Regulators consider guideline to best-interest rule to address ‘deficiencies’

Image shows a metal door with the words, "Regulators at work." — Insurance regulators say producer oversight to sell annuities is lax under new sales rules.

By John Hilton

State insurance regulators plan to issue guidance on its best-interest annuity sales model after reviews turned up "deficiencies" in producer monitoring.

Iowa Insurance Commissioner Doug Ommen discussed the reviews and coming guidance at the Life Insurance and Annuities Committee meeting Sunday. The committee met during the National Association of Insurance Commissioners' spring meeting in Phoenix.

In February 2020, the NAIC adopted a best-interest standard requiring the following four obligations: care, disclosure, conflict of interest and documentation. The best-interest model was designed to harmonize with the Securities and Exchange Commission's Regulation Best Interest.
To date, 45 states have adopted the model standard.

But ongoing reviews of the new rules “disclosed several ways in which companies’ safe harbor implementation is failing to rise to the level of monitoring the relevant conduct of the financial professional, including inadequate board onboarding of new broker-dealers to sell for the insurer,” Ommen said, referring to the issues as "systematic deficiencies."

A safe harbor is a legal provision to sidestep or eliminate legal or regulatory liability in certain situations, provided that certain conditions are met. The NAIC model includes a “comparable standards safe harbor” that considers a producer in compliance if they satisfy a “comparable standard even if such standard would not otherwise apply to the product or recommendation.”

Examples include a broker-dealer registered under federal or state securities laws or a plan fiduciary under the Employee Retirement Income Security Act of 1974.

What recent compliance reviews are finding is companies are “not necessarily ensuring that the broker-dealer [is] even prepared to review fixed annuities,” Ommen explained.

“Some insurers seemed to reduce their monitoring responsibilities into an occasional audit and then some insurers have instituted an audit process that involves a review of only a small fraction of the percent of the sales actually made by the insurer,” he added.

Best interest vs fiduciary

Ommen is a vocal advocate for the best-interest NAIC rules, speaking out against the fiduciary rule proposed by the Department of Labor. Spurred by Ommen, the NAIC took the rare step of submitting a comment letter critical of another regulatory effort.

The fiduciary rule, expected to be published by the DOL this spring, would make virtually all retirement plan financial transactions subject to a fiduciary standard.

"We are also greatly disappointed in, and fundamentally disagree with, the Administration’s characterization of state consumer protections around annuity sales as 'inadequate' and providing 'misaligned incentives,'" the NAIC letter reads.

Patrick Smock is deputy chief of legal services for the Rhode Island Department of Business Regulation. Rhode Island completed an analysis last week, Smock told the Life Insurance and Annuities Committee Sunday.

“We had numerous open concerns with the life insurance, and all of them came down to their lack of safe harbor oversight,” he said. “So, I think it would be appropriate to go forward with some more of the oversight provisions.”

InsuranceNewsNet Senior Editor John Hilton 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.