ALREADY AN INDUSTRY in transition, the insurance and financial services sector is sure to experience more change during the second Bush administration. Increasing scrutiny of industry practices, the potential for federal regulatory intervention, and the President's determination to move ahead with social security privatization all suggest the industry is likely to experience an eventful four years. ICP spoke with a broad spectrum of industry experts to get their take on what the road ahead has in store for insurance and financial services meetings and incentive programs.
SOCIAL SECURITY REFORM AND YOU
The Bush administration intends to move full-steam ahead with social security privatization. Whether or not this will represent a windfall for the financial services industry seems to depend on whom you talk to. In the run-up to the election, the Kerry campaign released figures that indicated financial services companies would “benefit” to the tune of $940 billion in fees over a 75-year period with Bush's privatization plan. But Liz Varley, director of retirement policy for the Securities Industry Association, says that when looked at as a percentage of industry revenue, a social security privatization plan will “not be that significant in terms of new management fees.”
Whatever the bottom-line implications for the industry, it is clear that if privatization does occur, it will mean an adjustment period involving training and education, not only for consumers, but for industry professionals as well. Financial meeting planners could be seeing a lot of action.
Bill Shipman, co-chairman of the Cato Institute Project on Social Security Choices, says that while the industry is an “obvious beneficiary,” many financial services professionals he's talked to about privatization — including meeting planners — are clueless. “There is a big educational challenge,” he adds, particularly since he believes privatization is on a fast track. “We could have legislation by next year and see it implemented by 2006,” he predicts. “Providers are going to have to react fast, because it's going to happen fast.”
Shipman, who has been working on the issue for much of his professional life, believes privatization will essentially look like this: Individuals will have the right to either stay totally within the social security system or move into a market-based alternative. For the latter, there will be a three-step process that eventually moves an individual's assets into what resembles a retail financial services environment, where participating institutions will invest those assets in a portfolio operating with some investment guidelines and restrictions. Companies will compete for retirement assets, perhaps by providing additional services such as retirement planning software.
Regarding the educational and training demands associated with a new social security program, Shipman believes the government will first provide consumer education. Once privatization takes hold, financial services companies could be scrambling to get appropriate training out to the field as they start competing for market share.
The Securities Industry Association is already seeing an effect on its meetings, says Varley, citing a workshop on the impact of social security privatization that will take place at the SIA's annual conference in February. “If firms want to provide services, they are going to have meet many requirements, including training upgrades,” she says.
SPITZER'S SNOWBALL EFFECT
“We are in the opening pages of a very long and a very sordid story,” said California Insurance Commissioner John Garamendi in November. Later that month Garamendi filed suit against Universal Life Resources, a San Diego — based broker, along with four insurance companies, accusing them of participating in a kickback scheme.
He was one of several state officials following the lead of New York State Attorney General Eliot Spitzer, whose investigations into steering and bid-rigging brokerage practices have created a frenzy of activity at the state and federal levels. In October, Spitzer sued insurance brokers Marsh & McLennan Cos. for fraud and antitrust violations, charging that Marsh cheated its corporate clients by rigging bids and sending business to insurers with whom it had payoff agreements.
Spitzer, Garamendi, and Connecticut Attorney General Richard Blumenthal testified in Washington, D.C., before a Senate committee that their investigations show that insurance companies routinely pay brokers and agents undisclosed “compensation,” including trips, for steering business to them. But the trips they refer to are very different from legitimate sales incentives, say industry experts. “An incentive trip should never be put in the same category as undisclosed commissions paid under the table,” emphasizes Jim Henson, senior vice president and chief marketing officer of Shenandoah Life Insurance Co. in Roanoke, Va.
Henson and other industry leaders have been quick to condemn bid-rigging and marketplace manipulation practices, arguing that these are exceptions to standard industry behaviors. At the same Senate hearing in which Spitzer and Garamendi testified, Independent Insurance Agents and Brokers of America Inc. national officer Alex Soto, who is also president of InSource Inc., a Miami-based independent insurance agency, called for the preservation of industry incentive programs. “Sales incentive programs are a legal and legitimate tool used in nearly every industry to reward performance, including those that rely on commission payments,” Soto testified. “From refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice.”
In light of continuing investigations, some elected officials and consumer groups suggest that while the insurance industry has long been regulated at the state level, it's time for the federal government to step in. A poll of attendees at The Conference Group's 16th Annual Executive Conference for the Property-Casualty Industry last November found that 53 percent of the executives surveyed believe that “given the new regulatory model emerging, federal regulation [of the insurance industry] will receive a big push in the 2005 Congress.”
A CULTURE OF COMPLIANCE
As the financial services industry heads into the future, it's apparent that the harsh regulatory scrutiny of its practices is not going to abate any time soon.
In a speech before the Securities Industry Association annual conference in Boca Raton, Fla., last November, NASD Chairman and CEO Robert Glauber told industry professionals that while he knows the NASD and the Securities and Exchange Commission have made life difficult for the industry, “we have turned up the heat because the climate has demanded it.”
As for how long this intensified regulatory climate will persist,” Glauber added, “the ball is in the industry's court. And the solution is not simply technical; it is cultural. Industry professionals need not only to comply with our rules and the federal securities laws, they need to develop and adhere to a culture of compliance.”
The mutual funds industry in particular has been intensely investigated in the past 18 months concerning a number of practices, including incentive programs and sales contests. And the regulators' response has been a blizzard of new rules.
This provides challenges for any financial services industry professional — whether a trainer, planner, or compliance officer — trying to operate within the regulators' guidelines. “The real challenge is an interpretive one,” says Michael Brown, a former NASD compliance examiner and the founder of B/D Solutions, an Atlanta-based consulting firm. “At what point does a meeting become a boondoggle, or as the NASD uses the term,a ‘lavish affair?’”
As Glauber pointed out in November, the NASD has taken steps to help the industry with the added compliance burden, offering more educational and training resources, ranging from webcasts to seminars and conferences. With Sarbanes-Oxley regulations added to the list (see page 31) it's clear that industry professionals, from the CEO on down, will be spending more time on compliance matters.
Accordingly, compliance issues are hot topics at financial services meetings. At the annual Compliance & Market Conduct Exchange, hosted by the insurance and financial services marketing organizations LIMRA and LOMA in November, a panel discussion on the “High Stakes of SEC & NASD Compliance in the Current Environment” covered new regulations, such as the amendments to NASD Rule 3010 and new NASD Rule 3012 that affect how financial services company practices should be inspected, maintained, and supervised.
“Companies want to do the right thing,” says panelist Nancy Creedon, partner, Deloitte and Touche LLP. “But it's often not crystal clear from reading the rules what the right things are.”
Meeting Industry Forecast
The meeting industry looks strong for 2005 — albeit somewhat turbulent. Here are some of the leading trends.
The shrinking dollar
The continuing decline of the U.S. dollar — in 2004 it fell almost 30 percent against a basket of currencies, including the euro — means that if you budgeted last year for a European incentive in 2005, you'll be revising those numbers, or looking at less expensive destinations.
Airline woes, planner opportunities
With a host of factors like high fuel costs and excess capacity working against them, airlines are having trouble turning a profit. But, says Darryl Jenkins, director of the Aviation Institute at George Washington University, the highly competitive environment within the airline industry can lead to negotiating opportunities for meeting planners. “Certainly if you are smart in the way you book you will have a lot of flexibility [for good deals] this year,” Jenkins says.
Hot hotel market
The lodging industry is on the rebound. A recent report by PKF Hospitality Research, Atlanta, found that by the end of 2004 the top 50 U.S. hotel markets achieved an average occupancy of 64.8 percent — a 5.4 percent gain over 2003 — and they are expected to rise further in 2005. Room rates are escalating as well: Another report from PKF and Torto Wheaton Resarch, Boston, found that average daily room rates in the top 50 markets shot up 3.7 percent in 2004 and are expected to rise another 4.7 percent this year. The balance of power has shifted from the buyer to the supplier, and it will mean fewer great deals and tougher negotiating for planners.
Homeland security issues
Joe McInerney, president of the American Hotel and Lodging Association, is optimistic that the new Congress will extend the Terrorism Risk Insurance Act, currently due to expire at the end of 2005. Without the extension, hotel companies are concerned they will not be able to obtain comprehensive and affordable terrorism coverage. As well, in December Congress passed and President Bush signed the Intelligence Bill, which contains several provisions that will affect travel and meetings. For more information on the Intelligence Bill, see page 12 in this issue.
