Iowa Proposes NAIC Annuity Standard That Eclipses Suitability

Iowa Insurance Commissioner Doug Ommen is attempting to cross a seemingly unbridgeable divide with a new "best interest" annuity sales rule that erases references to "suitability."

The proposal will be presented and discussed next week when a National Association of Insurance Commissioners' working group meets in Columbus, Ohio, for an all-day meeting. The Annuity Suitability Working Group is attempting to finalize a rule before the NAIC Summer Meeting on Aug. 2 in New York City.

After several meetings over the past year, the group is at loggerheads over some members' desires for a tougher standard that spells out "best interest." More conservative members have resisted those explicit words.

In a memorandum to the group, Ommen made it clear his compromise retains suitability ideas even as the word is scrubbed from his proposal. The driving force is to harmonize state insurance regulations with the new Securities and Exchange Commission's Regulation Best Interest, Ommen explained.

The NAIC goal is to pass an annuity suitability model law that individual states can then adopt.

"While the SEC has not articulated in the actual text of its Regulation Best Interest rule an incorporation of all suitability foundations, 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.

Compromise and tough choices are clearly evident in Ommen's "care obligation" language. While clearly much tougher, with language ("diligence, care, skill and prudence") found in the defeated Department of Labor fiduciary rule, the standard stops short of even the SEC's.

While attorneys noted the SEC language requires the "greatest benefit" to the consumer, Ommen said he rejected tying the care obligation to a financial outcome.

"We believe that maximizing financial outcome may also carry greater risk or uncertainty in outcome," he wrote. "No product or strategy that is dependent on future market performance avoids all uncertainty in outcome."

Instead, Ommen's proposes that the financial professional's judgment should be pointed to "the recommended option would be best suited to the consumer over the life of the product."

This interpretation does not limit the analysis to financial benefits since some options offer a desired certainty or "peace of mind," he explained.

"The use of the phrase 'best suited' recognizes the varied benefits that some options offer to meet the consumer's financial situation, insurance needs and financial objectives," Ommen wrote.

Ommen 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.

'Important And Critical Step'

Early response from industry representative is generally positive.

Joseph Nowak, senior director of advocacy and public policy for Nationwide Financial, submitted a comment letter of support for the best interest concepts.

"Although true harmonization will require further comparison against the SEC’s recently adopted Reg. B.I., your willingness to move towards alignment is an important and critical step," he wrote.

A letter from the joint trades -- including the American Council or Life Insurers, the Insured Retirement Institute and others -- objected to the word "prudence" and asked that it be removed.

All parties are expected to attend next week's Columbus meeting. But Ommen left no doubt that his embrace of a best interest standard is solid.

“Only in expressing what we mean by the words ‘best interest’ can we clarify the distinction between fiduciaries’ asset management obligations and transaction-based recommendation obligations," he wrote.

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.

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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.