Regulators issue draft guidance to test compliance with annuity rules

Image shows a man in a trenchcoat and fedora and the word "Annuity." — State insurance regulators are concerned about "deficiencies" in producer monitoring.

By John Hilton

A state regulator group is circulating draft guidance on compliance expectations for its best interest standard for annuity sales.

The National Association of Insurance Commissioners adopted the Suitability in Annuity Transactions Model Regulation #275 update in 2020 to strengthen state regulation over annuity sales. It is also a reaction to ongoing federal Department of Labor efforts to extend blanket fiduciary status to insurance producers selling annuities.

Forty-six states have adopted versions of #275, Louisiana the most recent.

"The new regulation improves the standards for annuity transactions by requiring producers to collect comprehensive financial information from clients, put clients’ interests ahead of their own in selecting products, and disclose conflicts of interest during the transaction," the Louisiana Department of Insurance said in a news release. "The regulation ensures producers offer advice that best aligns with consumers seeking lifetime income through annuities."

The Annuity Suitability Working Group is accepting comments on a seven-page "guidance and considerations" draft for state insurance departments to use when determining an insurance company's compliance with the new rules. Comments are being accepted through Friday, Nov. 8 by email only to [email protected].

Concerned about 'deficiencies'

In March, Iowa Insurance Commissioner Doug Ommen said reviews of compliance with #275 turned up "deficiencies" in producer monitoring. Ommen chairs the Annuity Suitability Working Group.

Reviews “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.

Finding a safe harbor

The guidance deals solely with the safe harbor provisions of the annuity sales rule. It covers five areas of compliance:

Conditions for a safe harbor. A common situation that will trigger the safe harbor is the licensed insurance producer who is also registered as a securities agent and is subject to the supervisory control system of a registered securities broker-dealer, the guidance noted.

For example, a financial professional recommending a variable annuity who is registered with the Securities and Exchange Commission.

"To avail itself of the safe harbor, the insurance company should review the broker-dealer’s business rules, processes, and procedures that pertain to the firm’s supervisory control system over the registered variable annuities to ensure that they are adequate and that they provide comparable controls as those required under" #275, the guidance said.

A "reasonable basis" for recommending an annuity. Insurers must rely on the information and opinions of the producer when matching a client with an annuity, the guidance noted. However, "it is clear that the rule expects the insurer to conduct an analysis that goes beyond blind adherence to the analysis and conclusions of the entity supervising the financial professional.

"An insurance company must ascertain that a recommendation was made and documented as required by the other comparable standard. The insurer must receive adequate consumer profile information and other evidence of a good faith basis for the transaction to determine that the annuity would effectively address the consumer’s financial situation."

Monitor the relevant conduct. The guidance calls for onboarding, audits, due diligence questionnaires, ongoing monitoring and data requests in order to keep close tabs on producers.

"Simply relying on the statement of a financial professional that he or she complied with a comparable standard falls short of the monitoring required of an insurer," the guidance stated.

Provide information and reports. The insurer is to give information to the entity supervising the financial professional to "ensure that that entity has as much information as possible in making supervisory decisions," the guidance said.

This information should include number of annuity replacements sold, complaints lodged, commissions paid, total number of annuities sold that were later surrendered, and additional details.

Third-party supervision. The guidance also spells out the requirements for insurance companies that contract out supervisory duties.

"If the insurer has delegated the entire supervisory process by contract, the entity with which the insurer has contracted for performance would be the one that decides whether the annuity is in the best interest of the consumer on behalf of the insurer," the guidance said. "This delegated supervision cannot just be simply transactions-based and must incorporate all aspects of the supervision that the insurer would have incorporated."

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.