Selling Suitably in 2012

By Nicholas C. Gerhart and Patrick C. Reeder
AnnuityNews
InsuranceNewsNet Magazine, October 2011

Annuities continue to play an important part in retirement income discussions, just as regulators have been strongly focused on the product and how these products are sold. For example, the NAIC adopted a revised Suitability in Annuity Transactions Model Regulation in March 2010. As a result of this new model, which has already been adopted in more than a dozen states, many carriers and producers have revised their annuity suitability procedures.

As Scottish philosopher Thomas Reid observed, “The rules of navigation never navigated a ship.” It is also true for annuity suitability. Good rules are necessary; however, it is those that live them that bring them to life.

For example, as a result of the enhanced suitability model, insurance producers often gather significant information about their clients’ financial situation, needs and risk tolerance in order to make suitable recommendations. One of the unintended consequences of these new rules is that in order to meet their suitability obligations, insurance producers may have to learn about clients’ securities holdings. This has led to questions about what an insurance producer, who is not also securities licensed, can ask or recommend in advising clients on suitable sources of funds for insurance policies. In June, the Iowa Insurance Division continued its leadership in the annuity regulatory arena and released two bulletins which give guidance as to what is permitted, and prohibited, by insurance producers and those holding securities licenses.

The Iowa bulletins apply to producers selling annuities and life insurance. In addition, they draw a distinction between an “insurance-only person” (one who has a valid insurance license, but not one for securities) and a “securities-only person” (one who has a valid securities license, but not one for insurance).

In order to comply with Iowa’s requirement that an insurance producer must have reasonable grounds for believing that the recommendation to purchase, borrow against, exchange or replace an annuity or life insurance is suitable for the consumer, an insurance-only person is permitted to discuss the consumer’s risk tolerance, financial situation and needs.

An insurance-only person may discuss:

• Financial experience.

• Financial objectives, including need for guarantees and minimum lifetime income stream.

• Risk tolerance.</p>

• Need to balance and diversify risk.

• Tax status, including the use of tax deferred vehicles.

• Existing assets, including investments and insurance holdings.

• Sources to fund the annuity or life insurance.

• Liquidity needs and liquid net worth.

• Financial time horizon.

• Intended use of the annuity or life insurance.

An insurance-only person may NOT:

• Discuss risks specific to a consumer’s securities portfolio.

• Provide advice on or compare a consumer’s specific investment performance with other financial products.

• Recommend or identify specific securities that could be liquidated to fund an insurance product.

• Recommend specific allocations between insurance and securities products.

• Offer research, analysis or recommendations to a consumer regarding specific securities.

• Complete securities forms, except for forms generally relating to or forms required as part of an insurance transaction.

• Hold him or herself as an investment advisor, securities agent or investment advisor representative.

An insurance-only person can talk about the stock market “in general terms” including “market risks and recent or historic economic activities that are generally known to the public and regularly discussed in public media” and have “general discussions about balancing risk, diversification, etc., that support an insurance position within a consumer’s financial plan.”

They are permitted to give advice as part of a financial plan; however, he or she must identify him or herself as an individual who holds a producer license and that he or she “is authorized to sell annuity or life insurance products and not sell, recommend or provide advice about securities.”

As millions of baby boomers are preparing to retire, the insurance industry continues to promote the importance of annuity products as part of an overall retirement plan. The guarantees within fixed annuities, combined with the ability to convert one’s accumulation value to a lifetime income, will likely contribute to continued sales growth in the fixed annuity space. With this increasing demand for a product that may be entering its “golden age,” sales practices of annuities will remain under the regulatory microscope. State departments of insurance will continue to regulate fixed annuity products and enacting the enhanced model suitability in annuity transactions is a top priority in many state departments of insurance.

We expect more new issues to arise. Insurance-only producers need to use care when determining the appropriateness of an annuity transaction for a customer and balance between doing a proper suitability analysis and offering investment advice without a license. Thanks to Iowa’s leadership, we have a solid outline on sales activities that insurance-only producers may complete in determining whether an annuity is suitable for a customer. We can also expect states like Iowa to bring their solutions to the NAIC for broader adoption by other states.

Producer Requirements

The 2010 NAIC Suitability in Annuity Transactions Model Regulation offers three core requirements:

1) A producer who recommends the purchase or  exchange of an annuity must obtain “suitability information” from the consumer, which includes:

• Annual income.

• Existing assets, including investment

and life insurance holdings.

• Financial situation needs, including the financial resources used for the funding of the annuity.

• Age.

• Financial experience.

• Financial objectives.

• Financial time horizon.

• Intended use of the annuity.

• Liquidity needs.

• Liquid net worth.

• Risk tolerance.

• Tax status.

2) A producer must have reasonable grounds for believing that the producer’s recommendation is suitable based on facts disclosed by the consumer, including the consumer’s suitability information.

3) The producer must have a reason able basis to believe the following:

a. The consumer has been reasonably informed of various features of the annuity.

b. The consumer would benefit from certain features of the annuity, such as tax-deferred growth, annuitization or death or living benefit.

c. The particular annuity as a whole, the underlying sub-accounts to which funds are allocated at the time of purchase or exchange of the annuity, and riders and similar product enhancements, if any, are suitable.

d. In the case of an exchange or replacement of an annuity, the exchange or replacement is suitable.

Nicholas C. Gerhart is vice president of compliance/regulatory affairs for Sammons Financial Group/Midland National Life/North American Company Life and Health, where he handles corporate compliance and market conduct issues and manages regulatory affairs. He can be reached at [email protected].

Patrick C. Reeder is Of Counsel in Stradley Ronon’s Insurance Practice Group. Based in the Washington office, Mr. Reeder advises a broad range of clients in regulatory compliance, government affairs and strategic business transactions with a focus in highly-regulated industries. He can be reached at [email protected].

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