Regulators Debate Need For ‘Prudence’ In Annuity Sales Standard

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

State insurance regulators aim to tentatively finalize a standard for annuity sales by the National Association of Insurance Commissioners' Fall Meeting in December.

Debate over whether to add "prudence" to the model law dominated another 90-minute conference call Monday by the Annuity Suitability Working Group. Chairwoman Jillian Froment warned members to expect a "heavy call schedule" over the coming weeks.

The group will meet in person Saturday morning at the NAIC Summer Meeting in New York City. Efforts to complete an annuity sales model law have been ongoing for more than a year.

The difficulty is finding the proper landing spot between the current suitability standard and a full fiduciary standard.

“We set up the guardrails that 'best interest' is something more than suitability but it’s less than fiduciary," Froment said. "We’re trying to decide what is a best-interest standard and evaluate that against both suitability and fiduciary."

Five Questions

The group is working its way through a five questions designed to reach consensus on the toughest remaining issues. Monday's call featured Question 3: Should the care obligation of a producer include “prudence”?

The group and interested parties fell along predictable lines, with more conservative regulators opposed to adding the word. The Securities and Exchange Commission omitted "prudence" from its Regulation Best Interest, Iowa Insurance Commissioner Doug Ommen noted.

Ommen authored much of the current draft the working group is tweaking. The "Iowa draft" was introduced earlier this summer in a bid to harmonize the NAIC effort with the SEC rule, Ommen has said.

Adding "prudence" would hamstring agents, Ommen said.

"It would create a legal standard that would suggest that a variable annuity that is wrapped in a stock fund could never be recommended because a fixed-indexed annuity would always be more prudent, because that is more tied to conservation," he explained.

Difference Of Opinion

Others saw it differently, of course, such as Birny Birnbaum, executive director of the Center for Economic Justice.

"Absent the term prudence, the care obligation is limited to diligence, care and skill and those are all directed at the producer, not to the consumer outcome," Birnbaum said. "It’s only when you are the term prudence that the standard of care actually addresses the consumer outcomes."

While Birnbaum was supported by regulators such as Jodi Lerner, attorney for the California Department of Insurance, most seemed to line up behind Ommen. Both sides agreed that better definitions are needed.

"Am I acting with prudence if I recommend a product that has a longer surrender period that is appropriate for (the client's) age? Probably not," said Dean Cameron, director of the Idaho Department of Insurance. "There’s an inherent conflict and in order for us to best protect consumers, it’s incumbent on us to have terms that aren’t subjective and can be readily defined and readily enforced."

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

The working group meets for an hour Saturday and will continue debating the requirements of the "care obligation," Froment said.

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.