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NAIC Projects On Suitability And Senior Designations Get Green Light

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Regulators have been given the go-ahead to develop new regulations that will seek to curb unsuitable annuity sales and the improper use of senior designations.

During the summer meeting of the National Association of Insurance Commissioners here, the NAIC’s executive committee approved these charges.

However, Birny Birnbaum, an NAIC funded consumer advocate, said the problem might not be just unsuitable sales, but could also be the way commissions are paid. “What if you couldn’t get more than 20% commission in year one and you got a certain percent each year after that?” he said. In some cases commissions can equal up to 110% of the first year premium on the sale, he said. “You don’t hear about an inappropriate umbrella policy,” he added, making a point of contrast.

“I would discourage you from revolutionizing the entire compensation structure of the industry,” said Michael Lovendusky, a representative with the American Council of Life Insurers, told regulators. “You could put every one on salary and it would still not prevent unsuitable sales.”

The proposed senior designations model is on a fast-track with a potential June 16 vote on a draft that could be brought to plenary by the end of June, said New York Superintendent Eric Dinallo, chair of the Life Insurance and Annuities “A” Committee. This model, based on a model adopted by the North American Securities Administrators Association, Washington, received on April 1 the support of AARP and ACLI, both of Washington, and the National Association of Insurance and Financial Advisors, Falls Church, Va.

Prior to the “A” Committee discussion on a new suitability product, the Suitability of Annuity Sales Working Group met to begin looking at how to get a handle on what they say are continuing problems associated with the sale of annuities to seniors.

The NAIC already has 2 versions of a suitability model in place in approximately 35 states. One version focuses strictly on the suitability of sales to consumers age 65 and over. A second version expands on the original to include all consumers.

But recent activity convinced regulators in states such as Florida, Iowa, New York and Wisconsin to charge the Life & Annuities “A” Committee with looking into the possibility of creating a new model that would be more comprehensive and cover new problems that regulators see surfacing such as the misuse of senior designations by producers.

During the call, Kim Shaul representing Wisconsin, started the discussion by telling regulators what kinds of problems are surfacing in her state. She said the state has set up an Annuities Suitability Advisory Committee and has found that older adults do appear to be the focus of annuity sales with 76% of new annuities sold to those 65 years of age and older. Among the problems Shaul noted were: inadequate disclosure, not being told the length of a surrender charge or not understanding the impact of those charges, stressing the initial interest rate in discussions although that is not the guaranteed rate, and not enough discussion about a free-look period.

Jim Mumford, an Iowa regulator, detailed some of the tools his state uses to ensure suitability, including the NAIC Suitability model, a model disclosure regulation, agent training requirements, as well as a collaborative effort on indexed annuities with the ACLI and NAIC-funded consumer advocate Brenda Cude.

One of the issues that arose was whether and how to incorporate guidelines that already exist, such as guidelines from FINRA, Washington.

Mary Beth Senkiewicz, a Florida regulator, said the issue of suitable sales to seniors is a significant one in her state. She said there is evidence that some producers are not properly selling these products, although she said she did not want to use a broad brush in describing the issue. Senkiewicz reviewed some of the details in a new Florida law (CS-4CS-4SB2082) which among other points makes twisting and churning a misdemeanor in the first degree, and willfully submitting a fraudulent signature a felony in the 3rd degree. The effective date for the new law will be Jan. 1, 2009 or whenever the final rule is adopted.

In Alaska, according to regulator Katie Campbell, the state put in a provision to the nonforfeiture law where a company had to use the later of a 10-year period or age 70 in order to prevent extremely long surrender schedules for those contracts issued to older seniors. Utah has a similar law according to Utah regulator Tomasz Serbinowski.

Riva Kinstlick, vice president-external affairs with Prudential, Newark, N.J., said one major industry change that may be affecting the suitability of sales is the growth of producers who are independent third party agents who are not bound by the requirements of one carrier.


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