Two pieces of news provide a flicker of hope amid the doom and gloom.
By Linda Koco
The Colorado Insurance Division has expanded the list of terms that it said should not be used in life insurance and annuity advertisements, due to the potential for misleading consumers. These terms are “certificate of deposit” or CD, “safe” and “secure.”
The change went into effect on July 1 as part of amended Colorado Regulation 3 CCR 702 - 4, 4-1-2. The division held a hearing on the proposed amendments in May, but various insurance sources have told AnnuityNews they were unaware of the change.
The development may upset some insurance apple carts. This is especially the case for the ban on “safe,” a word that appears frequently in life and annuity sales and marketing materials around the country. Insurance marketers use “safe” to help customers understand where products stand in terms of risk, for purposes of asset or product allocation. The term is particularly evident in materials depicting fixed policies and rider guarantees.
The materials where firms have tended to use the word safe include newspaper ads and fliers, websites, brochures, business stationery, business cards and sometimes television and radio promotions. Some firms also show links to websites that do (or may) use the term in describing insurance products and solutions.
Now, due to the Colorado measure, existing materials will need revision. Sales strategies may likewise be affected.
Colorado took the step in response to complaints that the terms “certificate of deposit” or CD, “safe” and “secure” were being used in ways that could mislead consumers, according to Vincent Plymell, communications manager in the Colorado Department of Regulatory Agencies and spokesman for the insurance division.
Concerning the term “certificate of deposit” or CD, the issue was one of "bait and switch” advertising by some producers, he wrote in an email. For example, some producers advertise a CD with a good interest rate, “but when someone tries to buy it, they are put in an annuity,” he said.
The crux of the issue is whether the person or entity doing the advertising is an insurance producer or a bank, Plymell continued. “An insurance producer probably does not have access to sell a CD, while a bank may have staff to do so. It is a question of intent and deception.”
Most of the complaints on this have involved seniors, he added.
Concerning the terms “safe” and “secure,” Plymell said problems have surfaced where “consumers took these words to mean risk-free.”
Fifteen terms were already on the banned list. These are: investment, investment plan, founder’s plan, charter plan, deposit, expansion plan, profit, profits, profit sharing, interest plan, savings, savings plan, private pension plan, retirement plan and risk-free.
“This amended regulation is now strong enough for the department to consider the use of such terms a violation, and if necessary, push to the Colorado Attorney General's Office for further review,” Plymell said.
Whether the change will spread to other states is a question that insurance professionals elsewhere will be looking at, since regulatory concepts tend to spread from state to state.
The Colorado advertising regulations essentially follow the version of the model developed in 2000 by the National Association of Insurance Commissioners (NAIC), experts point out. This is the NAIC Advertising and Sales Promotion of Life Insurance and Annuities Model Regulation (No. 570).
To date, 13 states have adopted that version as it relates to the form and content of advertisements, including the NAIC Model’s list of (generally) prohibited terms, according to research by Pamela M. Heinrich. A Wauwatosa, Wis.-based attorney, Heinrich serves as outside general legal counsel to the National Association for Fixed Annuities (NAFA). The 13 states she named are: Alabama, Arkansas, Colorado, Illinois, Louisiana, Missouri, Nebraska, New Hampshire, New Jersey, Rhode Island, Virginia, West Virginia and Wisconsin.
Several sources said that the model does not include the terms that Colorado just added to its don’t-use list. However, Colorado regulators may have found that piecemeal efforts to address problems associated with those words were unsuccessful, so they turned to a blanket prohibition, suggested Cailie Currin, president of Currin Compliance Services in Greenwich, N.Y.
“I will not be surprised if other states follow,” Currin wrote in an email. “It is clear that there are many troubling uses of these words in the marketplace today.”
The insurance industry will probably not feel much effect just yet, since Colorado is seems to be the only state that has prohibited the new terms as of now, C.J. Rathbun told AnnuityNews. She is senior consultant and compliance expert with First Consulting & Administration in Kansas City. However, she too thinks other states may follow.
Even if states don’t follow right away, carriers might. As Rathbun put it, “My experience is that insurance companies don’t allow use of any terms that get complaints. That’s because, if a regulator says it’s misleading and you use it, then you’re at fault.” The companies don’t want that.
The troublesome aspects
The CD concern: Currin believes Colorado’s ban on use of certificates of deposit or CDs has to do with the way some fixed and fixed index annuities are compared to bank CDs.
“The model advertising regulation requires that comparisons between products be complete and accurate,” she said. Problems occur if an advertisement suggests a comparison between, say, a CD and a five-year annuity having a five-year surrender charge.
“Annuities should not be sold by making the analogy to a CD that rolls over every few years into another product,” said Currin, who is an attorney. “Annuities are designed to be long-term products, not short-term equivalents to these banking products.”
In advertising reviews, First Consulting also does not allow comparisons between a CD and an annuity, Rathbun said, noting that “a CD is guaranteed by the government but a fixed annuity is not.”
Misuse of “safe:” It can be misleading to describe a fixed or fixed index annuity as safe, Currin said, explaining that an annuity “is safe from some things and not safe from others.
“The words ‘safe’ and ‘secure’ are problematic when they are used in that kind of absolute way.”
Still, she said her firm does not raise concerns with use of the word “safe” as long as it is clear what the product is safe from (market declines, for example) and what it is not safe from (loss of principal, for example, due the possible imposition of a surrender charge).
“We know that other regulators object to the term ‘safe’ too,” noted Rathbun from First Consulting. So her firm suggests its clients use the term “principal protected” instead.
“Risk-free” is another term that raises regulatory eyebrows, “because nothing is risk free,” Rathbun said. For that reason, her firm suggests saying “lower risk than the stock market” or “not exposed to the stock market” instead.
Even company names and taglines come under scrutiny. At Currin Compliance, for instance, the experts believe that using the banned terms (including “safe”) for those purposes is a red flag and creates exposure for the firm. “In all states, I recommend removing those and other equally problematic words from firm names and taglines,” Currin said.
Not a blanket prohibition
Some people wonder how much enforcement the division will impose. Will the department allow a ramp-up period for bringing materials into compliance? Will moderating factors be considered? Since the banned word list also references not using “other similar terms,” what might those terms be?
The regulation does indicate that the focus is on terms that have “the capacity or tendency to mislead.” But it also includes some confusing language about how a purchaser may be misled about receiving “something other than a policy or some benefit not available to other persons of the same class and equal expectation of life.”
As NAFA’s Heinrich reads Section 5.B, it is not a blanket prohibition on terms. “The words are prohibited under certain conditions or circumstances. They don’t say ‘never.’”
Instead, she sees them as “guardrails” for the lay of the land. The intent is to prohibit fraudulent or misleading advertising, and to avoid consumer confusion, she said in an interview.
Still, Heinrich advised proceeding with “great caution” since there are still unknowns.
As for the association’s position, she said “NAFA supports the advertising principles in the NAIC model and the objective of not misleading consumers. The association also supports having a landscape that promotes a healthy and vibrant market. Hence, we have concern if there is a tightening or a misunderstanding of regulations.”
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at firstname.lastname@example.org.
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