Things to Know About the NAIC’s Best Interest Rule Proposal

Commentary

Last week, interested parties were asked to submit comments to the National Association of Insurance Commissioners regarding their proposed “Best Interest” Revisions to NAIC Annuity Suitability Regulation.

Americans for Asset Protection’s (AAP) submission can be found here. Top Washington, D.C. law firm Eversheds Sutherland recently broke down the NAIC proposal.

In its comments, AAP observed that the proposed draft changes would:

1. Add significant and disruptive changes to the existing Suitability Model;
2. Implant a “best interest” standard of care ahead of final rules issued by the SEC and DOL; and,
3. Attach onerous and unworkable disclosure requirements for cash and non-cash compensation.

These changes are being proposed even though the 2018 Charges for the NAIC (A) Committee, which oversees annuities and life insurance, for the Suitability (A) Working Group are to:

1. Review and revise, as necessary, the Suitability in Annuity Transactions Model
2. Consider how to promote greater uniformity across NAIC-member jurisdiction

Under the first charge, the words “as necessary” are a key directive to the Working Group. One of the definitions for “as necessary” is: essential, indispensable, indicating something vital for the fulfillment of a need.”

To the “fulfillment of a need” part, AAP urges the NAIC to recognize the unprecedented regulatory success of the 2010 Suitability Model. AAP’s comments pointed out the findings of the NAIC’s own reports and the outstanding demonstration of a regulation that is working for consumers.

Strong Regulatory Oversight

In fact, the report data illuminates the steady regulatory oversight by state insurance departments and efforts by insurance companies, marketing intermediaries and insurance professionals to establish procedures, practices and training to adhere to and comply with the suitability standard of care.

The NAIC reports that fixed indexed and fixed rate annuities, despite their impressive popularity and growth, show that annuities represent about 1/10th of a percent of all complaints and between a minimal 1 percent and 2 percent of the complaints of their coverage type. In addition, under reasons for the complaints, 2014-17 suitability complaints accounted for a miniscule number of all complaints.

Despite this quantitative evidence of success and despite the lack of demonstration of a “vital need,” the proposal involves radical, and in many cases, unworkable changes to the existing model.

Two of the more significant include the new disclosure requirements and the change to the scope of the Model Law.

The scope of the 2010 Model applied to any recommendation to purchase, exchange or replace an annuity made to a consumer that results in the purchase, exchange or replacement recommended.

The new scope applies to any solicitation, negotiation, recommendation or sale of an annuity.

The terminology “solicitation, negotiation, recommendation” comes from the Producer Licensing regulation and while, an established standard for licensing, is not the correct standard for suitability or best interest. The appropriate standard of conduct for a suitable or best interest sales is at the point of recommendation, for which an agent or advisor receives compensation and when the consumer acts on that recommendation.

Until both the advisor makes a recommendation and the consumer relies on the recommendation and takes action, the agent and advisor are simply and appropriately soliciting potential clients and fulfilling their role to educate and inform the consumer on insurance considerations in a financial plan.

In addition, solicitation is inappropriately used in the definition of cash compensation and could potentially damage the necessary and required training and education of agents and producers.

Compensation Disclosure Changes

The second disruptive change is made in Section 7 of the Proposed Model and applies to disclosure requirements. In a drafting note, the proposed draft states: “If a State has adopted the NAIC Annuity Disclosure Model Regulation, the State should insert an additional phrase in paragraph (1) above to explain that the requirements of this section are intended to supplement and not replace the disclosure requirements of the NAIC Annuity Disclosure Model Regulation.”

AAP asks why “supplemental” disclosure requirements are added to suitability regulations when they would be more adequately and uniformly handled under disclosure regulation -- the review and revision of which is included in the 2018 NAIC (A) Committee charges.

More concerning is the specific compensation disclosure requirements. The proposal sets a standard that commission at or less than 3 percent not be disclosed to the consumer. AAP asks why 3 percent? Is that the “reasonability” standard set by the working group?

Three percent on a five-year MYGA is reasonable and not significant for disclosure, but 6 percent on a 10-year FIA is – even though the agent’s commission is identical over the surrender period of the product? AAP is also concerned that not disclosing 3 percent or less might lead the consumer to mistakenly believe the advisor or agent is receiving no compensation.

And finally, most concerning is the non-cash compensation disclosure requirements. The proposal states that producers “shall disclose to the consumer information regarding the non-cash compensation that exceeds $100 per producer per year the producer receives from an insurer or intermediary that is tied to the sale of annuities including, but not limited to, gifts, meals, trips, entertainment, prizes, marketing, and advertising.”

Compensation is a fundamental and substantial aspect of the loyalty duty under impartial conduct regarding any insurance advice, and it is best not to implant it into a model law only dealing with annuity suitability standards.

Also, non-cash compensation is rarely related to a single product recommendation or even a specific product type and, therefore, is an unquantifiable standard for a specific annuity recommendation. Most non-cash compensation arrangements involve many coverage types and can even span multiple insurance companies.

AAP strongly recommends that Working Group adhere to its charges and make only changes that are necessary or vital to a still-to-be identified need and does not substantively or materially impact the current regulation or cause unnecessary disruption to today’s annuity marketplace.

Doing so would also help the Working Group meet its second charge of promoting greater uniformity across state jurisdictions, rather than offering substantial changes that in most cases are unnecessary and disruptive.

AAP will work hard with the Working Group and consumer representatives to ensure that any proposed changes to the Suitability model will not limit consumers access to affordable advice and educational information that helps them understand how insurance helps them become financially secure and independent.

Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.

This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question. Contact Kim at [email protected].

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