Insurance regulators are having substantial success in pushing to get states to adopt a best-interest update to annuity sales rules.
Whether it is enough success and happening fast enough is yet to be determined.
As of press deadline, at least 15 states had adopted some form of the new NAIC update to the Suitability in Annuity Transactions rule. Several more states are in the process of adoption, said Iowa Insurance Commissioner Doug Ommen during a summer meeting.
The National Association of Insurance Commissioners adopted the rule update in February 2020. It articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.
With industry representatives and regulators agreeing on a best-interest compromise standard, it was expected that states would give the new standard significant momentum through quick adoption.
But with the outbreak of COVID-19 in 2020, states were slow to adopt the update in the months that followed.
Meanwhile, the Biden administration began making noise about pushing for a fiduciary standard through Department of Labor rulemaking. Always wary of federal encroachment on insurance regulation, state regulators began lobbying harder for faster adoption of the best-interest update.
The NAIC began lobbying state officials last summer and began work on a series of 25 frequently asked questions to help nudge the decision-makers. Those FAQs were adopted recently by the NAIC Life and Annuities Committee.
“This FAQ document has proven valuable as those states have moved forward,” Ommen said.
The NAIC model rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. Consumer advocates say the rule has no teeth and falls well short of true consumer protection.
The Key Question
Regulators worked on the FAQs for many months in the Annuity Suitability Working Group. One question in particular generated different proposed answers and attempted to address the very issues that make annuity sales uncomfortable for many:
Why did the NAIC determine that “cash and non-cash compensation” is excluded from the requirement to “identify and avoid or reasonably manage and disclose” material conflicts of interest?
The annuity update determined that “most forms of producer compensation do not present a material conflict of interest with the purchaser, and that purchasers expect producers to be compensated,” the final answer reads.
A disclosure form is also required with all annuity purchases to clearly outline the relationship between producer and consumer as well as all compensation. With that in mind, the NAIC “determined that general incentives regarding production levels with no emphasis on any particular product do not create an unanticipated conflict of interest,” the final answer reads.
The NAIC concluded that sales contests, sales quotas, bonuses and noncash compensation based on sales of specific annuities within a limited time frame “should be avoided.”
The Fiduciary Red Line
New York is the outlier state in annuity sales regulation. The state ignored the NAIC and adopted its own regulation, which applies to life insurance sales as well and sets a high bar for a sale to be in the consumers’ “best interest.”
The future of that rule is cloudy after the New York Supreme Court Appellate Division reversed a lower court ruling that the state Department of Financial Services was within its authority when it issued Regulation 187. The DFS appealed that decision in May.
Some are comparing the New York regulation to the dreaded fiduciary rule put in place by the Obama administration. That rule was tossed out by a federal court in 2018.
With President Joe Biden putting the Democrats back in power, the Department of Labor announced in June that it would amend the regulatory definition of the term fiduciary “to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries.”
That has insurers concerned and could lead to further court battles.
In the meantime, Lincoln Financial pulled insurance products out of New York in July.
Lincoln is exiting because its electronic signature process does not comply with the state’s requirements, according to the company’s statement.
“Recently, as part of a review of its electronic signature processes, Lincoln Life & Annuity Company of New York (Lincoln) became aware that the application currently used for its life insurance products sold in New York, does not comply with New York’s requirements for use with electronic processes and platforms,” according to the statement. “Therefore, Lincoln will be suspending new sales of certain term and indexed universal life products in New York until a new, electronic-compliant application and process can be implemented.”
Lincoln is just the latest of many companies that have pulled products from New York under pressure from regulations as well as market conditions such as persistent low interest rates.
For example, John Hancock pulled several life products, leaving only Accumulation IUL and Protection Term as the products it sells in New York.
Where annuity sales regulation ends up might depend on how quickly states adopt best-interest rules in the coming months.