Applying Suitability and Best Interests of the Client Standards in a COVID-19 Environment
Life insurance landscape was changing pre-COVID 19
Until recently, in the world of life insurers, these issues have only come up in the case of the sale of a registered security product. Such as a variable deferred annuity or a variable universal life product. With the advent of Regulation 187 in New York, this type of standard is now extended to all life and annuity products sold to individuals. Also, advice that is given on the execution post-sale policy options contained in contracts already in force.
Immersive enlargement in scope
The regulation is in many ways more instructive on the factors to be considered in determining suitability, than any prior guidance or experience in the securities world, in particular in a post COVID world.
Section 224.3 (g) sets forth a myriad of factors that constitute “suitability information”.
They include the typical factors such as:
- Annual Income
- Net Worth
- Financial Objectives
- Risk Tolerance
It also includes a broad catch-all provision:
“any other information provided by the consumer which in the reasonable judgment of the producer is relevant to the suitability of the transaction (emphasis added)”.
A pre-COVID-19 example might be weighing the financial strength and ratings of different insurers.
A life insurance policy is in many ways only a promise to pay at a future date. Insurer credit quality needs to be factored into financial return when comparing two life insurance policies. Just like it is when comparing two bonds, when a lower-rated bond demands a higher interest coupon.
Let’s say the purchaser on a life policy is looking at the death benefits cumulative return on premiums at life expectancy. One could easily see a higher rated insurer’s policy being preferable, even if its cumulative return at life expectancy was somewhat lower than a lower-rated insurer.
In a COVID-19 environment, the ease of the process for obtaining the policy could be a critical consideration to the purchaser.
- The extent to which face-to-face meetings with a broker to witness the execution of documents and potentially, with a medical examiner to answer medical disclosure questions.
- Providing fluid samples might well be a key issue for the consumer in deciding on a purchase.
Insurers are currently seeing the application process unwind and terminate with consumers, because they do not want the “hassle” of having a stranger enter their home for completing a medical exam requirement. These sessions are typically required for policies being purchased, having a death benefit greater than or equal to $100,000.
The ability of an insurer to adequately underwrite risk without an examination could well be a determining factor in the purchase. Where a purchaser indicates a clear preference for a simpler process, one could argue that an insurer’s product becomes less of a commodity where price alone determines suitability.
Some insurers are reportedly pending and not deciding on application for 30 days, as a means of minimizing COVID-19 anti-selection activity. A prompt response to an application and speed in securing coverage, could be a key consideration to the consumer (e.g. a business owner who needs to put in place key man life insurance coverage to close a needed loan).
Insurers who can innovate quickly in responding to their consumers
- Increase market share, while maintaining underwriting integrity
- Increase distributor productivity at the same time
Some examples of innovation:
These underwriting and technological innovations could address consumer concerns and encourage the purchase of the industry’s products.
- Substitution of an affirmative answer, to having a primary care physician and undergoing an annual physical examination
- A favorable record of pharmaceutical use drawn from a database as an alternative to a paramedic examination
- Use of a good health statement as a prerequisite to policy delivery
- Completion of applications, medical records authorizations and other regulatory documents with secure electronic signature technology
- Electronic face-to-face meetings, with agents that enable document sharing and discussion
How Might Regulators React
One would easily imagine a friendly regulatory reaction to such innovation in this difficult time.
- The technology exists today and regulations facilitate innovation.
- The Uniform Electronic Transactions Act has been held to allow for electronic signatures in insurance transactions.
- Appropriate privacy and consent laws allow the obtaining of pharmaceutical usage records from databases with adherence to required safeguards.
Insurers need to take advantage of these capabilities and innovatively, using them to responsibly address both consumer concerns and insurer financial risks.
At the financial services and insurance group of Practus, LLP we stand ready to work with forward-thinking life insurers and distributors in tackling the legal and regulatory hurdles and opportunities presented by the COVID-19 pandemic. Moreover, given our deep industry experience and virtual firm model (using technology to replace brick and mortar firm overhead) we can deliver this service more efficiently than our competitors.