NAIC Working Group Approves Annuity Sales Model Rule

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

State insurance regulators scaled one hurdle Tuesday when a working group tentatively approved a new annuity sales model.

But the rule remains a long way from the finish line. Next, the parent Life Insurance and Annuities (A) Committee will take up the rule during the fall meeting of the National Association of Insurance Commissioners.

That meeting is Dec. 7-10 in Austin, Texas. The committee is accepting comments on the reworked Suitability in Annuity Transactions Model Regulation (Model 275) until Nov. 26.

"The draft includes a best interest standard of conduct and a framework for achieving that standard that the A Committee needs to consider,” said Iowa Insurance Commissioner Doug Ommen, who chairs the A Committee.

Still, the Annuity Suitability Working Group left some thorny issues undecided following a nearly three-hour conference call Tuesday. Regulators spent the time reviewing language line-by-line with representatives from consumer, trade and industry groups.

The issue of whether new annuity sales rules will apply to in-force policies was not discussed. Working group chair Jillian Froment, director of the Ohio Department of Insurance, briefly mentioned the Harkin Amendment and confirmed it is a problem.

The amendment was added by then-Sen. Tom Harkin of Iowa to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It grants states an exemption to regulate indexed annuities as insurance products, rather than securities products like variable annuities, as long as they adopt the NAIC annuity regulation Model 275.

The new annuity sales model includes a drafting note indicating that it will replace the existing regulation where it is mentioned in Dodd-Frank. If the NAIC replaces Model 275, states that don't adopt the new regulation might also lose the ability to regulate indexed annuities.

NAIC attorneys confirmed the Dodd-Frank language is a real issue that must be addressed, Froment said. The Executive Committee and Plenary will need to provide direction on the issue, she added.

“We need some direction at this point again," Froment said. "We need them to either move forward with it on their own or send some direction back to us."

Best Interest Defined

The working group added language defining best interest, which was another sticking point. The language is not as succinct as New York included in its Regulation 187: “Only the interests of the consumer shall be considered in making the recommendation.”

By contrast, the working group settled on this definition:

Best Interest Obligations. A producer, when making a recommendation of an annuity, shall act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.

The model articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

The model will need to be approved by the A Committee and then the Executive Committee before it can be sent to the states for adoption. Some states, such as New York, have moved ahead with their own annuity and life insurance sales rules.

Trade group were pleased with the result.

Insured Retirement Institute: "As the proposal moves to the next step of the NAIC process, it now includes IRI-recommended language to provide a safe harbor for all insurance producers who are subject to, and actually comply with, equivalent or greater standards such as Regulation Best Interest or the Investment Advisors Act. This will avoid duplicative compliance requirements for those who already comply with rigorous standards."

-- Jason Berkowitz, IRI chief legal and regulatory affairs officer

American Council of Life Insurers: “As the proposal advances through the NAIC process, ACLI will continue to advocate for a harmonized best interest standard of care for annuities across all state and federal regulatory platforms. This standard would benefit retirement savers and consumers across the country who are planning and saving for the future.”

-- Bruce Ferguson, ACLI senior vice president, state relations

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.