In early 2016, MetLife—then the nation’s largest insurer, with nearly $950 billion in assets—announced it was spinning off its life-insurance business into a new entity to be called Brighthouse Financial. (Brighthouse will have an estimated $240 billion in total assets, and MetLife will sink to No. 2 in the U.S. insurance industry, just behind Prudential Financial, with nearly $800 billion in total assets.)

In a press release, MetLife said the decision was “driven by a strategic review of our business and the impact of regulatory and economic factors. “But the move set off a round of questions and self-examination by other insurance-industry participants. What exactly were these regulatory and economic factors? And is this the beginning of a trend that other insurers are likely to follow?

“There has been a trend over the past five years where we’ve seen a number of traditional life insurance companies spin off or sell their individual life and/or annuity business units,” observes Jon Berry, managing director and head of the insurance and investment management practice at Chicago-based Navigant Consulting (Berry is in Boston).

The primary reason behind these decisions, says Berry, relates to a variety of regulatory pressures—some of which, it should be noted, could change in the Trump Administration. Chief among the regulatory concerns: “the increased capital requirements to maintain proper reserves on the balance sheet,” he says.

All U.S. life insurance companies are required to set aside capital reserves to ensure they can pay out future claims. By January 2017, however, most states will require that they increase that capital amount, per a calculation method called Principle-Based Reserving (PBR), overseen by the National Association of Insurance Commissioners (NAIC).

Yet another consideration, Berry points out, is the persistent low interest rate environment, which is negatively impacting many insurers’ investment accounts. “These two factors continue to reduce the spread and the ability for large insurers to generate the types of revenue necessary to raise stock prices and hinder companies’ ability to invest in new products and markets,” he explains.

Separating Sales
That, too, could change with the new Administration. But this is not the end of the story. A short time later, MetLife announced it was selling off its U.S. retail advisor force of some 4,000 representatives—called the MetLife Premier Client Group—to competitor Massachusetts Mutual Life Insurance Co. (MassMutual). “By decoupling manufacturing from distribution,” MetLife Chairman, President and CEO Steven Kandarian said in a press release, “our U.S. retail business will be more agile, and both MetLife and the U.S. retail business can achieve significant cost savings.”

Others pinpoint a different cause. “MetLife sold its distribution unit to MassMutual largely because of the DOL regulations,” contends Jimmy Lee, CEO of the Wealth Consulting Group, a Las Vegas-based boutique wealth management firm, referring to last April’s Department of Labor ruling on fiduciary standards for retirement products.

Insurance is regulated by state agencies, of course. But sales of retirement products are not. The new DOL regs—which are scheduled to take effect in April 2017 and, if let stand by the Trump Administration, require Best Interest Contract Exemptions (BICE) to ensure clients understand exactly what they’re getting and what they’re paying for must be implemented by January 1, 2018—are forcing many financial-services companies to restructure their compensation models for their sales forces. Specifically, there’s a shift from commission-based compensation to a fee-based model.

“The DOL changed the whole ballgame on the compensation-and-benefits packages,” says Lee.

Though the DOL ruling doesn’t specifically target life-insurance purveyors, the ramifications of the ruling on those insurance providers that maintain a distribution sales force could be profound. “Most life-insurance carriers will likely amp up their efforts to sell through third-party distribution channels,” says Lee. “Ultimately, the insurance providers will become more of a pure manufacturer than a manufacturer-and-distribution force.”

In fact, some go so far as to say it’s become practically impossible to do both. “Not only has selling key financial products been the only real avenue for growth,” says John Rodgers, senior managing director and chief operating officer at SSA & Co., a New York-based strategic consulting firm. “Now there’s added fiduciary responsibility for their agents to their clients. The agents aren’t in a position to be experts on competitive products, only their own. However, the regulation is forcing the agents to either (a) become an objective fiduciary advisor to their clients (i.e., compare competitive financial products and help the client decide on the best for their situation), or (b) stop selling certain financial products. Both scenarios are bad for agents in this conflictual situation.”

The Trump Conundrum
On the other hand, the new federal regime could upend the regulatory scheme. Some anticipate President-elect Donald  Trump will appoint a new Labor Secretary who will, in turn, overturn the fiduciary ruling. Yet others point out that, as of this writing, nothing of that kind has actually been stated.

“My personal opinion is that although Trump will be ‘business friendly,’ recent regulations like the DOL [fiduciary ruling] would be lower on the priority list and likely wouldn’t be actioned before the impact is made to the insurance companies,” says Rodgers. “The only exception I can imagine would be if the new Treasurer Secretary has connections to the insurance industry and understands the disruption the new regulation is causing. From a business perspective, I would expect Trump to initially focus more on foreign trade—including financial service—[than] on domestic federal regulations.”

It’s too early to know, of course, but a change may be in the wind. “The President-elect feels that the current Administration has over-reached and over-regulated,” points out Scott Schwartz, a partner at Bleakley Financial Group, in Fairfield, N.J. “I would expect, however, the rollout and enforcement of the regulations to continue. I am more confident in the ability of the new Administration to do so in a more measured and less intrusive manner.”

The uncertainty makes planning difficult. “It is far too early to have any idea what may happen under the new Administration,” insists Robert Karn, a principal at Karn, Couzens & Associates, in Farmington Conn. “[But] I think we have to presume it goes forward until advised otherwise.”

Convergent Factors
Whatever course life insurers take, there’s little doubt the triple whammy of increased capital reserve requirements, low interest rates, and anticipation of the DOL fiduciary standard packs a wallop. “The providers of life insurance have a lot that they are balancing,” confirms Eileen McDonnell, chairman and CEO of The Penn Mutual Life Insurance Co., which has $100 billion in life insurance contracts in force.

Besides this “convergence of three major issues,” she says, life insurers are also facing “the introduction of new mortality tables [that] are expected to be implemented within the next few years.” People are living longer, healthier lives, and insurers have to adjust their assumptions about longevity and risk.

An Ongoing Evolution
In a sense, though, all this is nothing new. “Life insurance is always evolving,” says Schwartz, at Bleakley. “Each new development in life insurance tends to be driven by what’s going on in the market.”

Traditional whole-life (also called permanent) policies come with a fixed annual premium. But Schwartz recalls when he started in the business, universal life—which allows varying premium payments within a certain minimum and maximum—was popular “because short-term interest rates were very high,” he says. Then, when equity markets got hot, insurance providers sold a lot of variable-life policies that enable a choice among mutual-fund-like investment options. “When the equity market collapsed around 2008, insurers started pushing guaranteed-income products [because] people wanted a guarantee and didn’t want the market volatility,” he says.

A Relationship Business
Given these shifting winds, and the complexity of the different kinds of products, Schwartz stresses the importance of a good relationship between client and advisor. “People need insurance for so many different reasons,” he says. “They underestimate the value of a good life-insurance professional—somebody who can actually sit down and help them navigate through all this and evaluate what’s appropriate and what isn’t.”

Steven Schacter would agree. As a senior vice president at Forest Hills Financial Group, in Chappaqua, N.Y., he’s been helping clients with insurance and other financial-planning products for more than 30 years. “My business is a relationship business, built on trust and rapport,” he says.

He still sees value in life insurance as “an effective savings vehicle for retirement planning,” he says. “For the right client, it’s another pocket to put your dollars in. But it’s not the answer for everything or everyone.”

To Schacter, one of the chief selling points is the contractual guarantee. “Beyond the death benefit, I like a whole-life policy that builds value the client can borrow against tax-free, without necessarily waiting till retirement,” he says. “There’s no other financial product like it.”

Cash Value or Death Benefit
Therein lies a divide: what’s the best thing about life insurance? “I’ve always been a big believer in it because of the need for financial protection for family or estate planning needs,” says Karn, at Karn, Couzens. “But due to a combination of low rates and high costs, I no longer see it as an effective savings or accumulation vehicle. Further, if one borrows against a permanent policy there could be a tax liability should it lapse, so caution is in order.”

This is not to say that life insurance is no longer a good idea for most people. “People need coverage,” Karn holds. But he recommends “term or permanent coverage designed primarily for a death benefit, not a savings component, in almost every case,” he says.

New Technologies
Perhaps the latest stage in the evolution of life insurance is interactivity. “Some carriers are offering a way for you to reduce your premium based on your behavior,” says Anand Rao, a partner in PricewaterhouseCooper’s advisory practice, in Boston.

It’s a high-tech idea that’s been proposed for health insurance, too—rewarding a healthy lifestyle with lower rates. “If you exercise or control your diet, you might be improving your life expectancy and should be rewarded with a discount,” notes Rao. “The carrier might get you on a treadmill to test your improved stamina, for instance, but just as auto insurers sometimes give bonuses for good driving, life insurance providers are looking into this, too.”

Such an incentive may be particularly appealing to the millennial generation, and one good use of the technology could be for the initial screening of applicants. Using technology to help measure health—and, from the insurers viewpoint, risk—is a relatively quick and easy way to evaluate potential new policyholders. “In the near term, technology and the utilization of big data to simplify the underwriting process and expedite the issuing of a policy is a substantial trend,” allows McDonnell at Penn Mutual. “Engaging the next generation in a genuine way is a top priority as we look to the future.”

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