Carrier and Agency Duties Under the DOL Fiduciary Rule
The insurance industry thrives on rewarding top-selling agents, but the Department of Labor’s (DOL’s) fiduciary rule says traditional sales incentives tied to annuities present a compliance challenge for carriers and producers working with qualified retirement funds.
With the DOL fiduciary rule reaching full implementation this year, we thought it was worth taking a look at the duties carriers should be looking at as they get their houses in order.
As a reminder, while this is intended to provoke thoughts and discussions about your obligations, we’re not your lawyers or compliance officers. You’re required to do your own due diligence, period.
Insurance industry sales rewards
Captive? Independent? Life and health? Property and casualty? It doesn’t matter where you fall in the industry, odds are, if you sell insurance, you have historically had some kind of incentive structure beyond a commission.
- Incentive trips and product-sales cruises
- Production-linked commission bonuses
- Marketing credits or production-linked business freebies
These loyalty rewards and sales incentives are an area of scrutiny for producers who may be selling annuities or permanent life insurance policies that are ultimately funded by retirement plans.
Who has what duties?
Ultimately, the DOL affirms carriers bear the responsibility of overseeing producer activity and compliance. However, before agencies glibly disclaim responsibility and skip off into the sunset, it is worth bearing in mind:
- The NAIC model covering best interest practices still holds agencies (aka business entities) accountable for following the same practices as producers
- There is a growing tidal wave of states that are adopting the NAIC model
- State law supersedes and supplements these federal regulations – it’s BOTH/AND not EITHER/OR
Also, remember that smaller agencies and intermediaries like IMOs/FMOs/NMOs/brokerage general agencies/aggregators exist in no small part to serve their affiliated producers, which may mean handling administrative duties like paperwork and documentation. So, helping producers maintain compliance may still be a central obligation to your agency.
Carrier duties under the DOL fiduciary rule
Setting aside agencies’ supporting roles and services, the DOL places specific oversight duties squarely on insurance carriers as they are regulated as financial institutions. These are:
- Mitigation
- Compensation
- Documentation
It’s worth noting the DOL’s guidance puts these three duties of oversight on somewhat of a triangular balance. If you don’t do much to mitigate improper inducements in the areas that could be problematic, then you better tighten your compensation and be prepared to document and provide serious oversight of each producer’s sales. If you mitigate areas of peak concern and tighten your compensation controls and oversight, then the documentation of producer processes need not be as stringent.
Insurance carrier duties of mitigation under the DOL fiduciary standard
Under the DOL’s fiduciary rule, businesses that have these supervisory responsibilities have the duty to mitigate factors that cause conflicts.
Practically speaking, what can that look like? Following are a few examples of ways companies can mitigate conflicts of interest:
How the DOL impacts product- and situation-specific conflicts
Per state regulators, misrepresentation of annuity sales (particularly fixed-index and variable annuities) is a perennial issue. As a carrier, you likely know that annuity churn – swapping one annuity for another – is an issue, so you can put strict guidelines on when that is appropriate, and scrutinize those specific situations carefully. Or, if 401(k)-to-IRA rollovers are one of the situations in which you find producers are most likely to improperly offer an annuity, then you can put very strict situational guidelines on what a producer can do or advise in regard to rollover funds.
How the DOL rule impacts incentive trips, cruises, and sales-metric events
Frankly, incentive trips that are exclusive to a single product or kind of product have been a struggle for dually licensed producer/advisors who hold both insurance and securities licenses for quite some time. The DOL guideline is clear; it isn’t stopping carriers from rewarding and recruiting top-selling agents. It is saying carriers should stop pushing any product-specific quotas and incentives.
How the DOL rule impacts pre-set menus
Pre-set menus with a guideline for appropriate audiences and sales can be a fantastic way for carriers to help prospects assuage decision fatigue to find products that fit their needs. Done poorly, though, pre-set product menus can also be a way to exclusively push your most profitable products in a way that discounts the consumer’s specific needs. Mitigation in this area means setting a fair criteria for what makes the menu, and possibly having a few different menus for various goals and stage-of-life criteria.
Insurance carrier compensation structures under the DOL rule
The DOL’s rule has a lot to say about a carrier’s duty to end compensation structures that push the favor of certain products over others. If a carrier can bring commission incentives in line, ensuring annuities and other fixed or variable contracts don’t have a higher incentive than other equitable products, then carriers don’t have to provide as much oversight to ensure producers are treating consumers fairly. Take away outsized incentives, and you’ll make it that much easier for a producer to do their best by the consumer.
How carriers handle documentation and analysis of producer data under a fiduciary standard
Perhaps the most anxiety-inducing requirement is documenting oversight of your producers.
The DOL fiduciary rule definitely takes the position that your downstream producers are your responsibility. This has already been a trend in the industry; think of the wave of states like Texas and Kansas that have adopted laws to enforce carrier appointments for any end producer who might be selling that carrier’s products.
But this comes with very real difficulties for carriers.
For one thing, producers may be many agencies removed from their carrier. Carriers are often working with producers in states where there’s no appointment, no official link between the carrier and their producer. Yet, the DOL fiduciary rule still says carriers are squarely in charge of retaining documentation of those producers’ actions and reviewing that documentation annually to measure their producer force’s DOL compliance as a whole.
Another serious complication: A producer may have many carrier appointments, and each carrier could have its own DOL compliance processes. So, depending on which carrier’s product ends up in a consumer’s hands, the producer will have to remember which one of the 20 different processes they need to follow.
So, it’s a real elephant of a challenge to provide true documentation and oversight. And how does one eat an elephant? One. Bite. At. A. Time.
Best practices for documentary duties
1. Mitigate conflicts and eliminate improper compensation structures.
Remember how mitigation, compensation, and documentation are a three-legged stool of oversight? Never discount how helpful it is to practice the first two in order to de-pressurize the third one. Ending conflicts further upstream is a great way to recruit and retain good agents when they realize that there are also fewer hoops to jump through to do right by their clients.
2. Standardize within the industry.
The DOL outlines requirements for producers such as using a process, collecting asset estimations, and taking a systemic approach to review client situations and come to a justification for recommendations. If the requirements are the same for everyone, why should there be a hundred different processes to document them?
3. Upgrade your tech.
We wouldn’t be AgentSync if we didn’t remind you that efficient, integrated tech can make documentation easier for producers while also making it easier for your team to review and analyze your documentation and producer compliance. Instead of combing through systems to match case numbers and client names via PDFs and spreadsheets, consider what softwares could provide these insights and automate some parts of the fiduciary compliance documentation process.
DOL fiduciary rule isn’t the only standard for annuity obligations
As states adopt the NAIC’s Suitability in Annuity Transactions Model Regulation #215, which we’ve covered in regards to insurer duties on the blog, insurance carriers will need to square state interpretations of suitability with the obligations lined out in the DOL fiduciary rule.
AgentSync can’t help you judge your producers’ hearts. But it can make it easier to maintain fullstack compliance and documentation by synchronizing producer information with the National Insurance Producer Registry, and making it easy to coordinate data across systems. To see how we can help your organization stay compliant, watch a demo.
About AgentSync
AgentSync powers rapid growth for insurance carriers, agencies, and MGAs by offering modern tools for producer management. With its customer-centric design, seamless APIs, and automation, AgentSync’s products reduce friction, increase efficiency, and maintain compliance, ultimately helping to improve the broker onboarding, contracting, licensing, and compliance processes.
Founded in 2018 by Niranjan “Niji” Sabharwal and Jenn Knight, and headquartered in Denver, Colo., AgentSync has been recognized as one of Denver’s Best Places to Work, as a Forbes Magazine Cloud 100 Rising Star, an Insurtech Insights Future 50 winner, and is ranked 88 in Forbes – America’s 500 Best Startup Employers 2022.