Every state should “adopt and enforce” the National Association of Insurance Commissioners’ (NAIC) Suitability in Annuities Transaction Model Regulation, according to the Federal Insurance Office (FIO).
Reading between the lines, the underlying message is, this is no time for foot-dragging. All states need to adopt and implement the NAIC suitability model ASAP. If all states aren’t on board fairly soon, the feds might step in.
The recommendation was part of a lengthy report that the federal researcher submitted to Congress last week. Required by the Dodd-Frank Act of 2012, the report examines ways to “modernize and improve” the insurance regulatory system in the United States.
The Federal Insurance Office (FIO) is a research and recommendation agency under the U.S. Department of Treasury. It was created under Dodd-Frank to, among other things, monitor the insurance industry, including any regulatory gaps that could contribute to systemic crisis.
The 71-page report makes numerous recommendations concerning hot button regulatory oversight issues such as solvency, capital standards, reserving, producer licensing, market conduct and more. Included are reforms that the FIO says the states “should” undertake, plus “areas for federal involvement” and a “hybrid approach to insurance regulation.”
Annuity suitability recommendation
The annuity suitability recommendation appears in the “marketplace oversight” section. It runs only 650 words, but annuity professionals will be perusing those words very carefully.
This is due, in part, to the high profile role that FIO seems to be assuming in the post Dodd-Frank reform era — not as regulator, but as a researcher/recommender with voice and authority. It is also due to the implied federal oversight nature of the annuity suitability recommendation.
“The suitability of an annuity purchase should not be dependent upon the state in which the consumer resides,” the FIO states.
“Given the importance of national suitability standards for consumers considering or purchasing annuities, states should adopt the Model Suitability Regulation. In the event that national uniformity is not achieved in the near term, federal action may become necessary.”
The last statement — that “federal action may be necessary” — will no doubt stir up a certain amount of industry murmuring.
That is because, according to various published reports, at least 45 states have already adopted one version or another of the annuity suitability model developed by NAIC. “So why even bring this up?” some professionals will ask.
Apparently, this has to do with lack of uniformity among those regulations. NAIC has adopted three versions of its suitability model over the years. The 2003 version applies to sales involving senior buyers. The 2006 version updates the model to apply to consumers of all ages. And the 2010 model substantially strengthens the standards (by clarifying insurer compliance and producer education requirements, for example).
At least 25 states are said to have adopted the 2010 version, with more on the way. But the other states adopted the earlier versions or, in a few cases, they have entirely different suitability approaches in effect.
NAIC has put a big push on to spur the remaining states to adopt the 2010 version. But states handle NAIC model adoption in different ways and in accordance with their own laws. That means state adoption of this particular model, as with most models, has occurred over a period of years, not months.
Relative to that point, the FIO’s call for the states to achieve uniformity in the “near term” will be another source of concern. Annuity professionals and state regulators will ponder what “near term” means in this context. Within a few months? A year? Five years? When?