NAIC’s Proposed Annuity Sales Rule Under Fire

Not surprisingly, a draft annuity sales transactions model law by the National Association of Insurance Commissioners is satisfying neither side.

An NAIC working group met several times this year around the country in trying to advance an annuity sales model -- mostly without success due to a few thorny issues. The group recently opted to put what it has out for public comment, due by Feb. 15.

The draft takes a pass on many controversial topics that arose during working group meetings in Kansas City (May 31-June 1), Boston (August) and Chicago (October). In fact, a drafting note explains that the rule will avoid even the term "best interest" until it is further defined by the Securities and Exchange Commission and FINRA.

In another section, a paragraph on extending the rules to supporting personnel who deal with the consumer is tacked on for future discussion. A New York representative suggested this language at the Chicago meeting.

The hours of debate at the meetings were well attended by both industry and consumer groups. Normally on opposite sides, both groups ripped the model law as it is currently constituted.

"We remain troubled and confused by the draft," said Wesley Bissett, senior counsel for government affairs for the Independent Insurance Agents and Brokers of America. "They still haven’t identified an underlying problem that needs to be addressed with regulation."

One big problem from the industry's point of view is the lack of clear expectations in the model law, Bissett explained.

"Our position has been that any new requirement should be clear and objective so that those subjected to these new requirements know exactly what they have to do to comply and they’ve failed that as well," he added. "I have no idea what I would tell our agents to do in order to comply with this."

Many states have gone ahead with their own annuity sales rules, which contributes to the difficulty for working group members. New York, in particular, passed a tough rule that applies to annuities and life insurance sales, and all in-force policies.

Big Plans, Big Rules

As many as 14 states want to put a "fiduciary duty" on insurance agents via new regulations, an industry spokeswoman said Friday.

Birny Birnbaum, executive director of the Center for Economic Justice, attended all of the meetings and said he believes the working groups is sincere about strengthening consumer protection.

"It is unclear how the current draft accomplishes this task," Birnbaum said in a comment he planned to submit to the NAIC. "It is unclear how the proposed regulation enhances regulators’ ability to stop the sales of annuities that are not in the best interest of consumers."

In particular, the model law provides no tools for regulators to stop harmful annuity sales, Birnbaum said.

"For example, now, if a producer has six different products to sell and based on a suitability analysis, the producer determines all six are suitable," Birnbaum wrote. "The producer recommends the product that is not in the best interest of the consumer and which has the highest compensation to the producer.

"That is permitted now and appears to also be permitted under the proposed regulation because the producer says that she has recommended a product that puts the consumer’s interest ahead of the producer’s interest."

The model appears to fall back on disclosure when disclosures have not proven they work, he said.

Model law language addresses one key point clearly by stating that an appropriate recommendation does not mean "the annuity with the lowest one-time or multiple occurrence compensation structure."

The annuity sales model draft can be found here. Comments may be made by email only to Jolie Matthews at jmatthews@naic.org.

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.

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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.