulation, and it calls on the Government Accountability Office to examine and issue a report on the surplus lines marketplace.

The House of Representatives passed the reform package by a vote of 237 to 192 after several hours of debate yesterday, and the Senate is now expected to consider the proposal following the Independence Day recess.

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.





On the Hill
Senate Passes National Flood Insurance Program Extension
President expected to sign the three-month extension as soon as today.

Last night, the U.S. Senate finally followed the House of Representatives’ lead and passed a short term extension of the National Flood Insurance Program (NFIP). The legislation, H.R. 5569, extends the NFIP until Sept. 30, 2010 and is retroactive to May 31, 2010. The program has been expired since midnight, June 1, 2010.

Once President Barack Obama signs the bill into law (expected as soon as today), the NFIP should return to normal operations. Since the extension is also retroactive, any new policy applications or renewals that were signed and submitted during the hiatus will be effective from the date of application (or in the case of waiting periods, the waiting period will start from the date of application).

The Senate’s actions come nearly a week after the House passed this stand-alone version of the NFIP extension, and could not have happened a moment too soon. The Senate is scheduled to leave town this evening for the Independence Day recess and not reconvene until July 12, hence if the Senate hadn’t acted last night the program likely would have remained expired for another two weeks.

Over the last month, the Big “I” has tirelessly been working to convince Congress to pass an extension of this program, working with other industry groups as part of a coalition in Washington, D.C., and launching grassroots in 16 states on senators who were identified to be “key votes.” Though the association is grateful that Congress finally acted on a short term extension, it is nonetheless alarming that the NFIP was allowed to remain expired for so long, causing so much confusion and potentially leaving desperate homeowners and small businesses unprotected. Also disconcerting was the fact that the NFIP extension, which itself is not politically controversial, has for the last six months been considered in a package of “extenders” with other program extensions such as unemployment insurance and COBRA subsidies. Though these other programs may have merit in their own right, they are nevertheless controversial and have repeatedly hindered the NFIP’s extension, leading to three expirations this year alone. The Big “I” hopes the Senate’s action last night will start a new trend of the NFIP program being considered by Congress in its own right and without extraneous program extensions.

Though the retroactive extension of the NFIP is good news for independent agents and our consumers, it is important to note that this extension only lasts for three months, and the program will once more be facing a possible expiration on Sept. 30, 2010 unless Congress acts on another extension. The Big “I” is urging Congress to recognize the importance of the stability of the NFIP and to enact a long term extension of one to five years.

John Prible (john.prible@iiaba.net) is Big “I” vice president of federal government affairs.





L-H Trends
Financial Reform Package Tackles Fiduciary Issue
After review, SEC can require broker/dealers to act as fiduciaries.

Last week, the fiduciary standard achieved a significant milestone when the House and Senate conference committee working on financial services reform decided to give the SEC authority to extend the fiduciary duty to broker-dealers. The compromise calls for a six-month study of the issue. After that time, the SEC may issue rules—without requiring rulemaking or setting a timetable—under the Investment Advisor Act of 1940 that would apply to both broker-dealers and investment advisors when giving investment advice to retail clients. The rules would require that broker-dealers act in the best interests of their clients and disclose all conflicts of interest.

Recently, the two different standards of care that Registered Investment Advisors and Registered Representatives of Broker/Dealers are held to in providing services to their clients have received a lot of attention.  The Investment Adviser Act of 1940 differs from the Securities Exchange Act of 1934, which regulates broker/dealers, in the standard of care with which advice providers must approach clients. The Investment Advisor Act requires that an advisor act as a fiduciary, while the latter has only a “suitability” requirement. Translation: An investment adviser must always act in the client’s best interest, whereas a broker can choose an investment that is “suitable,” which means that the focus is on right fit for the client, but does necessarily mean that the investment that would have been “best” for the client. The suitability standard puts less of a focus on the total expenses of an investment than a suitability standard.

In 2004, the Financial Planning Association filed a lawsuit five years after the SEC adopted the “temporary” B/D Exemption rule, officially entitled “Certain Broker Dealers Deemed Not to be Investment Advisers.” The suit challenged the SEC’s authority to adopt the rule, which effectively allowed registered reps to be compensated by clients with fees. Previously, this arrangement was only allowed for investment advisers. But through the rule, registered reps avoided being regulated as investment advisers under the Investment Adviser Act of 1940 as long as any advice they gave was “incidental” to the brokerage services they provided.

Some proponents of applying the fiduciary standard to brokers were disappointed that financial services reform package does not outright require that the SEC extend such a standard to broker. However, SEC Chairman Mary Schapiro and commissioners Elise Walter and Luis Aguilar have publicly come out in favor of a fiduciary standard for brokers. Under  the compromise legislation, there are a few carve-outs for certain broker/dealer activities. For example, it would only apply when a broker was providing personalized investment advice about securities to retail customers. There are also provisions that say that just because a broker receives commissions, it doesn’t mean they violate the fiduciary duty under the Advisers Act, which also applies to the issue of whether a broker who sells proprietary products automatically violates their fiduciary duty under the Advisers Act.

Clearly, independent agencies that have registered representatives on the staff who offer products through a broker/dealer will have to follow developments closely to determine if they will be comfortable operating in the environment that emerges after the SEC completes its review. Because there are so many variables—expenses, carrier ratings, reputation for paying claims and other services—it will be challenging for agents selling financial products to determine what product is the “best” among a number of offerings. Registered reps who sell proprietary products are probably experiencing more anxiety regarding the fiduciary role than independent insurance agents who are registered reps because independent agents can access a variety of insurance products and mutual funds.

One of the concerns with the fiduciary standard is that it may result in fewer financial advisors. Those financial advisors who remain may target more affluent individuals, leaving a large swath of the U.S. public without the opportunity to receive personalized service. The SEC is aware of this concern, but clearly Congress is providing a road map to have similar standards for all professionals offering financial products and advice.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.


On the Hill
More Details of New Health Care Law Roll Out Today
Healthcare.gov launches; high risk pools off to a shaky start.

The race is on this week for states and the U.S. Department of Health and Human Services (HHS) to meet twin deadlines set in the health care overhaul law by today, July 1: the establishment of high risk pools and the launch of healthcare.gov, the consumer web portal. These two programs are some of the first tangible pieces of the newly-passed law to come to fruition. At press time, healthcare.gov was up and running. However, many states warn that it will take time to work the kinks out of the high risk pool programs, and even then federal funding is expected to be exhausted quickly.

As part of the law, Congress provided $5 billion to be divided among participating states to set up their own high risk pools providing coverage for uninsured consumers with preexisting conditions. If states do not wish to participate, the federal government will run a pool in the state through a nonprofit entity. These programs are intended to be temporary until 2014, when the state exchanges have been set up and insurers are required to accept consumers with preexisting conditions.

On the state level, the approach to this process has been varied, as 35 states have already established high risk pools over the last three decades. The law allows states to: (1) establish a program alongside an existing one; (2) establish a new high-risk pool, if the state does not already have one; (3) build on an existing program; (4) contract with a current HIPPA carrier to provide subsidized coverage or (5) take no action, in which case HHS would carry out setting up a program in the state. At press time, 30 states (plus the District of Columbia) have chosen to run their own program, while 20 states have deferred to a federally-run one.

In many states, applications are available to consumers as of today, with coverage beginning as soon as August 2010. As reported in the New York Times, Richard S. Foster, the chief actuary at HHS said 375,000 people could gain coverage in high-risk pools this year. He also predicted that “by 2011 and 2012, the initial $5 billion in federal funding would be exhausted.” Since the state exchanges won’t be set up until 2014, this could force states to either bridge the gap themselves or freeze enrollment. In addition, the Big “I” feels that 375,000 additional enrollees is an optimistic estimate, as the Congressional Budget Office (CBO) estimated that only 200,000 enrollees would be funded within the $5 billion limit. If the fund was unlimited, CBO estimated that 400,000 people would be enrolled in 2011, at a cost of $10 billion to $15 billion.

As of July 1, 2010 information on each state’s high-risk pool, along with all other health care options in each state, can be found on the HHS’s new consumer Web portal healthcare.gov. The first phase of the website will include information on private plans in each state, as well as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and, as mentioned, the new high-risk pools. HHS has compiled information from the states which will include every state authorized health plan, a list of the plans' network of providers, the services they offer, eligible requirements and how to sign up. The second phase of the website will be launched in October 2010 and will include more detailed pricing and benefit information.

On May 10, 2010, the Big “I," along with NAHU, CIAB and NAIFA, sent a letter (click here to read it) to HHS Secretary Kathleen Sebelius emphasizing the importance of licensed agents and brokers in the health care delivery system. The Big “I” will continue to actively advocate agent and broker positions in order to shape the implementation of the health care overhaul law as it unfolds.

Ryan Young (ryan.young@iiaba.net) is Big “I” senior director of federal government affairs.


P-C Trends
Summer Parties Near Water Present Risks
Offer your clients tips to stay safe during summer activities.

An estimated 32 million people across the U.S. plan to host parties or gatherings near water this summer, according to new research by Trusted Choice^® and the Big “I," yet they may not be aware of all the risks or prepared in case of an accident.

In a national survey, more than 43% of respondents, representing 98.6 million households, said they plan to host a party or any kind of social gathering this summer. Of those, more than 32%, representing more than 32.1 million households, indicated that their event will be held in or around water (such as a pool, beach, boat, lake, etc.).

Party host liability is one of the biggest risks associated with summer partiers.

“Asking guests to stop drinking at your summer party can be very awkward,” says Madelyn Flannagan, Big “I” vice president of agent development, research and education. “However, protecting your family and your guests is more important than an uncomfortable exchange at the neighborhood pool party. If you host a party and your over-served guest drives away and gets in an accident, you can be held responsible.”

Offer your clients these social host liability tips:

• It's best to avoid alcohol consumption when swimming. Always consume alcohol responsibly when swimming or entertaining at your pool.
• Familiarize yourself with your state’s host liability laws and make sure you’re properly insured.
• Limit your guest list to those you know.
• Consider hosting your party at a restaurant or bar that has a liquor license, rather than in a home or office.
• Provide filling food for guests and alternative non-alcoholic beverages.
• Schedule entertainment or activities that do not involve alcohol.
• Arrange transportation or overnight accommodations for those who should not drive.
• Stop serving alcohol at least one hour before the party is scheduled to end.
• Do not serve guests who are visibly intoxicated.
• Consider hiring an off-duty police officer to discreetly monitor guests’ sobriety or handle any alcohol-related problems as guests leave.
• Stay alert, always remembering your responsibilities as a host.
• Review your insurance policy with your agent before the event to ensure that you have the proper liability coverage.

Click here for additional tips on pool safety, grills and outdoor pits and driving/recreational vehicles.

The survey was conducted for Trusted Choice^® via telephone by International Communications Research (ICR), an independent research company in Media, Pa. Interviews of a nationally-representative sample of 1,006 households were conducted in May 2010. The survey has an overall margin of error of +/- 3.1%.

Margarita Tapia ( margarita.tapia@iiaba.net) is the Big “I” director of public affairs.