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Dutch Boy Blues

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Regulators trying to oversee the suitability of annuity sales no doubt understand the dilemma of the Dutch boy trying to plug the dike who stuck his finger in one hole only to see another leak spring.

Cracks, such as continued misrepresentation of annuity features and lack of disclosure of surrender schedules, continue to turn up in consumer complaints to insurance departments.

Indeed, details provided by regulators during the NAIC’s summer meeting were troubling, although not entirely surprising.

The latest crack, useless (or even worse, misleading) senior designations, will likely be plugged shortly with advancement of a proposed NAIC model. But regulators wearily note that those who want to deceive consumers will always find new and innovative ways to do so.

A structural change from a traditional captive system to an independent system is making it more difficult for companies to control the activities of independent channels such as regional broker-dealers and wirehouses, according to a presentation made to regulators. And, while companies can periodically review third-party activities, it is difficult, if not impossible, to require these independent outlets to comply with company suitability requirements, noted one of the presenters.

Indeed, statistics from LIMRA International indicate that the number of agents affiliated with companies declined to 160,917 in 2004 compared with 195,141 in 1998, while the number of independent agents increased to 155,050 in 2004, up from 118,685 in 1998.

An industry representative familiar with the issue says a wirehouse is not likely to willingly provide information about the sale of a product to its client to an insurer and allow that insurer to insinuate itself into the broker-dealer/client relationship.

New regulation to update existing suitability models available from the NAIC is one way to approach the problem. A new regulation would complement safeguards that other regulatory bodies including the Financial Industry Regulatory Authority and the North American Securities Administrators Association are advocating.

FINRA’s Notice 07-43 detailed what it expects of firms in its treatment of seniors, including suitability, the use of senior credentials and “free lunch seminars.”

In April, NASAA said it had approved a new model rule on the use of senior certifications and professional designations that prohibits misleading titles while making it possible for securities regulators to recognize legitimate designations.

Another interesting suggestion was raised by Birny Birnbaum, an NAIC-funded consumer representative. He called for regulators to look at producers’ commission schedule and consider changing the upfront commission structure. Changing the structure to a level commission would discourage inappropriate sales solely for that first-year pot of gold and would encourage continued customer service, he contended.

It is not a new argument, but perhaps it is worth a look. The life insurance industry is placing tremendous emphasis on the value of annuities, both fixed and variable, in providing income for baby boomers and the generation before them. When properly used and explained, annuities can provide a valuable safety net that protects consumers against income shortfall and inflation.

Thus, it would benefit all parties–consumers, companies and producers–to look at every possible solution, both front- and back-end, to curb abuses that potentially rob consumers of their money and peace of mind and potentially rob the industry of a huge opportunity to be the resource consumers turn to for financial security in the latter part of their lives.


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