The life insurance industry escaped the jaws of the Department of Labor fiduciary rule only to come face to face with another beast: the states.
New York's recent proposal to impose a best-interest standard on life-insurance sales — a higher standard than currently exists — would have a significant impact on insurance agents and brokers, by upending the way they currently conduct business.
While New York is the first state to propose such a standard, other states, especially those helmed by Democrats, would likely follow suit if the DOL ultimately dilutes its fiduciary rule, some legal experts said.
"If they perceive a rollback of obligations, I would expect more states to step in at that point," said George Michael Gerstein, counsel at law firm Stradley Ronon Stevens & Young.
The DOL fiduciary rule, which partially went into effect in June, raises investment-advice standards in retirement accounts such as 401(k)s and IRAs. It requires brokers to give advice that's in retirement savers' best interests, as opposed to advice that's merely "suitable."
The regulation ensnared products such as mutual funds and annuities, but hardly affects life insurance products, such as whole life and universal life. Such insurance policies are rarely held in retirement plans or funded with retirement-plan money.
Now, New York is upping the ante. The state's rule would, if enacted, create a much more stringent life-insurance sales standard than is currently on the books in any other state, experts said. And, importantly, it would cover all insurance sales, not just those in retirement accounts.
"New York's is a best-interest standard that is quite similar to the DOL [fiduciary] standard. So it goes above suitability," Mr. Gerstein said.
PATCHWORK OF RULES
There's currently a patchwork of state rules governing insurance products and sales.
Many states have adopted a suitability sales standard for annuities, allowing brokers to sell products suitable for an investor based on certain client information. The Obama-era Labor Department was concerned that this standard lets brokers choose products that pay them the largest commissions.
However, states don't have similar suitability requirements for life insurance, so the rules vary even more, experts said.
Sales are partly dictated by states' general standards of conduct being applied to life insurance producers, said Cailie Currin, an insurance compliance consultant. In New York, for example, the general standard for insurance producers is currently one of acting in a competent and trustworthy manner, she said.
The National Association of Insurance Commissioners is currently in the process of enhancing its model "suitability" rule, which has been adopted by many states, to include a "best-interest" standard. But that wouldn't cover life insurance sales — just annuities.
"I think there's been a steady progression of expanding suitability, and expanding the scope of suitability requirements," said Birny Birnbaum, executive director at the Center for Economic Justice. "It's the logical next step to include life insurance, given the evolution of life insurance sales as investment-type products."
Aside from New York, other recent activity hints at states' appetite to impose more stringent sales rules. Nevada, for example, passed a law last year imposing a fiduciary duty on brokers, though it doesn't cover life insurance products. New Jersey lawmakers introduced legislation this month requiring advisers to disclose their fiduciary status to investors.
Such activity is occurring as the Labor Department under Donald J. Trump delayed major parts of the fiduciary rule from taking effect. There's speculation that the DOL will propose easing some of the rule's requirements, pending a regulatory review.
SEC officials have indicated an intent to release their own fiduciary standard, likely sometime this year, though consumer-protection advocates fear it will be less-stringent than the DOL rule on the books.
"At this point, I think there are states trying to look at what their options are if DOL guts the rule," said Barbara Roper, director of investor protection at the Consumer Federation of America.
It's not clear other states will join New York and Nevada in enacting a fiduciary or best-interest standard, and if they do that they will include life insurance sales. But, New York's pioneering effort could make other states more willing, experts said.
"It is always a bit easier to do something like this once another state has gone first," said Ms. Currin, president and CEO of Currin Compliance Services Inc. "But I have my doubts that the life insurance portion would be adopted by many states quickly."
Others say New York is toughest when it comes to life insurance regulation, and it may be a silo in this regard.
"I don't think other states will necessarily see what New York is doing and feel compelled to follow suit," said Sheryl Moore, president and CEO of consulting firm Moore Market Intelligence. "New York is usually quick to do things that other people don't follow with."