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Life Health > Life Insurance

NAIC Suitability Model Wins Key Vote

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A model that would regulate the sale of annuities to senior citizens advanced a major step toward full approval by state insurance regulators.

The Senior Protection in Annuity Transactions model regulation was adopted by the Life & Annuities “A” committee of the National Association of Insurance Commissioners, Kansas City, Mo. The committee, which narrrowly attained a quorum needed to vote on the model, voted it up by a 6-1 margin.

The model must still be adopted by the NAICs executive committee and plenary before becoming NAIC recommended policy.

The issue of suitability has been a controversial one, spanning over four years and numerous drafts.

Among other things, the current model holds both insurers and producers responsible for the suitable sale of annuities and includes variable annuities under its purview.

The model requires that prior to the purchase, surrender or other disposition of an annuity based on a producers recommendation, there be reasonable efforts to obtain information about the senior consumers financial and tax status, investment objectives and other relevant information.

Additionally, an insurer must establish a system that will assure compliance with the regulation.

Other provisions in the model state that compliance with the National Association of Securities Dealers Conduct Rules regarding suitability will satisfy the requirements for variable annuities.

For a full text of the model, visit

Final changes to the model before the vote included new wording for the scope of the model developed by the American Council of Life Insurers, Washington.

Changes also included new language offered by the Wisconsin insurance department and North Dakota Commissioner Jim Poolman concerning the duties of insurers and insurance producers. The new language states that insurers are responsible for establishing systems that ensure compliance with suitability requirements.

“This is a good product. It is not perfect in everyones eyes and probably not in anyones eyes, but it is a good product,” said Merwin Stewart, Utah commissioner and chair of the “A” Committee, after the vote.

Reaction following the vote was mixed, interviews indicated.

Insurance groups including the ACLI; the National Association of Insurance and Financial Advisors, Falls Church, Va.; and Life Insurers Council, Atlanta, must have their members vet the adopted draft before deciding whether to lend support, according to interviews. If support is not given, then other decisions must be made including whether to oppose the draft or remain silent and whether to oppose the draft before the NAIC or in state legislatures.

ACLI will be talking with member companies, but insurers continue to be concerned that age 65 is used rather than an older qualifying age and that the model includes variable annuities, according to Linda Lanam, ACLI vice president and general counsel.

There are also reservations over the requirement that insurers have systems in place to ensure suitability, she says.

The language in the draft creates a safe harbor for those companies that comply with NASD conduct standards but does not preclude action by insurance commissioners.

What is unclear, according to Lanam, is whether an extra level of responsibility will be created. For instance, she asks, if an insurer delegates responsibility to a broker-dealer, will that broker-dealer now have two levels of obligations?

The NASD establishes a system of supervision for broker-dealers and registered representatives, and ACLI wants to be sure it can rely on that system to satisfy suitability conduct rules in order to comply with the regulation, she explains.

Changing the language regarding the scope of the model was important, Lanam says, because it focuses the model on annuity transactions rather than a broader range of financial services products such as mutual funds over which insurers may not have control.

It is a positive that both companies and producers will be subject to a call from a commissioner for corrective action and that regulators now feel they have a tool to take corrective action, says Ron Panneton, senior counsel-law and state relations with NAIFA. “The responsibilities in the model are indeed balanced,” he adds.

Panneton notes the “pretty solid supervisory requirements” that are part of the Wisconsin proposal that are now part of the model. “A good agent wont object to meeting the requirements of this proposal,” he says.

Kevin Hennosy, publisher of, Kansas City, Mo., also applauds inclusion of the Wisconsin language in the draft because it ties companies to the behavior of the sales rep.

Hennosy notes that the model protects a part of the consumer population rather than the whole population but adds, “I believe that for the narrow area of the public that this addresses, this [model] will be an improvement.”

The regulation will make it very difficult for small companies to comply with its requirements, according to Scott Cipinko, executive director of the Life Insurers Council, Atlanta.

For small companies, the supervision requirements will make doing business more difficult and expensive, he explains. It will also create a drain on the resources of smaller insurance departments, he adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 28, 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.


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