In the past, insurers have had many reasons to be selective about the agents they do business with – regulatory requirements, reputational issues, fraud risks, and, of course, their ability to produce good business that will stay on the books. The need to properly screen agents has probably never been higher given the regulatory pressures that are being brought to bear on the financial services industry. Consider the following quote from Richard Ketchum, Chairman and CEO of FINRA at the 2016 FINRA Annual Conference:
“Many of the firms involved in our culture review have emphasized the importance of ethics at the individual registered representative level, and have also highlighted their processes for reviewing reps prior to hiring as an important, culture-related control. Equally troubling, however, is the fact that there remain firms that have substantial concentrations of employees with significant past disciplinary records or a number of settled sales practice complaints or arbitrations. To say it bluntly, statistical analyses done by FINRA’s Office of the Chief Economist and independent studies demonstrate that these firms are meaningfully more likely to have repeat sales practice violations that harm clients. Of course, I understand that not all complaints are fair and the right supervision can result in former “problem” reps performing well. But I think it is important to emphasize that a firm that takes these risks does it at a cost.”
The DOL Rule may take the need for insurers to screen agents to another level. Some insurers are signaling that they will sign the Best Interest Contract (BIC) as the financial institution. By doing so, these insurers are assuming additional risk by becoming a fiduciary. Would it make sense to continue to do business with “higher risk” agents in this new environment? Or would it be prudent for insurers to complete some analysis to determine which agents are more likely to comply with the new standards? Prior to the DOL Rule, an insurer may have determined that an agent represented an acceptable level of risk. Post DOL Rule, that same agent may pose an unacceptable level of risk, especially if the insurer is signing the BIC. Fortunately, there are some practical methods that insurers can utilize to identify higher risk agents.
Agents have historically been one of the most important factors for an insurer’s success. The DOL Rule won’t change that. In fact, due to the risk involved, the DOL Rule has probably amplified the effect that agents have on insurers. How insurers manage that risk will be a key factor in their continued success.