By

Lake Buena Vista, Fla.

If youre looking for ways to untangle the suitability challenge, particularly as it relates to variable annuities and life policies, one area to zero in on might be wholesaler support.

A new survey of broker-dealers shows that distributors think reps are not getting enough support to make the kinds of product decisions they are being asked to make, said Jim Doyle, vice president-professional services at Pivot/Info-One, in Easton, Conn. in a panel discussion here on the topic of suitability. The session was held during the annual Annuity Conference co-sponsored by the Life Office Management Association, Atlanta; the Society of Actuaries, Society of Actuaries, Schaumburg, Ill., and LIMRA International, Windsor, Conn.

Pivot/Info-One did the survey earlier this year, via written questionnaires sent to 20 leading broker-dealers and follow-up interviews with 10 of the 20, Doyle said. Taken together, the B-Ds represent over 85,000 registered representatives.

B-Ds have “an incredible level of dissatisfaction” with the wholesaling support they have been receiving, Doyle said. (See chart.)

And the unbundling of productssuch as the offering of various VA death benefit options and other guarantees, often for an additional costis widely viewed as increasing the complexity of the products, he said.

When asked if unbundled contracts raise suitability issues, “56% of the respondents answered yes,” Doyle said.

As he put it, “new share classes, benefits, features and benefit formulas, and the increase in available investment options have made an already complex sales process worse.”

This suggests that wholesalers and producers of todays complex insurance products need more education, Doyle concluded. In addition, he suggested that streamlining the product offerings and improving communication about in-force benefits to policyholders might help lessen the problems.

Suitability as an industry issue is not going away, agreed other panelists.

For instance, Al Sheridan, corporate vice president at LIMRA, reported that National Association of Insurance Commissioners much-discussed proposed model regulation on suitability is emerging. A working group of the NAIC in Kansas City, Mo., has been looking at it for the past four years, and the discussions have been politicized and complicated by ongoing debates over having state or federal regulation, he allowed.

But now, certain state insurance regulators have strong interest in having something done on the model by June, with a focus on monitoring suitability of fixed life and annuity products.

Companies with agents who sell both fixed and variable products will probably have to come up with a common set of suitability questions, for both classes of products, predicted Judith Hasenauer, a partner in the Blazzard, Grodd & Hasenauer, PC., law firm, Ft. Lauderdale, Fla.

Suitability is on the front burner for regulators this year, she noted in her talk.

Currently, she pointed out, NAIC has no model regulators for VAs, and most states defer to the Securities and Exchange Commission and the National Association of Securities Dealers, both in Washington, on variable life suitability matters.

But common law has already raised a number of suitability considerations, she noted, citing some key trends in this area. For instance:

–”A person who hangs out a shingle as a professional implies a representation that he is a professional with a duty to deal fairly with customers.

–”The more professional you appear, the higher the standard of duty.

–”Professional designations increase the standards.”

Meanwhile, on the federal level, various SEC pronouncements have placed responsibility for suitability compliance on the selling broker, but they hold insurers responsible for keeping good records and supervising brokers, Hasenauer said. Presently, the SEC seems especially interested in investigating 1035 exchanges for possible suitability violations, she added.

The bulk of regulations concerning suitability as it relates to variable contracts come from the NASD, Hasenauer continued. For instance, NASD Conduct Rule 2310 sets forth guidelines members must follow in determining suitability.

And NASD Notice to Members 99-35 provides a set of guidelines to help members develop procedures for sale of variable contracts. “Reps and broker-dealers cannot avoid that obligation by adding a disclaimer to the contract,” Hasenauer noted.

Under the NASD interpretations, suitability requirements apply only when “recommendations” are made, she said.

What is a “recommendation?” Hasenauer asked. Citing the NASD, she said: A members suitability obligation “applies only to securities that have been recommended by the member. It would not apply, therefore, to situations in which a member acts solely as an order-taker for persons who, on their own initiative, effect transactions without a recommendation from the member.”

In making a recommendation, Rule 2310 says members need to obtain relevant information about the customers financial and tax status, investment objectives, and so on, Hasenauer said.

What areas are of most concern to regulators right now? Here is Hasenauers list:

–1035 Exchanges. “These should not be done, merely to enhance agent revenue. The sales materials need to document a clear advantage to the consumer.”

–Bonus Annuities: “You should be able to demonstrate that, over a period of time, the consumer is better off with the bonused product than before, particularly when the bonus and a 1035 exchange are married.”

–Unbundled Enhancements: “These additionally may cause an ethical dilemma for the agent. Be sure you document how you got to the conclusion that the selected features were added, particularly when they make the policy cost more.”

How are insurers coping with all of this? Northwestern Mutual Life Insurance Company, Milwaukee, has responded by developing an “automated suitability system.”

Nine months in the making, this system has built-in safeguards, requiring policy applications to meet established suitability standards, said Maureen Joy Dziewt, an annuity marketing specialist at the insurer.

Apps that fall outside the standards are marked “fail,” she said. A policy cant be issued as an annuity until the red flag conditions are resolved, she said.

Red flags, under this system, can range from such things as “more than $3,000 contributed to an IRA-Roth” to “App is a replacement—review the source of funds.”

How is it working out? Dziewt says the automated system has improved compliance, bolstered consistency, and improved efficiency. It has also “reduced our cycle time and increased our ability to store and maintain data.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, April 22, 2002. Copyright 2002 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.