Alabama, Rhode Island, Push Best-Interest Annuity Sales Rules

By John Hilton

The Alabama Department of Insurance is accepting public comment until Monday on a regulation amendment to attach a "best-interest standard" to annuity sales rules.

The amended rule will take effect Jan. 1, 2021, Commissioner Jim Ridling said, and is modeled after the best-interest rules the National Association of Insurance Commissioners approved earlier this year.

Likewise, Rhode Island is proposing a similar update to the standard "suitability in annuity transactions" regulation that most states adopted since the NAIC produced it in 2010.

The Rhode Island Department of Insurance is accepting comments on its best-interest update through Christmas Day. It is scheduled to take effect April 21, 2021.

Adopted in February, the NAIC model law articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. Both the Rhode Island and Alabama rules specifically state as much.

But the agent must be able to show that such a recommendation is in the consumer's best interest.

Language Differences

The law firm Faegre Drinker Biddle & Reath noted some subtle but important language differences between the versions being adopted in Rhode Island and Alabama.

Both rule amendments establish a best-interest standard, in part, if a producer exercises "reasonable diligence, care, and skill in knowing the consumer’s financial situation, insurance needs, and financial objectives."

And both states call on the producer to reach a “reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information.”

Alabama stops there. But the Rhode Island amendment says that producers "must also understand the available recommendation options after making a reasonable inquiry into the options available to the producer."

Rhode Island is also requiring producers to disclosure more details on compensation. Prior to recommending an annuity, both states require producers to "disclose to the consumer the scope and terms of the relationship with the consumer and the role of the producer in the transaction."

Again, Alabama stops there. Rhode Island is requiring much more disclosure detail: "the sources and types of cash compensation and non-cash compensation to be received by the producer, including whether the producer is to be compensated for the sale of a recommended annuity by commission as part of premium or other remuneration received from the insurer, intermediary, or other producer or by fee as a result of a contract for advice or consulting services."

The NAIC hoped for swift adoption of its annuity sales update, but that did not happen. Finally, the association convened a panel to develop guidance for states in the hopes of prodding more state officials to advance the best-interest update.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.