NAIC Regulators Debate Extending Annuity Sales Rule To In-Force Policies

The National Association of Insurance Commissioners creates model laws for states to pass.

State regulators returned to a potential land mine Tuesday in debating whether in-force policies will be covered under any annuity sales model law sent to the states for adoption.

The Annuity Suitability Working Group held its first two-hour call in a speeded-up timeline designed to finally complete the model law. The group wants to present the model to the A Committee during the National Association of Insurance Commissioners' fall meeting in December.

After roughly 18 months of meetings, the group is in tentative agreement on a best interest standard for annuity sales. It articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

But New York officials are adamant that the standard apply to in-force policies, a move other regulators are hesitant to make.

One year after the issue was debated without resolution at meetings in Boston and Chicago, regulators returned to the definition of "recommendation." The definition should cover the consumer who just wants to add money to an in-force annuity policy, said James Regalbuto, New York deputy superintendent for life insurance.

The draft language defines "recommendation" as advice that "results in a purchase, an exchange or a replacement of an annuity." Regalbuto proposed adding language covering in-force contracts: “or modification or election of a contractual provision that generates cash or noncash compensation.”

That is a nonstarter for Idaho Insurance Commissioner Dean Cameron.

“I think if you include in-force, you open up a whole Pandora’s box and really make the opportunity for products to be available would be limited," Cameron said.

'Nothing Really Changed'

Recalling his days as an agent for farmers who would add money to existing individual retirement accounts, Cameron warned against overregulating.

"If it was suitable for them in 2018 and nothing really changed in 2019, is it not still suitable?" he asked.

“Where the producer voluntarily decides to give a recommendation to a consumer of something new to do with an existing annuity, the current regulation does not contemplate that and is not held to the same advice standard as if they sold a new annuity," Regalbuto explained. "I believe that to not include that would establish a very wide loophole with respect to the advice that could be given to consumers."

New York did not wait for the NAIC model law before passing its own best interest rules that cover life insurance as well as annuities. The New York regulation covers in-force contracts and includes tough training and disclosure requirements.

“It’s fine if New York wants to, but I don’t know if I want our model act" to cover in-force policies, Cameron said.

Whether to regulate in-force policies roiled other stakeholders during past meetings, with a Pacific Life representative telling regulators the idea "is going to cripple and terrify" the industry.

"Are we going to create a scenario where a producer shies away from responding to consumer inquires about their products … when all they want to do is drop another $500 in their IRA?" asked Steve Toretto, former associate general counsel for Pacific Life, during an October meeting in Chicago.

Put A Pin In It

Interested parties were not permitted to comment on today's call. Reached after the meeting, consumer advocate Birny Birnbaum, who was on the call, said regulating in-force policies is a must. Birnbaum is executive director of the Center for Economic Justice.

"The idea that a producer or insurer can recommend a consumer keep their policy and that such recommendation is not subject to the standard of care is one of several giant problems with the model," Birnbaum said via email. "Particularly when coupled with the provision that a producer has no obligation to know anything about any products other than the ones they sell."

After the extended back-and-forth debate, the group, under the guidance of chairwoman Jillian Froment, director of the Ohio Department of Insurance, opted to "put a pin in it" and punt any decisions on the in-force question.

The working group draft of the annuity sales model will be exposed for comment "as quickly as possible" this week with a firm feedback deadline of Sept. 30, Froment said. Three calls are scheduled for October and another on Nov. 5 on an as-needed basis, she added.

All comments should be sent to Jolie Matthews and Jennifer McAdam by email only to [email protected] and [email protected]

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.