What’s Wrong With Suitability? Industry Groups Wonder

By John Hilton

Regulators set their sights on the suitability standard governing insurance sales almost from the time it was adopted in 2010.

Meanwhile, agents keep delivering life insurance and annuities as their industry representatives wonder: What's wrong with suitability?

Dwight Carter of the Fixed Annuity Consumer Choice campaign denounced the rush to create a "theoretical 'standard of care' that propagates a false sense of security that laws can mandate good behavior and potentially ushers in a regulatory environment hostile to innovation while creating a platform for ruinous litigation."

Carter made the comments in a letter to the National Association of Insurance Commissioners, who will meet at the end of May to continue work on a "best-interest" standard for annuity transactions. Meanwhile, the Securities and Exchange Commission passed a tentative version of a best-interest standard covering broker-dealers.

The FACC campaign was organized to represent fixed annuity sellers during the Department of Labor's fiduciary rule process. The Fifth Circuit Court of Appeals threw out the DOL rule in a March 15 ruling.

The FACC finds it needs to stay active, Carter wrote, as state and other federal regulators rush "to fill what they may perceive as a vacuum, thereby perpetuating inherent flaws and false justifications of the DOL fiduciary rule that led to its demise."

In Favor Of Suitability

The NAIC adopted a suitability standard for annuity transactions in 2010 to regulate sales of those products. It stipulates that products only need be "suitable" for the client.

Still, industry veteran Kim O'Brien said the standard has been "an unprecedented regulatory success." Based on the NAIC’s reporting of complaints, O'Brien wrote in her comment letter, "the evidence of consumer satisfaction with their fixed annuity purchase is indisputable."

"Insurance companies and agents have spent years developing appropriate systems and protocols to comply with suitability," wrote O'Brien, CEO of Americans for Asset Protection. "The proposal for changes to the suitability model, now in place across the United States, would cause disruption, confusion, and costly administrative overhauls."

If changes are to be made, they should focus on producing more efficient disclosures that are likely to be read by potential clients, O'Brien said. Also, any new regulation or guidance should "address issues of full and fair disclosure that informs consumers about risk, rewards, fees/compensation, and conflicts to empower them to make informed decisions."

AAP cautioned that any action should "recognize and exempt compensation for bona fide training and educational activities as well as legitimate business reimbursements that are not tied to specific product or company recommendations."

Suitability is a relatively new regulation that is working well, Carter said. The NAIC should "hit the pause button" on its best-interest proposal and turn its attention to filling in the regulatory gaps on disclosure and compensation practices.

"Develop model regulations that will actually help consumers without unnecessarily harming the insurance industry," Carter wrote.

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.