Regulators Narrow Scope Of Suitability Model And Cut Out IMSA Compliance Provision
Sparks flew here at a meeting of the National Association of Insurance Commissioners life insurance and annuity sales suitability working group.
Utah Insurance Commissioner Merwin Stewart spoke up for regulators who are asking the Kansas City, Mo.-based association to come out with a broad statement of suitability principles.
“We want honesty,” Stewart said.
Regulators should expect participants in the life insurance industry to follow the “Golden Rule” and treat others as they want to be treated, Stewart said.
But Carroll Fisher, Oklahoma insurance commissioner, argued that insurance departments should focus on regulating life insurers financial stability.
Trying to regulate morality “will create a feeding frenzy for plaintiffs attorneys,” Fisher warned.
The NAIC formed the suitability working group to develop a Life Insurance and Annuities Suitability Model Regulation, to increase the chances that life and annuity sales recommendations will match consumers needs and resources.
The working group made two hotly debated decisions at the summer meeting on its draft of the model regulation.
One decision cut provisions allowing insurers to comply with the suitability guidelines by complying with suitability standards from the Insurance Marketplace Standards Association, Washington, and the National Association of Securities Dealers, Washington.
The second decision limits the scope of recordkeeping requirements to transactions that actually result in sales. Insurers would not have to keep records on the suitability of recommendations made to customers who walk away without making purchases.
Michael Lovendusky, senior counsel with the American Council of Life Insurers, Washington, predicted failure to recognize IMSA in the model regulation would reduce IMSAs vitality.
But Birny Birnbaum, executive director of the Center for Economic Justice, Austin, Texas, called the IMSA compliance provision a “get-out-of-jail-free card,” and Kevin Hennosy, executive director of SpreadtheRisk.org, Kansas City, Mo., questioned how state regulators could give a private organization such as IMSA public authority without requiring public oversight of the organizations activities.
Discussion of the scope of the model regulation was just as emotional.
Mike Hessler, an Illinois regulator, said imposing recordkeeping requirements on all transactions would create a recordkeeping nightmare.
An all-encompassing recordkeeping requirement would also increase carriers exposure to liability lawsuits, Lovendusky said.
Setting a strict recordkeeping liability standard would give class-action attorneys “a slam dunk,” according to Scott Cipinko, executive director of the National Alliance of Life Companies, Rosemont, Ill.
But some regulators and consumer advocates at the meeting were adamant about the need to apply the draft regulation to all recommendations.
“I believe every recommendation should be suitable,” said Brian Staples, a Kentucky regulator.
The Minnesota Department of Commerce already has a suitability definition that covers all sales recommendations, according to Scott Borchert, a regulator with the Minnesota department.
The working group also considered the matter of assigning responsibility for suitability.
Ron Panneton, associate general counsel with the National Association of Insurance and Financial Advisors, Falls Church, Va., recommended revising the draft to emphasize that insurers share responsibility for suitability with their producers.
The current draft states that those making the recommendations are responsible for suitability, Panneton said.
In most cases, the producer makes the recommendations, but the insurer should still share responsibility, Panneton argued.
Rosanne Mead, an Iowa regulator and chair of the working group, said she had tried to reflect the split of responsibility between the producer and the insurer in the draft regulation.
But she illustrated the potential difficulty of splitting responsibility by describing an independent agent who sells one grandmother five policies from five different carriers.
Although each carrier might do a good job of assessing the suitability of its piece of the business, it might have too little information to assess the suitability of the entire group of transactions, Mead said.
A regulator might require that all five carriers return the premiums to the grandmother without imposing any sanctions on the carriers, Mead said.
Another regulator, Minnesotas Borchert, accused ACLI of taking too long to endorse or reject the draft suitability regulation.
“This has been going on for three to four years,” Borchert said. “When will you decide what your position is? I am surprised and dismayed that the ACLI does not want to embrace the regulation.”
Lovendusky told Borchert that life insurers fear suitability regulations could end up costing them as much as privacy regulations.
Three years ago, privacy rules seemed to be a minor issue, but privacy compliance now costs millions of dollars a year, Lovendusky said.
Borchert scoffed at insurers worries about suitability costs.
“If [the industry] is not spending millions of dollars now to ensure suitability, it ought to be,” Borchert said.
Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.