Annuity Sales Inch Closer to a Higher Standard
August 8, 2018 by Rich Blake
The National Association of Insurance Commissioner’s (NAIC’s) annuity-rules subcommittee met in Boston on Saturday, August 4, with a goal of hammering out a final version of a proposal to elevate the current NAIC suitability rule to something closer to a best-interest standard, or what some have called “suitability plus.”
Callie Woods, a NAIC spokeswoman, confirmed on Aug. 6 that the NAIC Annuity Suitability Working Group’s final draft had been sent to the full Life Insurance and Annuities Committee. That committee will require at least one month to debate and discuss the final wording, Woods said.
Last month, New York State released — ahead of the Annuity Suitability Working Group’s final draft — its own final, tougher, more explicit best-interest-standard regulation on sales of annuities, as well as life insurance. Per the New York regulation, which takes effect in August 2019, agents and brokers need to put consumers’ best interests ahead of their own.
Created in April of 2017, the Working Group was partly a response to the Department of Labor’s fiduciary rule, which, had it not been struck down by the courts, would have required advisors to act in the best interests of clients with respect to retirement accounts. This would have also extended to annuity sales.
The Working Group, headed by Dean Cameron, director of Idaho’s Department of Insurance, fully reviewed the comments received on the revisions to the Suitability in Annuity Transactions Model Regulation (#275).
Best-Interest Framework
This Aug. 4 gathering in Boston came on the heels of a special meeting that the Working Group held in Kansas City, Mo., on June 1.
Although New York pushed ahead with its version of a stepped-up regulation for both annuities and life insurance, the NAIC working group is widely expected to make a model rule covering annuities only.
During the Kansas City meeting, a consensus was reached via straw poll to opt for what could be described as something akin to a best-interest standard – even if the precise term “consumers’ best interest” is not expressly used. It’s being called a “suitability plus” standard.
This approach would seem to track with what the Securities and Exchange Commission is looking to pursue as far the agency’s proposed new standard governing conduct of brokers.
Michael Humphreys, assistant commissioner for insurance at the Tennessee Department of Commerce, was among those who expressed support for the Iowa approach — a best-interest structure, but without using the term “best interest” expressly, according to a published summary of the Kansas City gathering.
James Regalbuto, Deputy Superintendent for Life Insurance, New York State Department of Financial Services, expressed concern about not including a specific “best interest” standard, according to the summary. He worried about the message it would send to consumers, according to the official minutes of that Kansas City gathering. Regalbuto expressed support for including the term “best interest” in the revisions.
The standards debate centers mainly on Section 6 of the proposed rules model, “Duties of Insurers and of Insurance Producers.” “Our end goal is to have a product that can pass not only this group, but the (NAIC) A Committee, plenary and ultimately the states,” Idaho Insurance Commissioner Dean Cameron said in Kansas City.
The industry is closely watching the NAIC to see what regulatory framework it produces, said John Hilton, senior editor, InsuranceNewsNet. “Having defeated the Department of Labor fiduciary rule, insurers are now waiting out not only the NAIC, but the SEC as well.”
Iowa Leads Way Forward
Language submitted by the Iowa Insurance Division (IID) drew support from several members of the working group.
Below are some of the key phrases that the IID put forward for use in Section 6, “Duties of Insurers and of Insurance Producers,” of the annuity transactions model law.
A (1)
In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the particular consumer.
A (2)
“Reasonable grounds for believing that a recommendation is suitable” requires reasonable competence, trustworthiness, fair dealing, diligence, care and skill by the producer or the insurer where no producer is involved.
A (3)
These standards require a consumer-focused evaluation and reasonable disclosures of the producer’s or insurer’s interests so that the consumer’s interests are placed ahead of the interests of the producer or insurer and the producer’s compensation and material conflicts of interest are merely incidental to the transaction.
This does not mean that the annuity product with the lowest one-time or multiple occurrence compensation structure must necessarily be recommended, but the recommendation must be diligently focused on whether the product costs, rates, benefits, features and other contractual provisions of the annuity address the actual financial situation, objectives and needs of the particular consumer.
A (4)
These standards shall be applied in a limited manner and scope to the licensed authority and qualification of the producer, or insurer where no producer is involved, and whether the producer, or insurer where no producer is involved, is only authorized to recommend a limited range of annuity products or product types.
A (5)
These standards require the producer, or insurer where no producer is involved, to orally or in writing describe to the consumer the grounds for the recommendation.
A (6)
The producer, or insurer where no producer is involved, shall consider all factors including the consumer’s suitability information, product costs, rates, benefits, features and other contractual provisions. The factors set forth are generally relevant in making a suitability determination, but the level of importance of each factor may vary depending on the facts and circumstances of a particular case. Factors should not be considered in isolation.
B. Prior to the recommendation of an annuity, a producer, or an insurer where no producer is involved, shall do all of the following:
(1) Make reasonable efforts to obtain suitability information from the consumer;
(2) Consider the types of products the producer, or insurer where no producer is involved, is authorized and licensed to recommend or sell that may align with the consumer’s disclosed suitability information and address the consumer’s financial situation, objectives and needs.
