Deferred Annuity Sales: Where Rests

The Responsibility For Suitability?

Unless you have been in the mountains of Afghanistan for the past 18 months, you are aware that the deferred annuity business in this country is under attackby regulators, the media and trial lawyers.

Federal regulators, state regulators and even self-regulatory bodies are all in a contest to see which can become the “alpha regulator” with respect to the sale and issuance of annuity contracts.

The financial press has long been skeptical about the usefulness of deferred annuities and the popular press seems to be echoing this skepticism. Trial lawyers, always eager to find new venues to garner legal fees, seem to believe that the annuity business is vulnerable to their predations.

The suitability of the recommendation of the purchase of an annuity contract by a consumer seems to be at the focal point of many of these attacks on the annuity business. Rules applicable to registered broker-dealers have long required that such a broker-dealer not recommend the purchase of a variable annuity unless it is positively found that the purchase is “suitable” for the purchaser. Now, state insurance regulators are adopting rules extending various forms of suitability requirements to annuity contracts in general.

These requirements give rise to the question of where responsibility for suitability lieswith the salesperson, with the selling entity or with the issuer of the annuity contract itself.

The rules of the National Association of Securities Dealers traditionally have placed the responsibility for the suitability determination squarely on the selling broker-dealer.

Those state insurance regulators that are adopting suitability requirements for non-variable products seem to want to place the responsibility on the insurer that is issuing the contract. Unfortunately, there also seems to be some confusion as to how much involvement the states want to have in the suitability and sales process for variable annuities. There appears to be overlap in some areas between state insurance regulators and those charged with oversight over VAs and there appear to be gaps in other areas.

Regardless of how the jurisdictional lines get drawn with respect to suitability enforcement and rule-making authority, suitability screening and determination are going to be with us for the foreseeable future.

Some regulators seem to hold the opinion that deferred annuities are suitable only for people below a certain age. Thus, they have adopted rules that make it difficult to sell such products to elderly consumers.

Other regulators almost seem to be taking the position that deferred annuities are never suitable. Much of the print and broadcast media also seem to subscribe to this position.

It is not the purpose of this article to attempt to explore beliefs regarding what are and what are not “suitable” sales of deferred annuities nor to discuss the subject of annuities in the payout stage. Instead, it presents thoughts on how various segments of the industry, working together, can ensure that proper and knowledgeable suitability analysis is performed in connection with the sale of all annuitiesnot just for variable annuities.

Proper suitability screening is not only good compliance practice, it is also good business.

The past 10 years have seen a dramatic increase in the number of new product features available with deferred annuity contracts. While this trend has been most pronounced with the sales of variable annuities, it has extended to traditional fixed annuities and even to equity index annuities.

The industry offers a veritable cornucopia of “alphabet soup” features, all of which have acronyms that are used throughout the industry. Some of the features are built into the contracts and others are add-ons. Whatever form these features take, each new feature adds complexity to the suitability screening process.

Even where it is clear, such as with variable annuities, that the suitability responsibility lies with the broker-dealer, these distributors need help from insurers to be sure that sales personnel, supervisory people and suitability screeners clearly understand the features and have the tools to determine if such features are, in fact, suitable for the needs of each particular consumer.

Based on our experiences, we have concluded that many salespeople, supervisory people and suitability screeners are not necessarily trained to understand the nuances of complicated insurance products and the applicability of the products to a particular consumers needs. This is so whether these people are working under the auspices of an independent broker-dealer or not.

In many instances, the insurer issuing the product is the only one involved in the sales process having the resources and knowledge to provide adequate training that will result in proper suitability screening.

Obviously, insurers are not eager to undertake any activity that could expose them to greater liability. Nevertheless, all elements of the annuity industry have a stake in making sure that everyone involved in the sales process has the elements shown in the accompanying list (see box). A cooperative effort in this direction only can help the industrys image with regulators, the media and with the consuming public.

Finally, when looking at the delivery of suitability screening to annuity consumers, the industry needs to consider the following questions:

Are the wholesalers who stimulate the point-of-sale personnel to sell particular annuity products the best people to train about some of the new product features?

Are the insurers publishing guidelines regarding the products and their features and how the product and these features may affect any particular consumer?

Have the distribution entities selling the products recognized the need for additional training of sales personnel to deal with these product features and their effect on any particular consumer?

A fresh look at these questions may result in fewer problems brought about by the sale of unsuitable annuities.

Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P.C. Their e-mail address is: Norse.Blazzard@bghpc.com.


Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 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.