California Threatens NAIC With N.Y. Annuity Standard

California Insurance Commissioner Ricardo Lara wants "as close to a fiduciary standard as possible" to govern annuity sales, his office says.

The California Department of Insurance weighed in this week with comments on a controversial annuity sales model law being debated by a National Association of Insurance Commissioners' working group.

If the NAIC doesn't come through with a tough standard, "like New York, we may decide to pursue laws that are stronger than the revised NAIC Model Regulation," Lara's office said in an email response to InsuranceNewsNet.

"California continues to push for amendments to the Model Regulation that are as close to a fiduciary standard as possible," the statement said.

The official CDI letter made several bold suggestions, including:

1. All incentives, including commissions, be declared a "material conflict of interest."

"Insurers also have a material conflict of interest with regard to consumers because they need to have producers sell annuity products in order to make a profit," wrote Jodi S. Lerner, attorney for the CDI.

2. Add "prudence" to the standard of care obligation.

Producers should act prudently when both determining whether a consumer should buy an annuity, as well as suggesting how much of their money should be placed in the annuity.

"To act prudently is simply to act in a non-negligent manner," Lerner wrote.

3. Consider adding "good faith" and "fair dealing" concepts to the annuity sales model.

4. Provide a written record of any recommendations.

All recommendations would "explain the grounds for the recommendation and the advantages and disadvantages of purchasing the product," Lerner wrote.

Important State

A substantial amount of annuity sales are made in California, said Sheryl Moore, president and CEO of Moore Market Intelligence. The state is "close" to top five for most annuity sellers.

The Annuity Suitability Working Group has 90-minute conference calls scheduled for July 23 and July 29 as members try to get as much of the rule finalized before the full NAIC Summer Meeting in New York City. Members will meet there for an hour Aug. 3.

In June, the group shifted to considering a new, tougher rule draft prepared by Iowa Insurance Commissioner Doug Ommen, also vice chair of the group.

In a memorandum to the group, Ommen explained his effort to harmonize state insurance regulations with the new Securities and Exchange Commission's Regulation Best Interest. He presented the Iowa draft as a compromise that retains suitability ideas even as the word is scrubbed from his proposal.

"We firmly believe that the actual text of the NAIC model regulation for annuity transactions should draw on the processes associated with suitability to shape the higher ‘best interest’ professional standard," Ommen said in a news release.

However, he also makes it clear that suitability has to go.

"Once the decision has been made to raise the professional standards to 'best interest,' no purpose is served by retaining a lateral standard of 'suitability' in the text of the rule," Ommen wrote. "The foundations of 'suitability' are subsumed into the principles of 'best interest' and no clarity is gained by retaining the distinction."

Four Obligations

Ommen's proposal articulates a best interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

Of those, Ommen has acknowledged that achieving a consensus on the definition of care obligation "may prove challenging." During previous meetings, the working group could only agree to a best interest standard if it wasn't called those words.

Unless the group goes further, it might not be near enough to keep California and Commissioner Lara on board.

"The commissioner is committed to ensuring that California consumers’ retirement nest eggs are adequately safeguarded," the CDI said.

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.

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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 john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.