NAIC Finding Little Support for Best-Interest Annuity Model

By John Hilton

The National Association of Insurance Commissioners’ draft best-interest model law for annuity transactions is at the center of a fierce debate in the insurance world.

The NAIC Annuity Suitability Working Group accomplished a significant goal in 2017 by completing its Annuity Transactions Model Regulation. The regulation is seen as a bid to transition annuity sales to a suitability standard that includes a stronger, consumer-focused component.

But based on comment letters, commissioners might have misjudged the readiness for another layer of fiduciary-type standards.

Neither Dean L. Cameron nor Doug Ommen, chairman and vice chairman of the working group, returned phone calls seeking comment.

On one side, industry organizations say the model law standards are too harsh and will suffocate annuity sales. These organizations are precise with their arguments, having battled the Department of Labor over its fiduciary rule for the past two-plus years.

“The proposed revisions to the existing model would dramatically alter the standard of care that applies to the sale of all forms of annuities and impose broad new compensation restrictions without offering clear benefit to consumers,” wrote Wesley Bissett, senior counsel for government affairs for the Independent Insurance Agents and Brokers of America.

Similar to the DOL rule, the NAIC model would place limits on agent compensation, require more disclosures and set a “best interest” standard. NAIC model laws must then be adopted by a state before they are applicable.

The NAIC model needs to be explicitly clear on the obligations of the producer and that of the insurer, Western and Southern Financial Group wrote in an eight-page comment letter.

“In raising the standard of care from suitability to best interest, the NAIC should not impose obligations on an insurer that are impractical, if not impossible, to fill,” wrote Jonathan D. Niemeyer, senior vice president and general counsel for WSFG.

Cover Life Insurance

On the other side, several state officials weighed in urging the NAIC to strengthen the model law to cover life insurance in addition to annuities.

Maria T. Vullo, New York superintendent of financial services, first suggested covering life insurance in an early comment letter. New York bypassed the NAIC and proposed its own best-interest standard in late December. It is in a 60-day comment period.

Vullo's thoughts were echoed by the California Department of Insurance, which argued that some life insurance products have similar risky investment components and should be covered.

Likewise, the NAIC stipulation that all “non-cash” compensation exceeding $100 must simply be disclosed was termed “insufficient” by Jodi Lerner, attorney for the California Insurance Department.

“Bonuses, contests, special awards, differential compensation and other incentives that are won or received as a result of having sold a threshold dollar amount of annuities would reasonably be expected to affect a producer’s ability to act impartially and in the consumer’s best interest,” Lerner wrote. “Therefore, these types of incentives should be prohibited.”

The Virginia Bureau of Insurance added a comment in support of specifically banning bonuses in the model law.

The working group is scheduled to meet next at the NAIC Spring Meeting March 24-27 in Milwaukee.

The Model Law

Per Eversheds Sutherland, the NAIC proposed the following key changes that state insurance regulators could then consider incorporating into their existing suitability regulations:

• Best Interest Standard. The NAIC proposal requires that an annuity purchase and replacement recommendation not only be suitable as is currently the case, but also be in the “best interest” of the consumer at the time the recommendation is made. Notably, the NAIC proposal does not substitute “best interest” for suitability; rather, the NAIC proposal requires that a recommendation be both “suitable” and in the “best interest” of the consumer.

• Best Interest Defined. The NAIC proposal defines “best interest” to mean “acting with reasonable diligence, care, skill and prudence in a manner that puts the interest of the consumer first and foremost.” This definition is similar to the DOL best interest standard, but differs in using the “first and foremost” qualifier instead of the “without regard to” qualifier in the DOL standard.

• But Not “Best Available” or “Least Expensive.” The NAIC proposal clarifies that “best interest” does not mean that a recommendation must be for the least expensive annuity product, or the annuity product with the highest stated interest rate or income payout rate available at the time, or the single “best” annuity product available in the marketplace at the time of the transaction.

• Not Limited to IRA Annuities. The NAIC proposal applies to recommended sales and replacements of all annuities for consumers, regardless of whether the annuity is purchased for an IRA account subject to the DOL’s best interest standard.

• Scope Expanded to Solicitation, Negotiation and Sales. The NAIC proposal expands the “scope” of the NAIC model to apply to solicitation, negotiation and sales of annuities, in addition to recommendations, but most of the operative provisions continue to focus on “recommendations.”

• More Suitability Information. The NAIC proposal expands the “suitability information” that a producer must make reasonable efforts to obtain from a consumer before making a recommendation to include information about the consumer’s risk tolerance for changes in nonguaranteed elements in an annuity and a consumer’s financial resources to fund the annuity.

• Producer Evaluation Responsibility. The NAIC proposal requires a producer to evaluate the types of financial products that correspond to the consumer’s disclosed suitability information and address the consumer’s financial objectives.

• Substantial Financial Benefit Standard. The NAIC proposal requires that any replacement recommendation be based on a determination that the replacement would provide a substantial financial benefit to the consumer over the life of the product.

• New Disclosures. The NAIC proposal requires consumer disclosures of any limitations the producer or the insurer has in regard to the type of financial products that can be provided, whether only specific insurance company products or a limited range of annuity products can be offered, the scope of the services provided, and the scope of the producer’s licenses. The NAIC proposal also requires consumer disclosures of any and all material conflicts of interest, the percentage or amount of cash compensation above 3 percent that the producer would receive, whether the producer would receive non-cash compensation from an insurer or intermediary (such as an insurance marketing organization), and the basis or bases for the annuity recommendation.

• Senior Exploitation Training Required. The NAIC proposal requires that producer training include training on financial exploitation of seniors and other vulnerable adults.

• Reasonable Cash Compensation Limitation. The NAIC proposal prohibits a producer from receiving more than reasonable cash compensation in making a recommendation, from making any materially misleading statements about the annuity transaction, or basing a recommendation on the producer’s own financial interest. In this regard, the NAIC proposal defines “reasonable cash compensation” as cash compensation that reflects the time and complexity of the product and the transaction involved and is not connected to the volume of production.

• Prohibited Practices. The NAIC proposal adds a new section on “prohibited practices,” that prohibits receiving more than reasonable compensation, and prohibits making material misstatements or basing a recommendation on the producer’s or insurer’s own financial interest.

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.

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.