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Life Health > Running Your Business > Certification

Uniqueness Counts In The Independent Agent's Sales Process

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Advisors are likely to be impacted by the June 2007 federal court decision in Hawaii denying class certification against Midland National for the sale of fixed index annuities.

The court said it could not treat all Hawaii residents who purchased Midland’s fixed index annuities the same. Thus, it could not certify the class because each consumer in the purported class had heard a different sales pitch, experienced a different sales presentation, and purchased an index annuity based upon unique financial conditions and objectives.

In short, too many variables in the sales process prohibited the court from treating all plaintiffs the same.

Significantly, the FIA distribution process protected the insurer from possible class certification–a legal determination to be avoided for sure.

Background: Embracing the independent agent as a main distribution channel for FIAs has led to the development of unique and individual sales presentations. Scripts and canned presentations are all but gone from the industry. (A few words of caution: if an agent or insurer is still relying on “scripts” to sell FIAs, it’s risky, since scripts create “sameness,” a key ingredient for class certification.)

While some firms provide examples or possible suggestions for advisors to use when explaining certain annuity features or benefits, these examples are not required and are still just a portion of a larger presentation.

At a minimum, the full sales process includes the items shown in the chart.

Even company-prepared marketing brochures and presentations allow for individual interpretation and comment by agents. To say that no two sales are alike is an understatement. Most agents claim their own sales process is fluid and flexible and adapts to each client. This uniqueness is a strength of independent agents.

At a time when suitability is paramount in the FIA industry, an agent’s ability to tailor and modify the sales presentation is directly in line with compliance requirements.

Take, for example, the fourth and final criteria from the Suitability in Annuity Transactions Model Regulation of the National Association of Insurance Commissioners. It requires the agent to make reasonable inquiry into relevant information which would assist the agent in making a suitable recommendation. Such a requirement demands flexibility in the sales process. The very nature of making suitable recommendations is incompatible with canned presentations.

It was the sales practice of one-size-fits-all which contributed to the tainting of the financial services market against FIAs. As with any financial product, the client’s needs dictate the financial solution.

Right now, lawyers for each side in the Midland case are looking at legal options under the court’s rulings. What will happen next for Hawaii residents who purchased index annuities is unclear.

The real fight in these lawsuits is class certification itself. After the determination is made concerning a class certification, the path of the lawsuit usually changes dramatically.

In most cases, when certification is granted, the lawsuit moves quickly into settlement negotiations. Economic factors often drive resolution. An extremely low percentage of class action lawsuits actually proceed to trial. In the case against Midland National, without class certification, the plaintiffs may pursue individual claims against the carrier and the writing agent.

Agents who sell products that come under legal scrutiny, therefore, need to understand how their errors-and-omissions coverage (legal liability insurance) works.

Each policy has a time limit for notifying the E&O carrier of any claim against the agent. Some policies use broader language to include even a threat of litigation. Most E&O policies do not cover allegations of fraud or intentional wrongs. Thus, if a consumer alleges the agent committed fraud, the agent may not have E&O protection.

Another issue involves submitting carrier appointment contracts after a claim has been alleged against an agent. The agent should read carefully the language asking about claims, as some carriers require disclosure of certain allegations or actions against the agent.

The court’s conclusion, in the Midland National case, reiterates what FIA carriers and agents have been trying to express to regulators, legislators and lawyers for several years–i.e., a product may be suitable under certain conditions and unsuitable under different circumstances.

The focus must turn from the FIA itself and begin to encompass whether the product fits the client’s needs. The Midland National decision concludes that each transaction must be examined to determine whether the FIA was an appropriate solution at that time, based on the client’s needs.

Danette Kennedy is president of Gorilla Insurance Marketing, Inc. Waukee, Iowa. Her e-mail address is [email protected]


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