Annuities: Suitability Changes and Challenges

A review of the latest NAIC Regulations

State insurance regulators continue to focus heavily on consumer protection in the annuity sales arena. With an increase in the range of annuity offerings and the accompanying complexity of many products — along with highly publicized tales of past unsuitable sales — regulatory requirements are definitely evolving, and you should be aware of the changes.

In order to ensure that the insurer and producer evaluate annuity suitability for their customers and that producers who sell annuities receive specific training about annuities and suitability, the National Association of Insurance Commissioners adopted significant revisions to its Suitability in Annuity Transactions, Model 275 in March 2010. This adoption, coupled with subsequent state regulatory activity in 2010 and early 2011 and the model’s expected future adoption by those states already embracing the prior version of the model, can raise many concerns for insurers when it comes to addressing the new requirements, including:

-Compliance with the model’s requirements
-Review of all annuity transactions
-General and product-specific training requirements for producersSome of the more significant changes are detailed in the model’s insurer annuity transaction review, adopted in Section 6 of the model. Those new insurer responsibilities primarily focus the mandate that carriers must not issue an annuity unless they have a reasonable basis for each annuity’s suitability based on the information with which the prospect provides the insurer or producer.

Additionally, insurers are required to establish and maintain processes and procedures that provide for a review of every annuity transaction. Therefore, going forward under the model, an integral part of insurers’ supervisory systems is to set forth standards and procedures for consumer recommendations that address their insurance needs and financial objectives at the time of the transaction.

Insurers must take critical steps, such as obtaining applicant information that they can effectively use to assess suitability. Suitability information, as defined in the model, includes:

-Age
-Annual income
-Financial situation and needs (including funding)
-Financial experience
-Financial objectives
-Intended use of the annuity
-Financial time horizon
-Existing assets (including investment and life insurance holdings)
-Liquidity needs
-Liquid net worth
-Risk tolerance
-Tax status

Capturing this information is a key element in the suitability process.

With well over three-quarters of the states having Model 275 or related content in place, history supports the insurance industry’s continuing adoption of these latest updates. And as this anticipated rollout process continues, insurers selling fixed annuities in the states that have adopted the model’s recent changes may soon be likely to put in place the required supervisory system and training procedures in order to comply.

Regulatory actions review

As we approach the one-year anniversary of the NAIC’s adoption of the current version of Model 275, it’s a good time to review some of the key annuity suitability regulatory developments of the past 10 months.

Some jurisdictions have already begun addressing the model’s latest revisions: For example, Iowa proposed changes to its existing rules shortly after the model’s latest revision, essentially bringing that state’s requirements into accord with the model and providing for what was then a delayed effective date of Jan. 1, 2011.

Colorado and Rhode Island also proposed similar changes to their rules and regulations, with recent final adoptions, resulting in effective dates of April 1 and June 1, 2011, respectively.

Of particular interest are the two new adopting jurisdictions — the District of Columbia and New York. Both jurisdictions essentially follow the model, with an effective date of Dec. 24, 2010 for the District of Columbia.

New York promulgated Emergency Regulation No. 187 with an initial time frame of Dec. 29, 2010 to March 26, 2011. As noted, this is the first annuities suitability regulation coming out of the New York Insurance Department. However, as a prelude to this promulgation, the department held four hearings across the state in 2009 to gather consumer and industry concerns about annuity sales.Oregon has also adopted additional regulatory requirements that are generally consistent with the model. These were adopted on Feb. 4, 2011, with a primary effective date of July 1, 2011.

Other related regulatory updates include Arkansas’ Rule 50 annuity suitability training course approval form, effective Sept. 30, 2010, and Oklahoma’s new rule addressing the training and education requirements for the sale of annuities, which became effective on July 14, 2010.

Florida, which has not yet adopted the model, continued its focus on senior protection in 2010 through its statutory revisions. The state has set forth additional standards and procedures for making recommendations to senior consumers that may result in a transaction involving annuity products. That legislative action also included the granting of stronger enforcement authority to the Florida Office of Insurance Regulation for violations of those new senior protections.

The road to be taken

Prior to the model’s changes and the initial state adoptions of those revisions, insurers’ challenges could generally be summarized as making reasonable efforts to obtain the prospect’s suitability information prior to recommending the purchase of the annuity. This helped ensure that annuity issuance was reasonable in light of the suitability information known to the insurer. Insurers were also required to establish a system of supervision that was adequate to achieve compliance with the prior version of the model.

Producer training

Finally, the new insurance producer training requirements address the need for adequate knowledge and provide for specific training, including topics and credit hours. Specific timeframes for completing training apply to insurance producers who hold the required life insurance line of authority before the effective date of each state’s adoption.

The model specifically requires that individuals who obtain a life insurance line of authority on or after the effective date may not sell annuities until they complete the annuity training course required by their state. Between the additional training and the varying timing requirements, insurer verification of individual’s training completion may require additional processes and coordination. 

Insurers are likely to continue to face challenges as new annuity sales suitability requirements become incorporated in various states. While specific states may certainly vary their effective dates for compliance, and some may eventually adopt requirements that deviate from the latest version of the model, the insurer’s responsibility and role in suitable annuity sales remain paramount in both this latest revision and as an ongoing state regulatory focus on protecting the consumer. 

Kathy Donovan is the senior compliance counsel of insurance at Wolters Kluwer Financial Services.

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