NAIC Working Group Working OT To Finalize Annuity Sales Rules

By John Hilton InsuranceNewsNet

An insurance commissioners' working group is accepting a new round of comments through July 10 and scheduled two 90-minute conference calls in a bid to finalize an annuity sales rule.

The National Association of Insurance Commissioners hosts their summer meeting in Manhattan Aug. 3-6. It would appear that the Annuity Suitability Working Group is trying to get its rule done by that date.

The group scheduled conference calls today on July 23 and July 29. The working group chairwoman, Jillian Froment, director of the Ohio Department of Insurance, said comments will be accepted through July 10 on these questions:

Topic: Conflict of Interest

Question 1 What constitutes a material conflict of interest when recommending annuities?
Question 2 When a material conflict of interest exists, how should an insurer and/or a producer avoid or otherwise reasonably mange the conflict?

Topic: Care Obligation

Question 1 Should the care obligation of a producer include “prudence”?
Question 2 “Reasonable for an ordinary producer in a similar circumstance to recommend.” Is this an appropriate standard for a producer when making a recommendation?
Question 3 “Provide an oral or written description of the basis of the recommendation to the consumer.” When considering this requirement for a producer, is it appropriate to allow both oral and/or written descriptions?

Comments should be submitted to Jolie Matthews by email only to [email protected].

Iowa Draft Rules

The working group met for an all-day meeting June 20 in Columbus, Ohio. The questions and topics are unresolved issues from that meeting.

Discussion at that meeting saw members integrating a new rule draft prepared by Iowa Insurance Commissioner Doug Ommen, also vice chair of the group.

In a memorandum to the group, Ommen explained his effort to harmonize state insurance regulations with the new Securities and Exchange Commission's Regulation Best Interest. He presented the Iowa draft as a compromise that retains suitability ideas even as the word is scrubbed from his proposal.

The NAIC goal is to pass an annuity suitability model law that individual states can then adopt.

"We firmly believe that the actual text of the NAIC model regulation for annuity transactions should draw on the processes associated with suitability to shape the higher ‘best interest’ professional standard," Ommen said in a news release.

However, he also makes it clear that suitability has to go.

"Once the decision has been made to raise the professional standards to 'best interest,' no purpose is served by retaining a lateral standard of 'suitability' in the text of the rule," Ommen wrote. "The foundations of 'suitability' are subsumed into the principles of 'best interest' and no clarity is gained by retaining the distinction."

Four Obligations

Ommen's proposal articulates a best interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

Compromise and tough choices are clearly evident in Ommen's "care obligation" language. While clearly much tougher, with language ("diligence, care, skill and prudence") found in the defeated Department of Labor fiduciary rule, the standard stops short of even the SEC's.

While attorneys noted the SEC language requires the "greatest benefit" to the consumer, Ommen said he rejected tying the care obligation to a financial outcome.

"We believe that maximizing financial outcome may also carry greater risk or uncertainty in outcome," he wrote. "No product or strategy that is dependent on future market performance avoids all uncertainty in outcome."

Instead, Ommen's proposes that the financial professional's judgment should be pointed to "the recommended option would be best suited to the consumer over the life of the product."

Ommen has acknowledged that achieving a consensus on the definition of care obligation "may prove challenging." During previous meetings, the working group could only agree to a best interest standard if it wasn't called those words.

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.

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.