For the past 2 years, NAVA, Inc., the Reston, Va. trade association for the retirement income industry, has spearheaded development of an industrywide program for straight through processing for fixed and variable annuities.

Significant progress has been made, and the standards are now being fleshed out in implementation guides. It is likely that several large annuity purveyors will be online with STP by year-end or early next year. Spillover to most of the rest of the financial services products will follow very rapidly thereafter.

What is straight through processing? It is a set of standards that permit inter-operability among insurers, distributors and vendors. It is intended to permit electronic, paperless transaction of new business from point of sale through issuance of the annuity, hopefully via printout at the consumer’s residence.

Many brokerage firms and similar organizations already use elements of STP in their business. But NAVA’s STP initiative is more comprehensive than any existing e-processing system. Moreover, it incorporates industry-accepted standards regarding suitability compliance, replacement screening, recordkeeping, e-delivery and e-signature that are more sophisticated and comprehensive than anything currently in use.

Why did NAVA develop its STP initiative? The current error rate on annuity applications, industrywide, is probably as high as 30%. At the same time, suitability screening, agent supervision, replacement requirements and the annuity products themselves are becoming more significant, more complex and more fraught with liability in the event something goes wrong or gets missed. Likewise, STP of financial services products is more expeditious, faster to market and more environmentally friendly than is the use of paper.

E-delivery of prospectuses alone will result in massive savings to issuers of registered financial products and save many forests from the destruction resulting from the making of paper.

Finally, regulators are becoming less and less forgiving of lapses in supervision of the sales process and of poor paper trails.

STP has potential to solve all these problems. In addition, it will enable inter-operability throughout the industry.

Throughout this project, NAVA has been fortunate to have received contributions from insurers, distributors, money managers, third-party vendors and regulators. All have worked hard and added much toward the success of the standards.

NAVA was particularly gratified to have support not only from numerous state insurance regulators, but also from the Securities and Exchange Commission and the Financial Industry Regulatory Authority. It would have been impossible to develop as comprehensive and complex an initiative as STP without consideration of the numerous regulatory elements that impact on electronic processing of regulated products.

For instance, the STP project proceeded at the same time that FINRA was developing new suitability and supervision requirements for deferred variable annuities. If the STP project was to work, it was essential to provide for suitability and supervision standards that could be incorporated into the STP processes.

Another example: STP has had to deal with the wide variety of regulatory requirements involving the bias toward use of paper. Likewise, disparate requirements for replacement processing, manually-signed applications, privacy protection, and the like, all had to be taken into consideration for STP, and solutions had to be found to enable nationwide consistency. A key element has been coordination with all the various regulatory bodies, one by one, to attempt to develop a consistent program that will work everywhere.

Today, NAVA is continuing its efforts to reach out to all state insurance regulators and is continuing dialogue with the SEC staff and FINRA.

When the STP project first began, many thought that e-signatures would be the biggest hurdle, from both a regulatory and technology viewpoint. That turned out to be one of the many myths not based in reality. President Bill Clinton signed a bill intended to implement e-signature capability nationwide, and every state has adopted some form of a law permitting e-signatures. Meanwhile, a number of e-signature vendors now have low-cost, effective e-signature solutions, and several participated in the STP standards setting and have committed that their products and services are or will be NAVA STP compliant.

Throughout the standards setting process, numerous issues like e-signature were tackled and resolved, thanks to the hard work of the NAVA staff, a small group of consultants, and people within the industry who made huge contributions. To quote Winston Churchill, “never have so many owed so much to so few.” Finding people with the requisite knowledge, talent and willingness to work, often without compensation or with reduced compensation and very little recognition, has not been easy, but it has been done.

What does this mean to the annuity industry? STP will soon be a reality. It will become the standard by which the annuity business, and eventually the entire financial service business will be done. Any insurer or distributor that is not on board with the program will be left behind–far behind. Every insurer and distributor needs to be sure their STP team is in place and that everything will be ready when STP is not merely a great idea, but is in reality the best and most productive way to do business.

Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the firm of Blazzard & Hasenauer, P.C. Their email address is: norse.blazzard@blazzardlaw.com