Reuters Paul Hackett special report social media advertising & insurance compliance: what is the big deal?

Reuters Paul Hackett special report social media advertising & insurance compliance: what is the big deal?

TABLE OF CONTENTS contents Social Media Advertising & Insurance Compliance The Landscape of Social Media Compliance Social Media Use by Policyholders Social Media Use by Insurers Problematic Scenarios for Insurers and Policyholders Conclusion 3 4 5 5 6 7 The following contributed to this Special Report: Author Alex D. Gardine Design Megan Nadkarni 2

Introduction Insurers should expect additional hurdles in the area of social media advertising compliance. To the extent that insurers are pursuing business in social media marketing channels and policyholders are increasingly meeting their insurance needs through social media utilities, it is imperative that insurers anticipate and employ comprehensive solutions for compliance issues that will invariably arise. Do state insurance advertising laws take in social media? What does the current social media regulatory landscape look like? To what extent are insurers and producers using social media? What are some problematic scenarios for insurers and policyholders? This paper tackles these insurance advertising and other social media compliance questions and arrives at the following conclusion: Insurers who do not invest in social media compliance solutions will find themselves at a distinct disadvantage not only in the marketplace but with regulators as well. social media advertising & insurance compliance By now, the sheer enormity of social media and its business and marketing potential should have the attention of all insurers. Not only do 80% of adults on the Web use a social media network, it is estimated that nearly 20% of consumers use social networks as their core navigation and information discovery tool. These numbers underscore what companies who use social media have come to understand: The social media revolution is here to stay. Conversely, while a few insurers have made significant efforts to incorporate social media, the vast majority have not. A 2011 poll indicates that over 75% of insurers are not actively using social media. Similarly, consideration for marketing and compliance issues that social media portends is also being neglected as over half of all life insurers do not have an established social media plan. But maybe the lack of insurer focus on the regulatory side is for good reason. Last time we checked, all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands had insurance advertising and sales laws on the books. These traditional state advertising laws intricately describe the prohibitions and requirements for insurers to market and sell their policies to the public. Nearly all such jurisdictions have defined what an advertisement is, addressed insurer record-keeping requirements, 3 required certain disclosures, outlined prohibitions for advertisements, and until recently, had apparently addressed in broad fashion all other nuances as they pertain to the rules for advertising and selling insurance. But the extent of the current regulatory framework is in question. In addition to legal experts who have weighed in on the issues of social media advertising compliance, other entities including the National Association of Insurance Commissioners ( NAIC ), Financial Industry Regulatory Authority ( FINRA ), and the New York Office of General Counsel ( NYOGC ) have either made rules concerning, or developed task forces on the effects of social media compliance as they relate to the sale of insurance. So does the existing regulatory scheme for insurance advertising account for the complexity of social media? On one hand, the sheer enormity and intricacy of social media suggests a lacking regulatory scheme. Regulators will need to balance the vast opportunities for new business with the risks to insurers and policyholders in the face of the growing onslaught of social media. Regulators may also be required to address significant issues in the name of protecting the public and keeping a level playing field. The very act of a regulator weighing in on the subject of social media advertising lends to the implication that the current regulatory landscape is, in fact, inadequate. One such weigh-in occurred when the NYOGC issued an opinion on social media and its status as an advertisement. New York s reiteration that the definition of advertisement is very broadly worded, means that social media advertisements should, at least for New York, fall neatly under the current scheme of advertising regulations. Likewise, the NAIC regards the principles of social media communication between insurers and their potential customers as largely congruent with traditional regulatory understanding of an insurance company s role and responsibility within the marketplace. On the other hand, the NYOGC s assertion that the use of a LinkedIn profile page for the promotion of insurance by an insurer or agent constitutes an advertisement is telling. The opinion demonstrates, at a minimum, that regulators believe social media issues warrant additional clarification and regulators are poised to act as additional questions arise. Although the NAIC generally regards insurer/policyholder use of social media communications as generally

harmonious with state law, the question about the possibility of future state regulations is far from settled. No state insurance department has of yet authoritatively addressed the intricacies of social media. In fact, the NAIC and state regulators are busily working with insurers to keep up with a social media trend that is dynamic and facing continued exponential growth. It is also a fact that regulators are trying to balance the current regulatory scheme with other regulations which have been giving guidance to social media communications for quite some time. The landscape of social media compliance More than a decade ago, before the social media blitz, the National Association of Securities Dealers ( NASD ) made its first foray into regulating electronic marketing communications. The NASD rules regulating chat rooms have since matured and have become the standard by which firms are permitted to sell securities in such forums. Later, in response to numerous inquiries regarding the status of social media communications, FINRA created a social media task force in 2009. The purpose of the task force was to discuss how firms and their registered representatives could use social media sites for legitimate business purposes in a manner that ensures investor protection. In 2010, the task force issued FINRA Notice 10-06 ( 10-06 ) which gave regulatory guidance specifically for blogs and social networking sites used for business purposes. 10-06 provided guidance in some noteworthy areas: Firms are required to retain communication records made through social media sites. Recommendations made through social media sites are subject to suitability requirements. Firms must understand the distinction between static and interactive content on social networking sites for determination of whether the content constitutes an advertisement. Firms must adopt supervision and training policies and procedures to ensure that their associated persons who participate in social media sites for business purposes do not present undue risks to investors. Firms must follow rules governing third-party posts for determination of whether site content is attribut - able to the firm. More recently, the FINRA social media task force added an additional rule by issuing FINRA Notice 11-39 ( 11-39 ). The purpose of 11-39 was to answer additional queries relating to the application of the social media advertising rules to new technologies. 11-39 addressed: Examples of what constitutes business communications for record keeping purposes. Record-keeping requirements for static and interactive communications. A prohibition on the use of a device which deletes content from a sponsored social media site. Social media compliance monitoring through random spot checks and annual certifications. Criteria for smartphone and tablet use to perform business activities. Requirements for changes to static content posted by a firm. Insurance products such as variable annuities or other insurance policy derivatives determined to be securities are already governed by the Securities and Exchange Commission ( SEC ) and FINRA, and therefore, 10-06 and 11-39. Although variable products represent only a segment of annuity products, 10-06 and 11-39 underscore several propositions: First, insurer/policyholder social media communication, at least for some insurance products, is already subject to significant oversight. Second, such oversight comes with much higher standards than the traditional state regulatory scheme. Against the backdrop of the traditional state regulatory scheme, 10-06 and 11-39 have become the principal benchmarks by which state regulators will likely implement policies for social media advertising compliance. The heavy influence of 10-06 and 11-39 is noted in the recent NAIC Market Regulation & Consumer Affairs Committee report. The NAIC commissioned the report to identify insurer/policyholder uses of social media, identify compliance issues, and provide guidance on how to address such issues. The committee report addressed these issues and also touched on state regulator efforts in non-legislative contexts. The report also outlined several issues which substantially take in the requirements of 10-06 and 11-39. The primary issue noted in the committee report is the NAIC s distinction between static and interactive social media content. For static content, the traditional rules apply regarding the proper approval, filing, and retention of advertising content. This is distinct from interactive content. With interactive content, an insurer using social media may be held liable for third-party posts under an entanglement theory and/or adoption theory. To a large extent, this distinction mirrors FINRA guidance in that it requires the insurer to be responsible for any interactive posts or content where the insurer was either involved in the preparation of the content, or the insurer had explicitly or implicitly endorsed the content. 4

Other cues from FINRA s guidance include the NAIC s recommendation that insurers adopt supervision and training policies to ensure that their associated persons who participate in social media sites for business purposes do not present undue risks to investors. The report also recommended that insurers employ risk-based principles to determine the extent to which the review of incoming, outgoing and internal electronic social media communications is necessary. Although the NAIC s committee report borrowed heavily from FINRA guidance, the industry took issue with the July report. In a comment letter to the NAIC regarding the committee report, the American Council of Life Insurers ( ACLI ) argued that some of the conclusions reached [ ] have no legal or regulatory basis. The ACLI letter made the general recommendation that social media compliance issues be analyzed and treated under the existing regulatory framework. The ACLI letter also outlined several problematic scenarios with the report including its concern with a NAIC example of entanglement or adoption theories where insurers may become liable for interactive comments posted by third parties, but which are not deleted by the insurer. The ACLI argued that the example regarding such an implicit adoption of a third-party post is contrary to and beyond anything identified by FINRA or the SEC to date. These positions are echoed in comment letters sent to the NAIC by other individual insurers and appear to have been influential since the NAIC example regarding non-deleted third-party posts is not found in the September version of the report. The ACLI also contended that the suggestion that statistical data contained in social media communications be reported on a quarterly basis exceeds the requirements of existing state insurance laws. Other issues taken up by the ACLI include issues with suitability and record-keeping requirements. The ACLI argued that these issues may be conflicting, confusing, and/or exceed existing state requirements. Even in light of such industry concerns, the NAIC and the states will likely continue to look to the FINRA rules for guidance on rulemaking as well as for enforcement. If implemented, any rules built on FINRA guidelines could mean another wrinkle into the arena of insurance advertising law, and therefore, require bigger compliance efforts from all insurers. Although it appears that state regulators will eventually track the FINRA guidance on the issue of social media advertising compliance, the question of how the regulators will proceed will depend on the actual uses of social media by insurers and policyholders alike. social media use by policyholders As consumers increase their demand for the interactive approach provided by social media, the old style of marketing and selling insurance policies could become the exception. Stand-alone websites are increasingly being seen by consumers as mere brochures. A recent study indicates that the percentage of consumers who will purchase their policies through an insurance agent or financial planner is deteriorating. Additionally, more than a quarter of adults prefer to direct-purchase their life insurance. These trends are not likely to reverse. In fact, the trend away from traditional sales channels will likely accelerate due to increased competition in an uncertain economy and a rising generation of consumers who are comfortable buying insurance with the aid of social media. Consumers are not only buying insurance with the aid of social media, policyholders are using social media in order to get answers about specific insurance products. Insureds are posting their experiences to their friends and family on Facebook, ranting about experiences (good and bad) on blogs and forums, and tweeting their interactions and perceptions across a range of insurance topics. These communications can include an array of issues including customer service relations, complaint handling, and the timely processing of claims. As these social media channels continue to develop, the onus will be on insurers to stay ahead of the curve. social media use by insurers Although a considerable number of insurers have neither presence nor policy when it comes to social media use, the use of social media by insurance companies is as varied as the companies themselves. Some carriers have taken a head-on approach. For example, one of the bigger life carriers launched a Facebook page in 2010 and has a marked presence on Twitter, Flickr, YouTube, and LinkedIn. Other major insurers have not only a presence in the major social media channels, but also successfully maintain their own proprietary social networking sites, message boards, and chat rooms. Several insurers have employed innovative uses of social media. One such use by several major carriers includes the use of a TweetDeck to function as an 5

access point for its customers who follow it on Twitter. The TweetDeck permits a wide range of communications; from customers who tweet their experiences as satisfied clients, to questions about coverage and specific complaints. The process begins when an insurer receives an initial tweet by a customer who is a follower. A response tweet is then posted on the insurer s TweetDeck in reply to the customer tweet. Depending on the query (complaint, billing issue, etc.), the company will reply to the customer via response tweet, usually with the intent of routing the inquiry to the proper department for resolution. Creative social media uses by insurers include interactive Facebook presences. On any given day, the wall of an insurer Facebook page may contain several policyholder complaints with company responses on a host of issues. It may also have tens of thousands of fans who Like the company and are permitted to read company messages as well as add their own comments. Additionally, insurers also employ online listening practices. By following the comments and tweets of other insurers, companies can keep current on what the competition is doing, as well as receive significant feedback about their own brand. Other innovative uses of social media include an analytical approach. Besides merely attempting to gain Likes and Fans to its social media platforms, companies are sifting social media data for metrics. Such metrics can show, among other things, conversations which include a company s name, when to tweet, how often to tweet, and which messages are effective. Even with such inventive uses of social media advertising to generate leads and enlarge an insurer s social footprint, they are not without risk. problematic scenarios for insurers and policyholders One of the more problematic uses of social media by insurers and agents comes in the form of misleading advertising. A recent example of a misleading advertisement through social media occurred in 2010 when FINRA took an enforcement action against a California securities broker. FINRA found that the broker not only failed to inform her firm that she had a Twitter account used to tout stocks, but that she had sent a series of unbalanced, overwhelmingly positive tweets. This example demonstrates the wide possibilities for agents and insurers to be out of compliance with their lead generation practices. In addition to being an example of misleading advertising, it also raises the question as to whether state regulators will expect insurers to maintain, under state record retention rules, a copy of every tweet or social media posting made by the insurer or its agents. Currently, a majority of states require a 3- to 5- year record retention of all advertisements disseminated in that state. It would be hard to argue that Twitter, Facebook, LinkedIn, or any other social media interaction is not being used for the purposes of promotion or creating an interest in an insurer or its products. As such, the trade-off for access to clients in social media channels has created a more complicated record-keeping burden. The byzantine nature of social media will effectively require insurers to control and track every message in every social media context in which they or their agents participate. The NAIC report notes that state regulators are aware of cloud or other data storage systems which may be effective in recording and allowing access to all insurer and agent social media use. The report also reiterates that each insurer is responsible for determining whether such a system provides the appropriate privacy, retention and retrieval functions necessary to comply with various state statutes and rules relative to recordkeeping. Other major issues regarding misleading advertising include the aforementioned problem of third-party posts which may attribute to the insurer through entanglement or adoption theories. As it was stated in the July NAIC report, the non-deletion of a third party post may also be considered adoption. It is not uncommon for nonaffiliated brokers or other parties to attempt to market their business through third-party postings directed at insurer social media sites or blogs. Some of these real-time posts may include unsubstantiated and potentially misleading assertions regarding the posting party s insurance costs and benefits and other less-than-credible information. Even the most reasonable observer of such third-party postings may be confused as to the relationship between the insurer and the third-party. Left unattended, such third-party posts could be interpreted as adoptive. Retweeting or replying to such posts as well as linking to third-party sites known to contain misleading content could also be considered adoptive. When met with regulatory inquiry, it may be hard for the adopting insurer to argue that it was not aware or responsible for any potentially misleading thirdparty posts given that many insurers using social media routinely scrutinize their interactive content for customer queries and complaint routing. As such, insurers should vet all third-party posts for misleading content on all of its social media platforms. Insurers should also be vigilant in keeping records of all potentially adoptive posts as well as take steps to insure the accuracy and timeliness of all advertising content. 6

Besides advertisement and recordkeeping issues, many insurers receive customer complaints through their social media channels. The question surfaces as to whether a complaint made on an insurer s Facebook wall or by tweet to the company Twitter feed, invokes state complaint-handling and its accompanying record-keeping rules. Under many state complainthandling rules, failure to maintain the complaint-handling record is considered an unfair trade practice and carries significant fines. It is unclear whether an insurer can avoid the handling issue and its accompanying record-keeping requirements, merely by responding with a Twitter reply or a follow-up Facebook comment directing an aggrieved consumer to the proper departments within the organization. Even if the complaint does not reach the proper department within the company, insurers should err on the side of keeping a record of any complaint lodged, no matter how informal, on any of its social media sites. Given the NAIC s inclination toward FINRA guidance, insurers would do well to adopt FINRA s stance on the complaint-handling issue. FINRA considers consumer complaints by text message or tweet to be subject to reporting requirements. Other problems arising from social media advertising include, among other issues: reputational risks from derogatory or false third-party posts; reputational risks due to agents, agencies, and third-parties who create corporate social media accounts; consumer privacy for insureds who post personal information on social sites; testimonial issues regarding Facebook Likes ; and inducement/testimonial issues for agents who give gifts for being a fan or who personally recommend a particular agent on social media sites such as LinkedIn. CONCLUSION Social media advertising can be complex and there is no panacea; however, proper social media use is not impossible. Even with relative congruence of state insurance laws and social media advertising, insurers will continue to have significant compliance hurdles to clear. Every firm should consider the guidance provided in the context of its own business and its compliance and supervisory programs. Insurers who continue to reach out through social media channels will get the benefit of brand exposure and a higher level of interaction with current and future policyholders. Accordingly, insurers should be sure to develop their own social media compliance programs in order to stay ahead of a fast market as well as state regulators. references 1 Singh S. et al. The Razorfish Social Influence Marketing Report. Razorfish. 2009. 2 Gibs J. Social Media: The Next Great Gateway for Content Discovery? Nielsen. 2009. 3 Koco L. Social Media Growing at Life Carriers. Insurancenewsnet.com. October 25, 2011. 4 5 Stead S. Social Media Meets Insurance Regulation: Where Are We Headed? June 7, 2010. 6 OGC Op. No. 10-11-07 7 8 Author s note: 14 VA ADC 5-41-20 and 211 MA ADC 152.02 defines social media as advertising for Life and Health products respectively. 9 10 11 NASD Rule 2210 12 FINRA Notice 10-06 13 14 FINRA Notice 11-39 15 www.sec.gov/answers/annuity.htm 16 17 NAIC. 2011 Committee Charges. March 29, 2011. 18 19 20 21 ACLI. Comments Re: NAIC Social Media (D) Working Group Draft White Paper on the Use of Social Media in Insurance. August 18, 2011. 22 23 Williams J. Comments Re: NAIC Social Media (D) Working Group Draft White Paper on the Use of Social Media in Insurance. August 24, 2011. 24 25 Bell J. More Americans buying life insurance direct. Homeinsurance.com. August 2011. 26 27 Agarwal R. and Tiwari M. Social Media Insight for Insurers. May 2011. 28 O Donnell A. Insurers Come to Grips With the Opportunities and Risks of Social Media. Insurance & Technology. Oct. 18, 2010. 29 30 Pauli K. and Nagel L. Insurance Customer Communications: Three Areas Where Innovation Trumps Tradition. Tower Group Webinar. Sept. 15, 2011. 31 Koco L. Social Media Growing at Life Carriers. Insurancenewsnet.com. October 25, 2011. 32 33 FINRA Quarterly Disciplinary Report, Jan. 2011. 34 Hollar M. et al. Social Media 101. AICP Panel Discussion. Sept. 26, 2011. 35 36 37 FINRA Notice 11-32 7

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