NAIC Annuity Sales Working Group of the Life Insurance and Annuities (A) Committee: September 17 Meeting Report

On Wednesday, September 17, 2008, a representative of this office participated in a conference call meeting of the Suitability of Annuity Sales Working Group of the Life Insurance and Annuities(A) Committee of the National Association of Insurance Commissioners (“NAIC”) (“the Committee”). The Committee focused mainly on hearing recommendations and suggestions from the Market Conduct Task Force of the National Association for Fixed Annuities (“NAFA”), and the Wisconsin Annuity Sales Supervision Advisory Committee. Below is a review of the pertinent discussions and issues raised at the meeting.

Don Walters, Senior Vice President of the Insurance Marketplace Standards Association (“IMSA”) reported that the Association’s Suitability Report was a work in progress and hopefully would be finalized by the next meeting of the Committee, on September 22 in Washington D.C.

NAFA representatives gave a brief presentation on the “Advertising and Suitability Best Practices” report. NAFA currently represents 96 percent of carriers who offer fixed annuities and conducted a survey of those carriers in preparing its report. In addition to providing information on acceptable and unacceptable forms of advertising, with a main focus on seeking not to mislead consumers; the report was broken down into two (2) main sections: (1) Suitability and Best Practices, and (2) Agent Education and Oversight.

The first section pertaining to Suitability and Best Practices provided five specific recommendations:

1. Company best practices and Model Regulations both recognize the importance of the insurance producer in assessing the suitability of any proposed sale of annuities. Best practices would require a company’s contracted producers to ensure that their recommendations are reasonable and suitable for applicants.
2. The need to make reasonable efforts to obtain consumer information concerning:

• The consumer’s financial status;
• The consumer’s tax status;
• The consumer’s investment objectives; and
• Such other information used or considered to be reasonable by the insurance producer, or the insurer where no producer is involved, in making recommendations to the consumer.

3. The inclusion of a requirement that the Product Suitability Information must be gathered by a producer during the sales process for every annuity sale.
4. The inclusion of a requirement that no fixed annuity would be issued without an analysis/review of pertinent consumer financial information.
5. Allowance for delegation of the suitability review. This could include, for example, a Broker-Dealer who was undertaking the suitability determination pursuant to Financial Industry Regulatory Authority rules, or some other third-party, from which/whom the insurer had assurance that the suitability review meets the best practice standards.

Regulators and interested parties commented on the recommendations and acknowledged  their consensus in embracing a concept that agents should not determine suitability, but rather should recommend a number of suitable products among which consumers could choose.

The concept of consumer financial education also was well received; however concern was raised over how consumers would feel about providing personal information.

The Suitability Report section pertaining to Agent Education and Oversight provided four specific recommendations:

1. In order to improve agent oversight and supervision, NAFA proposed the need to create an organization or producer information database to warehouse any “justified” complaint against a producer. This information should be available to carriers, insurance marketing organizations and the general public. Guidelines as to what would constitute a reportable event will need to be created. Litigation issues would need to be addressed before this program could commence.
2. Create a technology system such as “Vector.” The information would be used in the appointment process.
3. Adopt an industry standard for evidence of training and education for all licensed agents. This platform could be administered by a newly created organization and incorporate many aspects of the Iowa state licensing model for selling index products.
4. Uniform disclosure should be incorporated into consumer-driven advertising pieces.

Objections raised by the Committee to these recommendations related to what constituted the definition of “reportable event.” Concern that the idea of what justifies a complaint may differ from person to person and be hard to define objectively.

The Wisconsin Annuity Sales Supervision Advisory Committee presented its report on Section D of the NAIC Suitability in Annuity Transactions Model Regulation, which requires that insurers and general agencies have a supervisory system in place to ensure suitable recommendations for the purchase or exchange of annuities. Because variations exist among the types of supervisory systems insurers use for Model Rule compliance, the Annuity Sales Supervisory Committee suggested that the Model include guidelines to address the following general standards:

1. An insurer, general agency or third party shall have written guidelines to reasonably ensure the suitability of annuity sales.
2. Guidance for a suitability sale shall include a liquidity analysis reasonably designed to determine the consumer’s current and future need for liquidity.
3. A recommendation of an annuity product shall include a written disclosure to assist in the consumer’s understanding of the product being sold.
4. An insurer, general agency or a third party shall establish processes and written procedures to identify potentially unsuitable annuity sales.
5. An insurer, general agency or a third party shall have procedures to follow in the event that an unsuitable sale is suspected. Those procedures should include provisions for corrective action.
6. An insurer, general agency or a third party shall monitor to prevent, identify and address suitability issues.

• An insurer, general agency or third party shall take corrective action, as appropriate, to address sales practices or patterns resulting in unsuitable sales.

7. The NAIC should work to develop uniform state training requirements relating to annuities.
8. Agents recommending annuities must complete state-required training relating to annuities.
9. An insurer, general agency or third party shall make available to producers detailed product information regarding the annuities it sells.

Several suggestions and concerns were raised by the Committee regarding the nine recommended standards.

A recommendation that the third standard pertaining to disclosure should be addressed outside of the Committee parameters by the Working Group on Disclosure, with the possibility of a joint review by the Producer Licensing Committee.

Concern was expressed regarding the proposed new training requirements (Items 7-9), which could be an overly burdensome and unnecessary mandate in addition to the completion of Continuing Education courses already required.

Please note that the material above is a brief summary of the discussion and events that took place during the meeting of the House Suitability of Annuity Sales Working Group of the Life Insurance and Annuities (A) Committee of the NAIC. It is not intended to be a comprehensive review of any particular issues relating to the policies and/or programs discussed. Further, this report should not be relied upon for making any specific decisions.

Should you have any questions or comments, please do not hesitate to contact Colodny Fass.

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