NAICs Latest Suitability Effort Elicits Mixed Reactions

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Regulators latest effort to ensure suitable annuity sales to consumers is receiving general approval for its focus on the senior market. But insurers, producers and consumer advocates say they are still in the early stages of reviewing the new document.

Released on Feb. 21 by the National Association of Insurance Commissioners, Kansas City, Mo., the draft Senior Protection in Annuity Transactions model regulation and act takes a narrower focus than a previous draft that looked at suitability more broadly.

The previous effort was opposed by all three of these constituencies as well as some regulators.

A discussion of the new draft will be held during the spring NAIC meeting which starts on March 8. The session, to be held on March 11, is a preliminary step to a planned final adoption during the summer NAIC meeting in June.

An initial review suggests a case of “the good, the bad, and the ugly,” says Michael Lovendusky, senior counsel with the American Council of Life Insurers, Washington.

The “good” news, he says, is that after four years of discussing suitability, the NAIC has focused on the heart of the problem–the senior market.

The “bad,” he adds, is that regulators have included variable annuities, which are “already heavily regulated at the federal level.”

Additionally, they chose age 65 as the cutoff for a “senior” without a discussion of the issue, Lovendusky says. There has also been no cost benefit analysis, he adds.

The “ugly” part, he says, is that the model is intended to be adopted by the summer meeting in June, a short time span.

It is good news that regulators are addressing the senior market where there seems to be a problem, according to Ron Panneton, associate general counsel with the National Association of Insurance and Financial Advisors, Falls Church, Va. Panneton declined to comment on details of the new model until NAIFAs staff has reviewed it further.

The National Association for Variable Annuities, Reston, Va., is also reviewing the document, according to Mike DeGeorge, NAVA general counsel. The new draft has a much narrower focus, he notes. However, in previous comment letters regarding the earlier suitability model, NAVA has recommended that regulators exclude variable annuities from the model, DeGeorge says.

Kevin Hennosy, publisher of SpreadtheRisk.org, Kansas City, Mo., says it is a good thing that regulators want to address the area of most egregious violations, the senior market. However, he adds, it is too bad that regulators had to step back from protecting the larger population.

The insurer and producer are really the same entity because the producer is representing the insurer when a sale occurs, Hennosy says, and this should be reflected in the draft. “There is no reason that there should be a wall between the insurer and producer,” he says.

The exemption of direct response sales from the model act and regulation is a bad thing, according to Hennosy, because it is a huge market and one that the senior population uses.

Exempting the direct response market could encourage insurers to favor this kind of distribution and to “get rid of the agency force.”

Hennosy says that while the mitigation of responsibility sections for insurers and producers do allow for lesser penalties for genuine efforts to rectify mistakes, they also need to have language such as “reasonably promptly” tightened.

It is a positive that regulators are focusing on sales to seniors, one of the issues that was talked about when the matter of suitability was first raised, says Scott Cipinko, executive director of the Life Insurers Council, Atlanta.

Another positive, according to Cipinko, is the exemption of annuities used to fund prepaid funeral contracts.

However, he cites a concern that adequate staffing to carry out the requirements of the model regulation could be problematic for small companies. As an example, he says one company he is aware of has a home office staff of six people. “It is not a virtual company, but virtually small.”

Another point he notes in the model act is that under the enforcement section, if a violation is made by a depository institution, the commissioner must notify the appropriate federal regulator before imposing a monetary penalty on that depository institution or suspending or revoking its license.

“Will that be boilerplate language in model regulations going forward?” he asks.

More generally, Cipinko expresses concern over the process and the fact that regulators developed the models in closed session.


Reproduced from National Underwriter Edition, March 3, 2003. Copyright 2003 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.