N.Y. Urges Life Insurance Fiduciary Standard in NAIC Rule

In a reversal of roles, New York is urging the National Association of Insurance Commissioners to adopt the state’s new best interest regulation, which extends fiduciary responsibility to life insurance.

The New York finance superintendent made the suggestion in a comment letter submitted to the NAIC on its new annuity suitability model.

The NAIC model covers annuity sales only. Twenty comment letters on that proposal were accepted through a Jan. 22 deadline and released Thursday.

The NAIC wants to create a model law that all states will adopt, creating a uniform national standard. Maria T. Vullo, New York superintendent of financial services, urged the organization to go further and cover life insurance.

“We believe that acting in the ‘best interest’ of the consumer is an appropriate standard for these products, which often are relied on by consumers as retirement security and estate planning,” her letter read.

A 60-day comment period on the New York amendment concludes Feb. 26. State officials may opt to hold another comment period if changes are made, but it is not required to under state law.

The NAIC is “likely” to issue a revised draft of its model law, Eversheds Sutherland lawyers wrote in a client alert. The timeline puts “the New York proposal on a path for potential adoption before the NAIC completes its process,” the alert stated.

The New York proposal imposes “burdensome compliance obligations” and “certain requirements that appear impractical,” the law firm Drinker Biddle & Reath concluded in a recent analysis.

Plenty of Criticism

The NAIC received a host of critical comments from organizations such as the American Council of Life Insurers and the Insured Retirement Institute.

For example, the IRI expressed concern about the vague treatment of “third-party producers.” Many of IRI’s insurance company members distribute their annuities through third-party producers over whom they have no direct control.

The NAIC draft “will necessarily require subjective and qualitative assessments of each particular client’s circumstances, needs and goals,” wrote Cathy Weatherford, president and CEO of IRI. “Due to the structure and nature of the arrangements between insurers and third-party producers, insurers will not typically have access to all of the information they would need to make their own best interest determinations.”

Most of the comment letters urged the NAIC to work with other agencies pursuing best-interest standards, such as the Securities and Exchange Commission.

“The prospects for such conflicting standards are very real,” wrote David J. Stertzer, CEO of the Association for Advanced Life Underwriting. “There is a flurry of activity addressing the standards for recommending annuities and other insurance products.”

Consumer groups also wrote the NAIC in support of its model law, including AARP and the Consumer Federation of America.

The Model Law

Per Eversheds Sutherland, the NAIC proposal 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 substantialfinancial 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.