A Regulatory Roadmap for Annuities

In the aftermath of the 151A victory, there have been many questions from agents and brokers asking what's next. It seems that, following the industry's huge success, some really don't believe that the fight is over. And based on what we've been reading in the securities-fed media, they're right.

Insurance in general, and fixed annuities in particular, have never been the darling of the financial industry. Clients buy insurance for two reasons: safety and protection. Talking about buying or selling insurance isn't very sexy, and it can certainly clear out a room almost as quickly as yelling "fire." But those of us who have spent our professional careers building, distributing, or selling annuities understand their role and the need to help consumers consider them for their financial plan.

Helping the regulators regulate

We learned many lessons during the 151A fight: the need to market our products better, the need to train better, the need to explain our products to the public better. The industry is working together using many different outlets and venues.

But as a major deliverable to Congress and the SEC, these bodies were reassured that state insurance regulation would provide the best oversight for protecting consumers, and that the 2010 Suitability Model would be a major step toward ensuring that producers sell retirees suitable and appropriate annuities. That means more scrutiny on sales practices, marketing approaches, disclosure, and licensing and certification status.

Another significant lesson that we cannot forget is the need to help regulators - both state and federal - understand annuities and their distribution in the private marketplace. Why? While legislators and regulators may come and go, they are all too often entrenched for a significant period of time - and, more importantly, their staff is, too.

What does this mean for annuity regulation? Think about it. If you were a staff member working for a government regulator, how often would you personally interact with an independent insurance professional or advisor about protecting assets other than your home and car? Very few of them understand the life and annuity insurance marketplace that services small businesses and individuals without employer-sponsored savings plans. But all that is changing, with more than 10,000 baby boomers hitting retirement age daily and looking for ways to manage their employer-sponsored retirement accounts and income needs. More and more will be seeking the protection and safety of fixed deferred and income annuities.


Fixed annuity focus

Another aftermath of the 151A victory is the inclusion of all forms of fixed annuities in rules and regulations issued by insurance departments. With indexed annuities definitively and unambiguously ensconced within state insurance regulation, regulators are proposing language that does not delineate by interest crediting or deferred or immediate status.

One specific issue we are watching across the country is state-specific adoption of the 2010 NAIC Suitability Model Regulation. Understand that an indexed annuity that doesn't meet the "Harkin Test" does not automatically make it a security; it just doesn't receive protection as a non-security. The early results are in, and as of this writing, eight states have adopted some form of the NAIC 2010 Suitability Model, with another dozen pending or in discussion.

Also as expected, depending on the state and its regulatory climate, NAIC Model variations are already beginning to emerge. The variations mostly center on the main elements of the model - secondary review process, suitability review for replacements versus new sales, producer training and annuity continuing education, carrier training programs, and training verification.

The secondary review process requires that all fixed annuity sales include a suitability review by the insurance company in addition to the suitability review required before the agent makes a recommendation to buy an annuity. Most indexed annuity carriers already require suitability review prior to the recommendation, and many have been reviewing the suitability of the sale before issuing a policy for the past few years. So indexed annuity sellers have already adapted to the change, but sellers of traditional fixed annuities will likely see new forms and rules in place as carriers that hadn't required the same suitability review of their non-indexed products interpret and adopt compliant practices.

However, producers and advisors should anticipate changes to replacement sales because of the heightened focus and specific language on annuity replacements in the new model. The model's replacement definition may cause more carriers to put additional standards of suitability review and review processing in place for sales of annuities that are replacing another annuity.

The model requires a new four-hour course on the basics of fixed annuities (including both indexed and non-indexed), a one-time CE requirement that agents must complete by a certain date - usually based off the date of the regulation's adoption - before the producer can sell any fixed annuities. The product-specific training is based on the model's language that the producer must be knowledgeable about the product they are selling before they make the sale. Currently, industry thinking is that not only must carriers provide the materials required for agents to understand the products they are selling, but carriers should track and verify that the actual training took place by the date required before the next sale.

Insurance agents and advisors can expect that they will need to take the CE course once (as most states have CE reciprocity), and also the product-specific training from each carrier with which they hold an appointment and for which they wish to sell. They will most likely need this training before the summer is out because more and more carriers will simply require the training in all states, since it will be easier to implement nationwide after hitting a critical mass of states adopting the model.

Other annuity issues

While the NAIC Suitability Model is the most significant regulation agents and advisors will face in 2011, many state and federal initiatives could affect annuities and their sales through independent distribution - or broker-dealers "selling away" - whose outcome is yet not certain, but which the industry will be watching. Some of the biggest annuity issues to watch include:

  • State-by-state interpretation of annuity funding: What does and does not constitute investment advice or acting as an investment advisor, and working with insurance commissioners to clarify insurance-only activities.
  • State-by-state interpretation of the 2010 Suitability Model: Working and educating regulators who write the audit and examination standards of insurers to ensure that they do not overreach the intent of the original model.
  • SEC fiduciary standard determination: Who, and which, products will be under a fiduciary standard of care?
  • Taxation: As states struggle for revenue, the industry is looking to maintain the tax-deferral status of fixed annuities.

While there is little certainty in our industry, what is certain is that as long as there are regulators, there will be regulations, and when the regulation is unclear or ambiguous, rules and guidance memos may be drafted to "fix the regulation" or to achieve a desired or scripted outcome that may or may not be good for annuities.

Kim O'Brien is executive director of the National Association for Fixed Annuities. She can be reached at 414-332-9306 or kimob@nafa.com.

For more exclusive annuity coverage, visit ASJ's Annuity Resource Center.

Past annuity stories from ASJ:

Annuity Facts: State Requirements, Passed and Pending

Annuity Facts: Updates on New Education Requirements

Maximizing Your Options for Annuity Investments

Annuity Facts: What You Need to Know to Sell Annuities in 2011

How Women Can Take Your Annuity Sales to the Next Level


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