Regulators OK Exemptions For Some Products In Suitability Model

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A controversial draft document that establishes guidelines for the suitable sale of products created more controversy during a discussion among regulators over which products should be exempt from its requirements.

State insurance regulators who are part of a suitability working group decided to exempt individual life insurance and annuity products sold to employees during worksite visits.

They also exempted credit life insurance from the requirements of the draft model of “Life Insurance and Annuities Suitability Model Regulation,” a document being developed by the National Association of Insurance Commissioners in Kansas City, Mo.

And regulators in this working group also removed an exemption for long-term care products that was in an earlier draft because they maintained it was a health product and would not be included under the scope of the draft model.

The credit life insurance exemption is contingent upon confirmation that another working group of the NAIC that is addressing credit insurance issues examine suitability standards for credit life insurance.

The unanimous decision to exempt the worksite sale of individual life insurance and annuity products was made after a discussion over whether not granting such an exemption would kill the product by making its sale too cumbersome and whether such a possibility should be considered a legitimate reason for its exemption.

Patricia Jackson, a senior counselor in the law division of Met Life Inc. in New York, said that to comply with the requirements of the model regulation, a company would have to do fact finding, a process that would take several hours. No employer is going to allow an employee to take several hours during a day to do this, she said.

Jackson pointed out that it is a simple sale with no sales illustration. Employees determine whether they need the insurance and what amount of insurance they can afford, she added. No direct solicitation is made.

The average policy sold is less than $27,000, according to Jackson.

But Jack Yanosky, a regulator representing the Pennsylvania insurance department, raised the issue of whether solicitation did in fact go on. In the real world, he said, an agent would not walk away from seeking a commitment. An agent, Yanosky explained, would try to find an amount that an employee would agree to have deducted from a paycheck. So, for example, if $5 a week was too high, he argued that an agent might see if $3 was acceptable.

Carroll Fisher, Oklahoma insurance commissioner and Rosanne Mead, chair of the suitability working group, said that consumers in their states had not registered worksite sales as an area of abuse or concern.

Fisher questioned whether a model was needed at all but said that if regulators decided to develop one, then worksite products should not be included under its scope.

But consumer advocates funded by the NAIC said worksite insurance should be included in the suitability model.

Birny Birnbaum, executive director of the Center for Economic Justice in Austin, Texas, said that including a product under the scope of a model does not mean that it is a bad product. Rather, he continued, it means that any product sold should be suitable.

Birnbaum noted the amount of information collected on an interested employee: limited underwriting information, salary and family status.

“If you carve out an exemption,” he warned, “you are moving down a slope where exceptions are made for everything.”

Kevin Hennosy, executive director of Spread the Risk in Kansas City, Mo., told regulators that with the large list of product exemptions, it would be better if the regulation was killed. Currently, the draft regulation is “deceptive” because it creates the illusion that there are standards when, in fact, there are not, he added.

Additionally, Hennosy said that it would “place all the regulations on agents and none on companies.”

Consumer advocates also criticized the exclusion of credit life from the draft.

Deborah Goldberg, a representative with the Center for Community Change in Washington, said credit insurance has a “history of predatory lending and problems in the marketplace.” She said its exclusion from the model sends a message to consumers and low-income groups that the NAIC is not defending their interests.

Birnbaum noted that a number of companies have decided to stop selling the product. Citgroup announced it would stop selling single premium credit insurance in July (see NU, July 9). He called credit insurance a “poster child for suitability requirements.”

But William Burfeind, executive vice president of the Consumer Credit Insurance Association in Chicago, countered, saying credit insurance was not envisioned as a part of the model when work began and is currently being looked at by the NAIC.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 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.


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