COMPETITION, REGULATION, And ETHICS In The LIFE INSURANCE INDUSTRY

Recent Reforms in the U.S. Financial Services Industry

The competitive environment in the U.S. financial services industry changed considerably in 1999 with the passage of Gramm-Beach-Biley Act (GLB Act), also known as the Financial Services Modernization Act. This federal law advances integration among financial service providers by permitting banks, insurance companies, and broker/dealers to affiliate in a holding company structure. A holding company is a company that has a controlling interest in one or more other companies. Controlling interest of a company is ownership of enough voting shares of stock to control company policy. A company that is owned or controlled by a holding company is known as subsidiary.

The GLB Act also provides for functional regulation and addresses bankinsurance activities, consumer privacy issues, and multistate licensing for insurance distributors.

A large holding company that controls many different types of subsidiary financial institutions is sometimes referred to as a financial conglomerate.

Commercial Banks

Numerous countries, particularly those in Europe, permit bank insurance also known as bancassurance – distribution of insurance products through a bank’s branches and other distribution channels to the bank’s customers. Most countries require that an insurance company accept the risk associated with the insurance products sold by the bank.

For many years, saving banks in the states of Connecticut, Massachusetts, and New York, has been allowed to issue and sell life insurance and annuities- known as Savings Bank Life Insurance (SBLI) - over the counter in their bank. All other underwriting activities must be conducted by a financial holding company or by an insurance affiliate of a bank.

Securities Firms & Mutual Fund Companies

In US, securities firms and mutual fund companies cannot create their own insurance products. Instead, they may own a life insurance company, or they may enter into a distribution arrangement with one or more insurance companies.

Securities firms and mutual fund companies in the US may distribute both life insurance and annuities, provided that their sales representatives are properly licensed. Insurance products can be offered only in jurisdictions where the underwriting insurance company is authorized to conduct business and where the securities firm or mutual fund company is licensed to sell.

Regulation of the Life Insurance Industry

Insurance regulations helps ensure that insurance companies remain financially sound and uphold consumer’s trust. Most insurance laws can be classified into

Solvency is the ability of an insurer to pay its debts, policy benefits, and operating expenses on time. The purpose of solvency laws is to ensure that insurance companies are financially able to meet their obligations.

Market Conduct laws ensure that life insurance companies conduct their business fairly and ethically. Market conduct regulation is known as marketplace regulation in some countries.

Insurance Regulators

Governments are the primary regulators of the life insurance industry. In India, authority over insurance regulation rests solely with the national Insurance Regulatory and Development Authority (IRDA).  

Many international trade organizations and agreements influence insurance regulation either directly or indirectly. For Example, The European Union essentially serves as an additional regulator of the insurance industries in its member countries when it issues insurance directives. In this context, a directive is an order from the EU’s Council of Ministers requiring EU member countries to pass new laws or modify their existing laws to comply with the Council’s regulatory requirements.

In some countries, NGOs consisting of insurance supervisors influence life insurance regulation through the regulatory codes and reporting requirements they develop. Regulators often follow the organization’s recommendations regarding laws and regulations. The International Association of Insurance Supervisors (IAIS) plays a role on global basis. The goals of the IAIS are to

           

·         Promote cooperation among insurance regulators.

·         Establish international standards for insurance regulation.

·         Provide training materials to members

·         Coordinate regulatory efforts with regulators in other sectors of the financial services industry.

The U.S. Regulatory System for Insurance

The McCarran-Ferguson Act gives the state governments the primary authority to regulate the insurance industry. The federal Gramm-Leach-Biley Act provides for the functional regulation of financial institutions. Functional Regulation is the principle that similar financial activities should be regulated by a single regulator, regardless of which type of financial institution engages in the activity. Oversight of the functional regulation system is the responsibility of the Board of Governors of the Federal Reserve System. The Federal Reserve Board relies on functional regulator’s examinations of financial institutions, but the Board is authorized to intervene if it believes the health of a bank affiliate is threatened.

State Regulation

By SID & NAIC.A model law, also called a model bill, is a sample statute that states are encouraged to enact. A model regulation is a sample regulation that SIDs are encouraged to adopt.

Issues Regulated by SID

• Licensing of insurance companies to conduct business in the state.
• Licensing, conduct and, and continuing education of individuals who sell insurance products in the state.
• Review of comprehensive reports on the financial condition of insurance companies.
• Periodic on-site reviews of the financial condition and market conduct practices of insurance companies.
• Establishment and enforcement of state regulations concerning solvency, policy reserves, and investment activities.
• Review of policy forms to ensure that the forms meet the state’s requirements.
• Establishment and enforcement of regulations governing underwriting & claim practices.
• Review of guaranteed rates and nonforfeiture values.
• Maintenance of an office for handling customer complaints.
• Review & Approval of certain merger and acquisition activities.
• Imposition of sanctions on insurance companies or distributors that fail to comply.

Federal Regulation

Although most insurance regulation comes from the states, insurance companies are also subject to certain federal laws. For example, federal laws that regulate the sale of securities also apply to the sale of variable life insurance and variable annuities. A security is a document or certificate representing either an ownership interest in a business. Because many of the values of variable insurance products are based on securities, the federal Securities and Exchange Commission (SEC) which administers federal securities laws has determined that such variable products are securities as well as insurance products.

The following types of federal regulation affect insurance operations:

·         Federal income tax laws affect the design of products.

·         Federal consumer protection laws apply to insurance companies that engage in certain activities, primarily interstate advertising.

·         Federal laws concerning privacy affect how insurers collect and use personal information about their customers.

·         Federal laws regulate employee benefit plans.

·         Federal anti-terrorism laws require insurers to implement certain measures designed to detect and prevent illegal activities used to finance terrorism. For example, under USA Patriot Act, financial institutions must establish anti-money laundering programs.

Areas of Insurance Regulation

Solvency

Solvency regulation includes three general areas:

• Asset, Reserve, and Capital and Surplus Requirements
• Financial Statement Review
• Financial Condition Examinations.

            Market Conduct

Some of the areas that may be addressed by market conduct regulation are

Licensing of Insurance Producers Licensing is also known as registration in some countries.

Policy Forms State laws and regulations specify the type of provisions that must and must not be included in a policy form.

Product Promotion The Buyers Guide is a publication that explains to consumers how to determine how much life insurance coverage they need, describes the various types of life insurance policies, and educates consumers about how to compare the costs of similar types of policies.

Sales Practices Many jurisdictions have enacted laws to prohibit insurers and insurance producers from engaging in unfair sales practices, which involve some type of misrepresentation. A suitability requirement is a regulation that imposes a duty on insurers and producers to have reasonable grounds for recommending a specific product as suitable. The NAIC adopted the Senior Protection in Annuity Transactions Model Regulation to establish minimum standards and procedures for insurers and producers to follow when making recommendations to prospective customers age 65 or older regarding sales or transactions for annuity products.

Consumer Privacy

Many consumers are concerned about how their personal information is collected and used. These concerns have led to the enactment of privacy laws specifically designed to protect a consumer’s nonpublic personal information from indiscriminate dissemination. Nonpublic personal information is information about a consumer that an insurer or other financial services company collects in connection with providing a financial services product or service to the consumer.

In the US, many of the states have modeled their privacy laws after the NAIC Insurance Information and Privacy Protection Model Act, commonly known as the NAIC Model Privacy Act. The Model Privacy Act establishes standards for the collection, use, and disclosure of information gathered in connection with insurance transactions, such as underwriting & claim evaluation.

Privacy Principles for Life Insurance

Notice deals with providing a customer with information about when, how, and to whom his nonpublic personal information will be disclosed.

Consent pertains to asking a customer for approval to share her personal information with third parties who are not affiliated with the insurer.

Access refers to allowing the customer the right to review and correct his personal information.

Security concerns the physical, technical, and procedural measures a company takes to prevent the loss, wrongful disclosure, or theft of customer’s personal information.

Transfer relies to how a company adheres to the principles of notice and consent when transmitting data to third parties.

Data Integrity refers to the steps a company takes to ensure that the data collected is reliable, accurate, complete, and current.

Accountability is the principle of holding someone responsible for maintaining a consumer’s privacy.

Under the U.S. federal GLB Act, financial institutions including insurance companies must establish written procedures for protecting consumer’s nonpublic personal information, and they must disclose these privacy policies to their customers each year. Customers cannot block a financial institution from sharing their personal data with companies with which the institution is affiliated under a holding company structure. However they have the right, by written request, to block the sharing of confidential data with third parties outside the holding company structure.

Complaint Management

Complaint management regulations address issues such as the timeliness of insurer responses to complaints and standards for fair handling of such grievances.

Ethics for Life Insurance Companies

Ethics is a system of accepted standards of conduct and moral judgment that combines the elements of honesty, integrity, and fair treatment. Making ethical business decisions involves behaving in accordance with accepted legal and moral principles of right and wrong.

The Importance of Ethics

When a company operates ethically, the company gains the trust of its constituents. While trust is important in all industries, the nature of the life insurance industry makes trust vital. Before a person will buy a life insurance policy or an annuity from an insurer, the person must trust that

           

·         The insurer will remain financially healthy and stay in business long in the future.

·         The policy contains no hidden or inadequately explained provisions.

·         The producer’s statements and illustrations of the policy are clear & accurate.

·         The actions of the producer and the insurance company are fair and honorable.

Improving Ethics in Life Insurance Industry

Establishing Codes of Ethics and Corporate Ethics Office

Life insurance companies formulate ethical codes that set guidelines for appropriate values and standards of ethical business behavior. An ethical dilemma is a situation in which a person is uncertain about the best ethical decision. Another way to make ethics an integral part of insurance company operations is to establish a corporate ethics office, which is a department or unit in which employees that can receive advice or counsel to help resolve ethical dilemmas and report ethical misconduct.

Promoting Education & Training

Encouraging employees and producers to pursue further education and training is another way of developing ethical behavior and professionalism.

Encouraging Membership in Associations

Company associations are established as forums for a particular industry and they typically provide companies with opportunities to share information, improve performance, and present their views to consumers and regulators. Two of the major company associations for life insurance companies in various countries are:

LOMA, which is an international association that, through its research findings, education programs, and seminars on various aspects of company operations, promotes productivity, quality, and management excellence in insurance companies.

LIMRA which conducts research on insurance issues, provides marketing management education services and consulting services, and prepares a wide range of publications.

Some of the professional associations that are important to the life insurance industry include

           

• Actuarial associations such as Society of actuaries (SOA) in U.S, the Actuarial Society of India.
• Producer associations, such as the U.S. National Association of Insurance and Financial Advisors (NAIFA).
• Associations of legal professionals, such as the Association of Life Insurance Counsel (ALIC) in the US.
• LOMA Societies, which provide Society members, LOMA students, and other financial services professionals with opportunities for networking, continuing education, and professional development.

Participating in Self-Regulatory Market Conduct Initiatives        

The major self-regulatory market conduct initiative in the North American insurance industry is the Insurance Marketplace Standards Association (IMSA), which is a voluntary association of U.S. and Canadian life insurers that have qualified for membership by undergoing a comprehensive assessment of their market conduct. IMSA’s goal is to help insurers improve their market conduct practices and strengthen consumer confidence in the life insurance industry.

IMSA’s Six Principles of Ethical Market Conduct

An insurance company that adopts the Six Principles commits itself to

• Conduct business according to high standards of honesty and fairness.
• Provide competent and customer-focused sale and service.
• Engage in active and fair competition.
• Provide advertising and sales materials that are clear as to purpose and are honest and fair as to content.
• Provide for fair & expeditious handling of customer complaints and disputes.
• Maintain a system of supervision and review that is reasonably designed to achieve compliance with these principles of market conduct.