NAIC's Latest Suitability Effort Elicits Mixed Reactions

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.