Brian Casey and Benjamin Sykes of Locke Lord LLP and I discussed insurance regulatory compliance in a joint webinar on October 20th. Best interest regulations, DUAE ratings, and pandemic regulatory effects will all have implications for insurance technology in the coming months and years.
Best Interest Regulations in the Life/Annuity/Benefits Space
These regulations will place additional requirements on broker-dealer compensation systems, regulatory reporting, and real-time monitoring. SEC Regulation Best Interest (“Reg BI”) requires broker-dealers to act in the best interest of the retail customer when recommending a securities transaction or investment strategy. Broker-dealers must establish and enforce policies and procedures to identify and disclose facts about conflicts of interest — disclosure is not enough for compliance.
New York Reg 187 would be the nation’s toughest best interest law if it survives. It requires insurers to maintain a system of supervision for all life insurance sales that ensures insurer and producer compliance with Reg 187. Any variations in incentives must avoid producer recommendations that are not in the consumer’s best interest, and every producer must be adequately trained. A NY court ruled in favor of insurers and producers and overturned the revised Regulation 187 this year. NYDFS is appealing to the New York Court of Appeals.
AM Best DUAE Rating Proposal
Delegated Underwriting Authority Enterprises (DUAEs) are under pressure to modernize their technology estates, but many of these firms have immature technology ecosystems due to lower margins than insurers. DUAEs are commonly referred to as MGAs, MGUs, or program underwriters. They often consist of small, sales-focused groups with excellent knowledge of a niche customer group and/or a tailored insurance product. They typically don’t have the balance-sheet capital to bear the risks of insurance policies.
MGAs, MGUs, or program underwriters usually have technology needs similar to carriers. They often have immature technology ecosystems, primarily because they collect fees instead of earning premium. The DUAE rating would highlight these deficiencies.
MGAs and MGUs will probably not strive to achieve the highest possible rating because of the impact on their profitability. The DUAE rating could drive consolidation amongst MGAs, MGUs, and program underwriters so that they have sufficient financial capability to invest in new technology.
Likely Long-Term Effects of the Pandemic on Insurance Regulation
The pandemic will have long-term effects on the insurance industry, covering product features in areas like Employment Practices Liability Insurance (EPLI), business interruption, and voluntary benefits. The expanding use of digital technologies, growing IT security concerns, and increasing and dynamic regulations are all placing additional demands on IT capabilities.
The growth of ransomware, partly due to greater remote work and digitalization, is increasing the profitability of this crime, highlighting the need for strong security. The CISO and CIO must work together to make sure a NIST audit is performed and that remediation is funded and executed based on an acceptable risk profile. Policy administration systems must be flexible enough to configure rules to easily support shifting state mandates.
Best Practices: Insurance Market and Regulatory Evolution
The regulatory environment has had to respond to the fact that technology is in the middle of everything an insurance carrier does. Insurers will face increased reliance on digital processes and the need for greater insight into what third-party service providers are doing and how they deliver services. This digitalization means regulators need to know what third parties are doing, how data is protected, and how comprehensive security programs are.
The pandemic will have numerous impacts on insurance products like EPLI, business interruption, and voluntary benefits. This may also drive the expansion of the requirements for policy administration systems to support rapid responses to changes in state regulations and mandates as well as more digitalization.
To learn more about the evolving regulatory market, view our recent webinar, Aite-Novarica/Locke Lord Insurance Regulatory Compliance: Best Interest, DUAE Ratings, and Pandemic Regulatory Effects, or read the full report.
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