Delaware Introduces Best-Interest Annuity Sales Standard

By John Hilton

Delaware is the latest state to tentatively commit to add a best-interest annuity sales standard to its regulation of insurance products.

The state is accepting comment until Jan. 5, 2021, in an amendment to its suitability in annuity transactions regulation. If all goes well, the best-interest standard will be officially published on Aug. 1, 2021.

Delaware Commissioner Trinidad Navarro unveiled the amendment Tuesday. Several states, including Rhode Island and Alabama, have recently put similar best-interest amendments out for public comment, in response to lobbying from the National Association of Insurance Commissioners.

In February, the NAIC adopted a model law that 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. 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.

Parsing The Words

State officials have taken the NAIC model and tailored the language to their own comfort level on issues such as whether producers must consider other annuity options in the marketplace to satisfy the "care" obligation.

The Delaware language requires producers “to act in the best interest of the consumer when making a recommendation of an annuity.” Also, producers must ensure that the insurance and financial needs of consumers are “effectively addressed.”

Enforcement is at the sole discretion of the insurance commissioner, the amendment stated, with the full range of penalties under Delaware insurance law. That means fines, license suspension and other penalties.

"Any applicable penalty ... for a violation of this regulation may be reduced or eliminated if corrective action for the consumer was taken promptly after a violation was discovered or the violation was not part of a pattern or practice," the amendment stated.

Supervision rests with the insurer under the Delaware language. Insurers are expected to provide producers with training and set expectations. That includes eliminating sales contests.

"The insurer shall establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific annuities within a limited period of time," the amendment stated.

Producers are required to disclose "a description of 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."

Other States

Arkansas, Michigan, Nevada, Kentucky and Ohio are other states reportedly working on annuity sales amendments. Arizona and Iowa adopted rule updates earlier this year, and New York opted for a rule closer to a fiduciary standard, choosing to ignore the NAIC’s model.

The National Association of Insurance and Financial Advisors and the American Council of Life Insurers put out a joint statement in support of the Delaware proposal.

"As in the other states, Delaware’s proposed rule also would align with the SEC’s Regulation Best Interest to create a harmonized network of state and federal protections that preserve access to information and services lower- and middle-income savers want and need," the statement reads.

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.