NAIC Begins Tough Work on Best Interest Reg

With representation that spans the political spectrum, from liberal states to conservative ones, getting agreement on a best interest standard for annuity sales was always going to be tough for the National Association of Insurance Commissioners.

A conference call today to jump start discussion aimed at finalizing a new best-interest model law confirmed how difficult the task will be for the Annuity Suitability Working Group.

After the hour was up, the group agreed only on some minor language changes, setting aside more contentious issues, such as defining "best interest." Members advanced only nine pages into a 57-page document matching the rule language with comments received.

The group will reconvene March 24 in Milwaukee for the NAIC Spring Meeting. Commissioner Dean Cameron expressed hope that a final model law would be finished and voted on at that meeting.

Similar to the Department of Labor fiduciary rule, the NAIC model would place limits on agent compensation, require more disclosures and set a “best interest” standard. The standard would apply to annuity sales only.

Working group leadership, however, downplayed the draft law, adding that it was only meant to get the ball rolling.

NAIC model laws must then be adopted by a state before they are applicable.

Several states, including New York, Nevada, New Jersey and Connecticut, bypassed the NAIC and moved to produce their own best-interest standards. Those rules are in various stages of development.

'Misunderstanding'

The working group included commissioners from California and New York, which led to some interesting exchanges with leadership. In particular, there was a lengthy debate over the "purpose" language in the model law and how tough it should be.

That led Vice Chairman Doug Ommen, Iowa insurance commissioner, to remind everyone that suitability is a much tougher standard now than when originally conceived.

"I think that there’s been a misunderstanding with regard to what suitability really is," said Ommen, adding that the standard has been strengthened through the years to add disclosure requirements, for one example. "Our current rule already has a lot more than an old-line traditional suitability principle."

The group set aside language to redefine the purpose, as well as the definition of "best interest." On the latter point, some group members favored language suggested by the Insured Retirement Institute.

"'Best interest' means at the time the annuity is recommended, acting with reasonable diligence, care, skill and prudence in a manner that puts the interest of the consumer ahead of the financial or other interests of the producer," read the IRI definition.

But James Regalbuto of New York favored adhering to the Department of Labor fiduciary rule definition "where possible." The DOL rule's impartial conduct standards went into effect June 9 and should be "a guide" for the NAIC standard, he added.

Those standards require annuity sellers into retirement accounts to act as a fiduciary, make no misleading statements and accept only "reasonable" compensation.

"Maybe the best option would be to work on the rest of the regulation and then come back and rethink the definition again," said Jodi Lerner of California.

Language Agreements

The working group did adopt two language changes unanimously. In the first, the "scope" was defined as "this regulation shall apply to any recommendation or sale of an annuity," language proposed by the Indexed Annuity Leadership Council.

In the second, "cash compensation" was defined as "any discount, concession, fee, service fee, commission, sales charge, loan, override or cash benefit or other remuneration received in connection with the recommendation or sale of an annuity."

The language was suggested in a comment letter by the California Department of Insurance.

When the group meets in Milwaukee, far more vexing issues await, such as defining conflicts of interest and reasonable compensation. In addition, the group will have to agree on what a responsible annuity recommendation looks like.

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.