After an inauspicious beginning, a National Association of Insurance Commissioners’ subcommittee inched closer to an annuity sales standard last week in Kansas City.
The two-day meeting kicked off acrimoniously when chairman Dean Cameron announced that life insurance would not be considered. James Regalbuto, deputy superintendent for life insurance in New York, was ready.
The two men had a sharp exchange about whether the NAIC annuity suitability working group could consider life insurance under its “charge.”
“The NAIC is not supposed to be a dictatorship,” Regalbuto snapped.
And then it was over. From there, the diverse working group managed 10 hours of respectful, if lengthy, discussions on the hottest of topics dividing them.
Most interesting, the group favored best-interest principles in a package that does not mention the words “best interest.” Even the many industry representatives in the audience were fine with it.
“The substance of the language is what is important to us,” said Gary Sanders, vice president of government relations for the National Association of Insurance and Financial Advisors.
Summer Meeting Deadline
Under Cameron’s soothing leadership, the group took a series of “straw poll” votes designed to produce a final draft in time for the NAIFA Summer Meeting Aug. 4-7 in Boston.
Most significantly, the decisions included:
• Accepting annuity sales language offered by Iowa that Michael Humphreys of Tennessee referred to as “suitability plus:” A suitable sale requires “reasonable competence, trustworthiness, fair dealing, diligence, care and skill by the producer.”
Likewise, any recommendation “shall be made without placing the financial or other interests of the producer, or insurer where no producer is involved, ahead of the consumer’s interests as known from the consumer’s suitability information.”
• Strengthened documentation requirements to read: “A producer, or insurer where no producer is involved, shall at the time of recommendation or sale, make a record of any recommendation and the grounds for the recommendation.” Previous versions of the draft did not apply documentation to recommendations, only sales.
• Tabled sensitive sections under the insurer supervision section. On two points, the group could find no agreement: supervision of third-party distributors; and whether to ban sales incentives.
What’s In A Name?
The working group divide is represented by conservative Iowa and liberal New York. Yet, it seemed as though the more the members discussed the regulation, the shorter the gulf separating them became.
Both sides began with analogies. Iowa Insurance Commissioner Doug Ommen spoke of a doctor advising on a treatment. The doctor will outline what the risks are and the range of possible outcomes, but it is the patient who makes the decision.
The annuity sales standard should be simple, Regalbuto countered, “would you go ahead and do this if you knew as much as the person who is making this recommendation?”
That briefly drew the ire of Cameron, a former insurance agent, who said suitability regs are followed “95 percent of the time, maybe higher.”
“We are regulators who proceed based on facts, based on data, based on evidence,” Cameron continued. “If we don’t have the evidence, if we don’t have the data to back up what we’re doing, then we have a problem.”
Gradually, other states came off the fence.
“I can’t think of an instance in Tennessee where the suitability standard prevented us from having an enforcement case go forward,” said Lorrie Brouse, deputy insurance commissioner and general counsel for Tennessee.
The suitability standard has been “very effective” in Ohio, said Michelle Rafeld, state assistant director of fraud, enforcement and licensing. But a tougher standard is needed to fight the worst cases, she added.
Forcing agents to explain “how is this in the best interest of the consumer?” is the final regulatory piece, Rafeld said. “These can be very elaborate fraud schemes that go on for years.”
The big picture is creating a model law for annuity sales that will pass not only the full NAIC, but also be adopted by state legislatures, Cameron noted. When the discussion subsided, some liberal states were moved.
“I’m kind of buying into the idea of adopting best interest but not calling it best interest,” said Jodi Lerner, attorney for the California Insurance Department.
The group had brief discussions on oversight of third-party producers, as well as the status of controversial incentives such as trips and other rewards. No votes were taken on either topic.
The former issue is a big one in light of the Department of Labor fiduciary rule’s treatment of independent marketing organizations.. The DOL rule made insurance companies, banks, registered investment advisors and broker-dealers as “financial institutions” on the hook for liability.
That left IMOs out in the cold. A later exemption created by the DOL did little to improve their situation, as only the largest IMOs would have qualified.
With that in mind, many industry observers questioned how the NAIC could make insurers responsible for third-party producers. The intent with the model language was not to require a “monitoring and auditing” of third parties, Ommen said.
That wasn’t good enough for the group’s liberal wing.
“It needs to be clear that they are responsible for the third party that they are contracting with,” Lerner said. “So they need to be on top of it.”
The issue was quickly tabled. Lerner then pushed California language to ban incentives.
“If you’re going to move to a best-interest standard, prizes based on targeted sales goals shouldn’t be a part of that,” she said.
The language proposed by California made it unclear whether an agent could accept any compensation if participating in a sales goal, Cameron said. The proposal was confusing, Lerner agreed.
A ban on incentives could return as part of the “prohibited practices” section, others suggested.
While the comment period is over for the annuity sales model, the NAIC does not refuse comments at any time, an official said this week.
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]