Regulators heard a number of new ideas and suggestions during a discussion of the first draft of a model that focuses on suitable sales of annuities to senior citizens.
The Senior Protection in Annuity Transactions model act and regulation is the second attempt by regulators at the National Association of Insurance Commissioners, Kansas City, Mo., to create guidelines for suitable sales of annuities.
Although some of the discussion revisited long debated issues such as the responsibility of insurers and producers, a new proposal was introduced by the Life Insurers Council, Atlanta.
The proposal as well as some other suggestions could be incorporated in a second version of the draft for discussion before the NAICs June meeting.
The proposal recommends using an existing NAIC Annuity Buyers Guide and modifying two sections so that they actually could be removed from the guide, filled out and then become part of the consumers file.
Those sections are under the headings, How do I know if a fixed deferred annuity is right for me and What questions should I ask my agent or company, according to a plan presented by Scott Cipinko, LIC executive director, and Hugh Alexander of Alexander Law Firm, Denver.
Since most insurers currently use the Buyers Guide, there will be little additional expense in creating a tear-out section that will be used to capture the consumers information and disclosure of product information, the LIC proposal states.
This approach, the proposal continues, would allow for regulators “to determine if the sale was not unsuitable at the time that the sale occurred and not require a statute to be passed in order to implement the process.” However, states that have not passed the Annuity Disclosure Model Regulation would need to do so, the proposal adds.
More generally, regulators were advised that if they focus on what needs to be done, then their job of finalizing a model act and regulation would be easier.
After listening to the debate over suitability for several years, Birny Birnbaum, executive director with the Center for Economic Justice, Austin, Texas, said he feels the first step regulators need to take is to identify problems in the marketplace. “What is happening? What is it that regulators are concerned about?” he asked.
The next step, Birnbaum continued, is to determine why regulators are currently unable to address the issue of suitability. “Is it because they do not have the statutory authority or are there other reasons?” If regulators can establish these points, then there will be a clear focus on what needs to be done with suitability, he explained.
If regulators cannot answer these questions, he cautioned that “there will be another two years of discussion and argument, like there was in the past.
“Where are the holes in regulatory authority needed to address those problems?” Birnbaum asked.
If, he continued, regulators do decide to go ahead with regulation, it should say that you cannot make an unsuitable recommendation rather than say a producer must make a suitable recommendation. The reason, he explained, is that it is easier to implement a regulation that states what is unsuitable rather than one that addresses what is suitable.
Birnbaum added that he does not believe any suitability problems are strictly the result of “bad apples” who are producers. Rather, it is also a result of “some of the problems of structure of the products and marketing schemes by insurers.”
John Hartnedy, deputy insurance commissioner with the Arkansas insurance department, said he checked with his departments consumer division and found complaints about variable annuities ranged from not getting a policy soon enough to not knowing the tax consequences of purchasing the product. There was unsuitable sale, he said, and that was able to be satisfactorily resolved within days. “From everything that I can see, we dont have a problem,” he added.
Merwin Stewart, Utah commissioner and chair of the Life “A” Committee overseeing the project, recommended that regulators follow Hartnedys example.
Insurers also strongly urged regulators not to include VAs under the purview of the model act.
“Duplicative and potentially conflictive” regulatory efforts could be avoided by only including fixed annuities under the model act, said Linda Lanam, vice president and deputy general counsel with the American Council of Life Insurers, Washington. Both the Securities and Exchange Commission and the National Association of Securities Dealers regulate variable products, she said.
“It could really handcuff business,” if there are inevitable conflicts among insurance and securities regulators in addition to requirements of the SEC and the NASD, said Carl Wilkerson, ACLI chief counsel of securities and litigation.
A case in point, according to Kate Schulze, vice president and assistant general counsel of compliance with Aegon USA, Baltimore, is the requirement for companies to complete an application process by crediting money to accounts within five days of receiving the completed application.
Companies have five days to make sure that the application is in good order–signed, completed and money credited to the proper accounts, she explained.
The more review and the greater the number of entities that have to approve the application, the more questionable it becomes whether the money can be deposited and begin to earn money in that timeframe, she explained.
Sufficient regulatory oversight is currently in place, she continued, citing NASD Notice 99-35.
Among other points, that notice states that “when a variable annuity transaction is recommended to a customer, the registered representative and a registered principal should review the customers investment objectives, risk tolerance, and other information to determine that the variable annuity contract as a whole and the underlying subaccounts recommended to the customer are suitable.” (See http://c chwallstreet.com/NASD/, Notices section, 1999).
And, rather than take a transaction-by-transaction approach to checking for suitability, regulators were advised to take a sampling approach similar to auditing programs undertaken for market conduct examinations.
In response to concerns over the possible expense of the proposed suitability regulation, John Pouliot, an Ohio regulator, asked insurers to “say with some precision what the cost is.”
The issue of responsibility for suitability, a heated point during the development of the last draft, surfaced again.
During the course of discussion, at the behest of North Dakota Commissioner Jim Poolman as explained through a department representative, insurers and producers were urged to try to iron out their differences so that regulators would not have to “decide to the dissatisfaction of one or both groups.”
Toward that end, Ron Panneton, senior counsel for law and state relations with the National Association of Insurance and Financial Advisors, Falls Church, Va., noted that differences over the responsibility of producers and insurers still exist but assured regulators that efforts would be made to discuss those differences with insurers.
And, Panneton said, there should be a provision in the regulation that if a consumer does not provide information, provides inaccurate or incomplete information, or does not take the advice of an insurance producer, then the producer should be relieved of liability.
Reproduced from National Underwriter Edition, April 21, 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.