State Legislator Group Looking At Issue Of Suitability Of Sales

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The suitability of products sold to consumers, an issue that insurance regulators have found is like grabbing a tiger by the tail, is a beast that state legislators will consider taming.

The topic of suitability received extensive discussion at the recent annual meeting of the National Conference of Insurance Legislators. An alternate model regulation to one currently being developed by the National Association of Insurance Commissioners is being considered by NCOIL.

A decision by NCOIL on whether to pursue an alternate model, prepare a white paper or take a stance on the NAIC model will be made after regulators at the NAIC discuss the issue further.

The NAIC’s Life Insurance and Annuities Suitability model act and model regulation will be discussed during the NAIC’s winter meeting in Chicago later this week.

Rosanne Mead, chair of the working group, says work on the draft will start with a discussion of penalties.

Although the issue of company and producer responsibility for the suitability of a sale is not specifically on the agenda, Mead says it will probably be raised. Mead says that after the Chicago meeting there will be a better sense of whether the models will be moved out of the working group by the June 2002 meeting.

The project survived one motion at an “A” committee meeting to stop work on it. Some of the reservations that led to that motion were also sounded during the NCOIL session.

Bill Anderson, vice president and associate general counsel with the National Association of Insurance and Financial Advisors in Falls Church, Va., says he told NCOIL legislators that “we are not opposed to the concept of suitability and, in fact, we hope that all products our members sell are suitable.”

However, Anderson adds, NAIFA believes there are sufficient safeguards to ensure the suitability of products. Anderson also says that because of the exemptions of parts of the business such as direct marketers, “it is a very flawed regulation.”

Scott Cipinko, executive director of the National Alliance of Life Companies in Rosemont, Ill., raised concerns over the potential voiding of transactions if products that were sold were deemed unsuitable and questioned the role of regulatory authority.

Cipinko adds that there is a lot of private information exchanged between a client and a producer and if the producer is ever called upon in a suitability hearing to testify that information would become public.

Regarding the premise of the existing draft, Cipinko says, “There is no responsibility of the consumer here. It is consumer as child.”

Michael Lovendusky, senior counsel with the American Council of Life Insurers in Washington, also spoke to legislators on whether there is a need for a new regulation given existing tools such as the Unfair Trade Practices Act.

If a new regulation is pursued, Lovendusky says that success will depend on broad industry support from both companies and producers.

At previous NAIC meetings the issue of who is responsible for the suitability of a sale has been volleyed back and forth.

Currently, according to Mark Feldman of Feldman Associates in Charleston, S.C., six states have suitability regulations or laws on their books: Iowa, Kansas, Minnesota, North Dakota, Vermont and Wisconsin. Existing regulations are only a couple of sentences, he continues.

Feldman says “this type of regulation is unnecessary.” However, he continues, if regulation is pursued, then regulators should make sure that “it is simple and will work in the real world.”

In addition to suitability, legislators at the NCOIL annual meeting also adopted the Mental Health Parity model act, which requires insurers and managed care organizations to provide parity for both in-patient and out-patient mental health care.

Legislators also heard Victoria Femia, senior counsel-litigation, with the ACLI, address the need to put legislation in place that would allow insurance regulators to participate in federal legislation and programs that would give them additional tools to combat fraud.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 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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