NAIC Regulators Move Annuity Sales Model Forward

By John Hilton

A key National Association of Insurance Commissioners' committee put its tentative stamp of approval Sunday on a strengthened suitability in annuity transactions model law.

The Life Insurance and Annuities Committee met Sunday morning in Austin, Texas at the NAIC Fall Meeting. The committee adopted the text of the annuity sales model, which adds a best-interest standard to all annuity sales.

The Annuity Suitability Working Group worked on strengthening the annuity sales model for more than 18 months before voting to finalize it Nov. 5. The committee directed the working group to iron out a few remaining issues during a Dec. 19 conference call and report back so the committee can formally adopt the annuity sales model before the year ends.

Plenty of last-minute comments flowed in as industry representatives, trade associations and consumer groups made their final points. Once the committee adopts the annuity sales model, it goes to the NAIC Executive Committee and Plenary for a final approval. That could happen early next year, sources say.

Once the annuity sales rules become an official NAIC model law, it is sent to the states for adoption.

Contests Could Go Away

The model articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation. From an agent's perspective, two changes could result from the new rules.

The first is extra work and documentation to establish the consumer's profile. Agents will need to find out and document things like a consumer's financial situation, insurance needs and financial objectives.

The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. But the agent must be able to show that such a recommendation is in the consumer's best interest.

The rules requires producers to also disclose and describe the types of compensation they are receiving, and, if requested by the consumer, the amount of compensation received. Consumers must be given a disclosure alerting them to the right to request the amount of compensation.

Secondly, sales contests, bonuses and trips might be a thing of the past in states that adopt the new rules. The rule requires insurers “to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.”

'A Workable Regulation'

Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, said his membership is happy with the annuity sales model.

“We think that they’ve produced a very workable regulation," he said today. "It is a significant enhancement from our perspective to the standard that applies when producers recommend annuities to their clients."

Berkowitz predicted that many states will be eager to adopt the new annuity model, while some others will come along relatively quickly.

“We’ll be pushing for this to be adopted across the country," he said. "I think you will see an early rush of states that will want to get out on this quickly."

When it is formally adopted, the new NAIC annuity model will harmonize well with the impending best-interest regulation drawn up by the Securities and Exchange Commission, said an executive with the American Council of Life Insurers.

“We expect that the best interest standard for annuity recommendations will align well with the SEC’s Regulation Best Interest," said Bruce Ferguson, ACLI senior vice president for state relations. "Together, these two initiatives will significantly strengthen protections for consumers seeking guaranteed lifetime income in retirement through annuities.”

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.