Concerns Remain As NAIC Tries To Advance Suitability Model

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Lingering concerns over the details of proposed suitability regulation that would protect senior citizens who purchase annuities are causing a drag to a process regulators hope will be fast-tracked to adoption.

When the National Association of Insurance Commissioners, Kansas City, Mo., meets this week, it is still the intention to advance the model act and regulation toward adoption, says Merwin Stewart, Utah insurance commissioner and chair of the Life & Annuities “A” committee.

The Senior Protection in Annuity Transactions model act and regulation is the latest response to a sales suitability issue that has been heatedly debated for over three years. The latest version of the model focuses on senior citizens rather than sales suitability for the population as a whole because regulators maintain that the senior population is most susceptible to unsuitable sales.

But, it was this focus that was among the issues Birny Birnbaum, an NAIC-funded consumer representative and executive director of the Center for Economic Justice, Austin, Texas, questioned on the issue.

Birnbaum asked why the model was limited only to senior citizens rather than consumers in general.

Additionally, the proposed model should have a standard of conduct specifying that an insurer and a producer shall not make an unsuitable recommendation to a consumer, he said.

And, he continued, a private right of action should be part of the model. In spite of efforts of “hard-working insurance regulators” to police the marketplace, Birnbaum said resources are “very limited” and the record for identifying and remedying market conduct abuses, “spotty.” Consequently, a private right of action is needed, he said.

To adopt the model, he continued, would be “worse than doing nothing” because it seems to offer consumer protections when, in fact, it may reduce them and provide insurers with “a liability shield they dont already have.”

Indeed, the removal of a part of the purpose section of the model addressing a private cause of action was one that insurers said could make support difficult.

The sentence in the draft reads: “Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation.”

Frank Dino, a Florida regulator and life actuary, questioned why the issue was included in the model given that a consumer still has the right under law to pursue a legal redress. He raised the issue of whether it would create the appearance that regulators are moving away from consumers rights.

But Linda Lanam, ACLI vice president and deputy general counsel with the American Council of Life Insurers, Washington, said that in states where complaint records are public, there is anecdotal evidence that plaintiffs attorneys have come in and reviewed those files.

“Deleting it [the sentence] is a significant change in the direction and approach and might make it difficult to do anything but oppose it,” she said.

Among other issues that ACLI companies are concerned about, according to Lanam, is that any treatment of variable products reflect they are regulated currently by the National Association of Securities Dealers and that transactions covered by the regulation specifically be referenced as well as the responsibility of companies and agents.

Addressing the issue of specifying a standard of conduct, Stewart noted that regulators “cannot get to the point where they detail everything that should or should not be done.” It removes freedom and initiative of those in the market, he added.

Insurers are also concerned, they say, about the scope of the proposed regulation and their ability to make prompt payment to a contract holder if the proposed draft applies to surrenders or withdrawals, actions they maintain are a legal right of the contract holder.

Brian Staples, a Kentucky regulator, suggested language be added stating that the regulation would apply to a transaction that results in another insurance transaction or series of transactions.

If a contract is surrendered from one company and a different contract purchased from another company, even if that contract is ultimately deemed suitable, complications could arise, according to Lanam. For instance, she explained, if it was an annuity contract, even if the contract holder is made whole, there might still be a loss due to tax consequences, she explained. So, even though companies may be willing to work with regulators, they may not be able to in every case, Lanam continued.

The issue of satisfying a companys responsibility to make sure its producer sold a suitable product was also raised. Insurers raised the possibility of a certification satisfying that obligation. The language in the draft model lists a sampling, testing or audit reasonably designed to detect noncompliance with the regulation.

Insurers suggested certification be added to the list.

But regulators opposed that idea, stressing that a company needs to take responsibility for the producer and the sale made.

Insurers again raised the issue that any responsibility they have not require them to conduct a transaction-by- transaction review, a process they have said would be time-consuming and expensive.

Ron Panneton, senior counsel for law and state relations with the National Association of Insurance and Financial Advisors, Falls Church, Va., reiterated NAIFAs position that both a company and its producer need to be held responsible for the suitability of a sale.

Regulators also said that while every transaction is important, they also look for patterns in unsuitable sales practices.

“Does this producer have a pattern or if it is an insurer, are there a number of sales that are deemed unsuitable?” asked Staples, the Kentucky regulator, as he tried to explain what a regulator would look for.

If there is an instance where an unsuitable sale is made, then the Arkansas department expects the producer and the company to correct the situation, John Hartnedy, deputy insurance commissioner with the Arkansas department, said.

If a series of unsuitable sales are identified, he continued, then the department expects the producer and the company to correct those situations and “then we will start talking about penalties.”


Reproduced from National Underwriter Edition, June 23, 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.