State Regulators Tackle The Toughest Part Of Its Annuity Sales Model

By John Hilton

State insurance regulators are getting to the fine details of a best-interest standard for annuities, and the parsing of words is destined to leave some unhappy.

The Annuity Suitability Working Group held another two-hour conference call Tuesday in an ongoing, furious bid to nail down language of an annuity sales model law. The group wants a model completed before the National Association of Insurance Commissioners' fall meeting the first week of December.

The group took on the meat of the model -- "The Duties of Insurers and Producers" -- and started with "Best Interest Obligations." This is where the most disagreement is expected and the call delivered as much.

The most discussion followed a proposal from the Insured Retirement Institute to add this language: “the best interest standard set forth in this regulation requires a producer to adhere to a standard of conduct that does not guarantee an outcome.”

The language is borrowed from Regulation 187, a tough annuity sales standard passed by New York, noted Jason Berkowitz, IRI chief legal and regulatory affairs officer.

'This Is Going To Do Well'

"If I sold you a variable annuity and I did everything properly and ... all through the transaction we all think ‘This is going to do well. We’re going to have a very positive outcome here,’" Berkowitz explained. "Then the individual decides to annuitize during a downturn in the market and he claims the account value is not what he was hoping it would be when he started out -- well, that’s not something that’s reflective of an inconsistency in the best-interest analysis done by the producer."

Still, the language drew opposition from all corners.

From other trade associations: "The aspects of this about not guaranteeing an outcome, we’re generally supportive of, but the way he has framed it that there’s an obligation to adhere to a standard of conduct sort of exacerbates the concerns we already have." -- Wesley Bissett, senior counsel for government affairs for the Independent Insurance Agents and Brokers of America

From consumer groups: "We do want to guarantee an outcome. We want to guarantee that the recommendation is in the best interest of the consumer. Unless that’s what this is going to guarantee, it’s unclear what the purpose is of this entire exercise is. If you’re saying that you can’t guarantee the market performance, then that’s a product-specific disclosure." -- Birny Birnbaum, executive director of the Center for Economic Justice

From insurance commissioners: "I get really concerned about using broad language such as this. When it comes to enforcing it, I can see a producer and an insurance company, frankly, using it as a way to say ‘Yeah, that high-performance depiction that I used to sell it, we didn’t realize that, but that doesn’t matter, it doesn’t count.’ I’m overall concerned with the lack of clarity." -- Doug Ommen, Iowa insurance commissioner

The group decided the language could be saved for possible inclusion if Berkowitz recrafted it, something he agreed to do in time for the Oct. 29 call. Working group chair Jillian Froment, director of the Ohio Department of Insurance, said discussion will pick up with "Disclosure Obligations" on that call.

The group has just one additional call scheduled after that, on Nov. 5.

After roughly 18 months of meetings, the group is in tentative agreement on a best interest standard for annuity sales. It articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

But the group is still lacking a strong consensus on whether to extend the annuity sales rule to in-force policies, a point that has been debated several times. And a conflict with state exemptions for equity linked annuities was brought up at the last call and remains unresolved.

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.