Now that the National Association of Insurance Commissioners has agreed on a "best interest" standard for annuity sales, the race begins to get the rules on the books in 50 states -- or at least as many as possible.
The NAIC only passes model laws -- the states either adopt them via legislation or by regulations. And it can be a very time-consuming process as each state has different priorities, different legislative sessions, and are as ideologically opposite as liberal California and conservative Alabama.
But with the Suitability in Annuity Transactions model update, supporters do not have the luxury of time. New York has already adopted a tougher set of rules, while other states such as Massachusetts are in the process of doing the same.
If the industry is to avoid its nightmare scenario -- a patchwork of different rules from coast to coast -- then it needs to convince state officials to line up behind the new NAIC annuity model, and quickly.
"The more that we can get states to adopt this quickly and have the consistency throughout the country, the better," said Diane Boyle, senior vice president for government relations at the National Association of Insurance and Financial Advisors. "And then that does sort of negate the need to the states to look for other options."
Generally, adoption of NAIC model laws can take many years. For example, in October 2017, the NAIC adopted its Insurance Data Security Model Law and sent it to the states for consideration.
So far, the law is on the books in just eight states: Alabama, Connecticut, Delaware, Michigan, Mississippi, New Hampshire, Ohio and South Carolina.
'Best Interest' Standard
The annuity model amendment adds a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.
The new regulations mean agents will need to find out and document things like a consumer's financial situation, insurance needs and financial objectives.
The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. But the agent must be able to show that such a recommendation is in the consumer's best interest.
Only New York voted against adopting the amendments, which gives trade associations like the American Council of Life Insurers hope for widespread adoption. Some state regulators who were skeptical of the new rules voiced those doubts during Thursday's vote, but voted for the changes anyway.
"While I believe this law is not perfect," said California Insurance Commissioner Ricardo Lara, "overall for California it would be better for consumers than the existing regulations."
"From my standpoint, that bodes well for the future of this model," said Bruce Ferguson, senior vice president, state relations at the ACLI, of the nearly unanimous vote. "I anticipate a lot of states moving forward this year with adoption."
The method of adoption varies by state. About two-thirds of the states have adopted prior versions of the Suitability in Annuity Transactions rules by regulation, while at least a dozen have statutes, according to NAIC data.
Then it gets murky. Some states have issued bulletins or guidance that NAIC credits for addressing some of the same issues.
Six states -- Arkansas, Indiana, North Carolina, Nevada, Vermont and New Mexico -- have not adopted the most recent version of the NAIC Annuity Suitability in Transactions model "in a substantially similar manner," the NAIC said.
Will Be Lobbying
The industry trade associations say they will be lobbying state officials to adopt the new NAIC annuity rules as soon as possible.
The Insured Retirement Institute did not even wait 24 hours before sending a letter to all state insurance regulators expressing support for the NAIC model regulation, calling it “an improved model that is consistent with the U.S. Securities and Exchange Commission’s Regulation Best Interest (Reg BI).”
If it comes down to regulation versus legislation, trade association would prefer to deal with legislators answerable to constituents, Boyle said.
"All things being equal, I would say the legislative process is is often easier for NAIFA if there is going to be any obstacle in getting it through," she said. "And that's just because the nature of our membership allows us to have members in any given district so we have actual constituents talking to the legislators."
And it is important to work together with groups like ACLI to ensure that state officials know they are hearing a unified industry voice, Boyle added.
"We will be front and center supporting enactment by state legislatures," Ferguson said. "They may not have been as close to it as their regulator was, but they defer strongly and for good reasons to their insurance regulators. But again, how this rolls out will vary from state to state."
Trade association lobbyists say they hope that at least a dozen states adopt the NAIC model in 2020.
At the other end of the spectrum sit consumer groups who continue to oppose the NAIC's updated annuity suitability model.
Birny Birnbaum, executive director of the Center for Economic Justice, set out four objections to the model:
1. It allows insurance producers to portray themselves as working in the best interest of consumers when there is no such requirement for them to do so. The core of the rule maintains the suitability standard of care.
2. The rule provides safe harbors for conflicts of interest. After defining a material conflict of interest, the rule then exempts everything from such a conflict. Cash and non-cash compensation is not a conflict of interest, according to the rule, despite the fact that industry compensation structures designed to promote sales have been the source of problems for decades.
3. The rule continues the NAIC's practice of letting industry write consumer disclosures with the result that the disclosures provide a liability shield for producers and insurers instead of empowering consumers. The regulators rejected disclosure recommendations from consumer advocates.
4. The rule fails to apply to investment-type life insurance despite the fact that, for example, indexed life insurance is sold in the same manner as indexed annuities. Despite professed harmonization with Reg BI, Reg BI covers the sale of variable life insurance.
There is a lot of momentum behind the NAIC model at the state level, Birnbaum said in an email, and not a lot of opposition.
"Given that most states don't have consumer organizations working on annuities and life insurance, we expect a number of states will adopt the new rule based on the uncontested representations of industry and some regulators," 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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