California annuity sales rule on hold after industry outcry

California legislators were "one step away from all sorts of very onerous requirements" with its proposed annuity sales rule, according to one industry analyst.

The annuity sales bill passed the California Senate in May with no opposing votes at the committee level or from the floor. Since then, the bill attracted plenty of attention from industry lobbyists and is in the Assembly Insurance Committee.

The final result should look much closer to the best-interest model regulation put forth by the National Association of Insurance Commissioners, said Brad Campbell, partner at Faegre Drinker Biddle & Reath. Campbell was part of a panel discussion on annuity regulation this week at the National Association for Fixed Annuities' Annuity Leadership Forum.

Trade associations working

The panel cited work in California as an example of why trade organizations are crucial to protecting the industry from burdensome rules.

As an example, the initial version of the California rule would have required a producer to obtain specific personal information from a client before making a life insurance recommendation, Campbell explained.

"If the client refused to tell you one of those items you would not be allowed to, which is a weird burden to put on the producer and a weird way to prevent the client from having any autonomy in what they choose to share with you," he added.

Insurance Commissioner Ricardo Lara is supporting the California bill and explained why.

The insurance department "continues to see numerous complaints and cases which have the ability to ruin consumers’ lives," a note of support reads. "For example, a recent case involved a 94-year-old consumer who was persuaded to liquidate their existing annuity policy and use their inheritance to buy new policies which were later deemed unsuitable, causing a monetary loss of $220,000 and consequences to their income tax and social security benefits."

A compensation issue

The Independent Insurance Agents and Brokers of California and the National Association of Insurance and Financial Advisors were among the groups opposing the California bill. The two groups submitted written comments.

They most objected to wording that would make any cash or non-cash compensation a material conflict of interest. The NAIC model explicitly states that material conflict of interest does not include compensation because that is handled elsewhere in the regulation.

"Without the modifying language indicating that compensation paid to the producer is not a material conflict of interest, every sale of an annuity by a producer appointed by an insurer would qualify as a material conflict of interest and thus require the producer to somehow deal with that conflict," the trade groups informed legislators.

To date, 39 states have adopted the NAIC best-interest model.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.