3 New Battles Over STATES’ Sales Standards
March 27, 2018 by Allison Bell
A group of state insurance regulators is giving itself more time to think about a major regulatory hot potato: states’ efforts to set tougher sales standards for annuities.
And, possibly, for other financial services products.
The Annuity Suitability Working Group, part of the National Association of Insurance Commissioners, talked about updating the NAIC’s sample annuity standard, the Suitability in Annuity Transactions Model Regulation (Number 275), on Saturday, in Milwaukee, at the NAIC’s spring national meeting.
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The working group has tried to come up with a state-based proposal that could be a bridge between the U.S. Department of Labor (DOL) fiduciary rule standards and the NAIC’s own suitability standard.
The working group posted a draft revision on the web in November and asked for interested parties to submit comments by Jan. 22.
The working group received more than 20 sets of comments, including two batches from AARP.
The working group decided on Saturday to put off making any decisions: It gave commenters until April 27 to submit more comments on the proposed Model Number 275 revision.
“The working group intends to hold an in-person meeting sometime in May to review and discuss any comments received,” the working group says in the official meeting summary.
New Comments, Old Battles
In states that have adopted the NAIC’s suitability standard, the standard requires insurers and insurance sellers to verify that the products sold to consumers suit the consumers’ needs.
The DOL fiduciary rule regulations and implementation guidelines require retirement product issuers and sellers to put the interests of retirement savers first, without letting commission pay or other compensation issues cause conflicts of interest.
The first time the Annuity Suitability Working Group began seeking comments on the proposed Model Number 275 revision, commenters made the same kinds of comments they made on the DOL regulations: Insurance and industry groups want any new state standards to be flexible, and as much like the old standards as possible. Consumer groups and some state insurance regulators want any standards to be tougher, and at least as strict as the DOL regulations.
Charles Anderson, executive director of the National Association for Fixed Annuities (NAFA), argues in NAFA’s comment, for example, that “insurance company supervision must be reasonably circumscribed to apply only to oversight of an insurance company’s own products and own compensation paid to ts appointed insurance producers.”
“Whatever rules are ultimately adopted by the NAIC, they must recognize and embrace the independent agent distribution model. Independent insurance agents represent multiple insurance carriers, and thus any insurance company providing oversight for independent agents can only reasonably be expected to supervise its own products and the compensation paid to agents for sale of its own products,” Anderson writes, in a copy of his comment posted on the Annuity Suitability Working Group’s section of the NAIC website.
David Certner, a legislative counsel at AARP, says the Model Number 275 revision draft exposed in November is too weak. AARP believes the NAIC should develop a separate fiduciary standard, not try to bolt a fiduciary standard onto the NAIC’s existing suitability standard.
“An industry professional would have to make recommendations both ‘solely in the interest’ of the consumer and with the ‘care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use,’” Certner writes. “Quite simply, it is not enough for the adviser to solely rely on their own opinion. The professional must assess what a prudent expert would recommend.”
3 New Flashpoints
Here are three issues Annuity Suitability Working Group members are sparring over now, according to a summary of a March 14 working group conference call included in the working group’s spring meeting packet.
1. Cut out the definition of ‘annuity’
New York state has drafted its own state “best interest” proposal, and, in many cases, even the working group members who oppose that proposal appear to be letting the New York draft frame their arguments.
New York state regulators have suggested that the Model Number 275 update eliminate the definition of the term “annuity.”
New York state regulators have proposed applying their draft best interest standard to all “life insurance investment-type products,” whether those products are describes as life insurance policies, annuities or something else. From New York state regulators’ perspective, the broad scope of the proposed best interest standard makes defining the term annuity unnecessary.
2. A ‘consumer-focused’ approach
New York regulators have proposed that the NAIC’s updated model should require sellers of investment-type life insurance products to take a “consumer-focused approach.”
“In a consumer-focused approach, the producer, or the insurer where no producer is involved, must know the financial situation, objectives and needs of the consumer, know the features of the recommended annuity, place the consumer’s interest ahead of their own, make certain disclosures to ensure the consumer is fully informed, and abstain from certain prohibited practices,” according to language proposed by New York state regulators. “A producer, or the insurer where no producer is involved, must disclose and manage material conflicts of interest to ensure the recommendation is suitable for the particular consumer.”
3. Fee-based compensation
Many financial services products issuers and sellers have tried to avoid best interest standard concerns by struggling to shift toward fee-based compensation, and away from reliance on sales commissions.
Some insurers have asked the Annuity Suitability Working Group to exempt fee-based planners from any updated suitability standards when the planners are recommending products without surrender periods or surrender charges.
The working group decided not to add the exemption, according to the conference call summary.
The working group says it could return to the issue at a later date.
