Producers should be able to collect annuity sales commissions even when they have not recommended the transactions, insurance industry commenters say.
The comments were submitted in response to efforts by regulators at the National Association of Insurance Commissioners, Kansas City, Mo., to update the Annuity Suitability Model.
Proposed revisions were exposted to public scrutiny July 2.
Suitability rules are the rules that regulate efforts to ensure that consumers get financial services products that suit their resources and their needs.
Ohio Insurance Director Mary Jo Hudson has written to oppose the idea of updating the model.
“We believe that the adoption of a new suitability model would undermine our efforts to achieve uniformity on this important issue,” Hudson writes.
“To date, 31 states have adopted the current model regulation,” Hudson reports. “A new model would put all states out of compliance and create uniformity issues between those states that adopt the new model and those states that stay with the old.”
Instead of updating the model, the working group should help develop uniform enforcement procedures for the current model, Hudson writes.
Riva Kinstlick writes on behalf of Prudential Financial Inc., Newark, N.J., that the company opposes a “wholesale revision of the model.”
“We believe the current model is quite adequate in setting forth requirements and enforcement procedures to assure that insurers and producers sell annuities in a suitable fashion,” Kinstlick writes.
“Especially troubling is the implication in Section 6C that insurers would be strictly liable in the event an unsuitable sale were to take place,” Kinstlick writes. “An insurer could be certain that every sale of its annuities is suitable only if it made its own suitability determination for every sale. This would be unsustainable in the case of the common 21st century business model of independent third-party sales of many insurers’ products.”
Northwestern Mutual Life Insurance Company, Milwaukee, and Thrivent Financial for Lutherans, Minneapolis, have submitted a joint letter suggesting that some sections of the proposed revisions could increase costs without doing much to produce more suitable sales.
The draft revisions, would, for example, require insurers to review 100% of annuity sales.
“By implementing effective controls based on a sampling of new business cases, and by taking corrective action when needed, an insurer can create a supervisory system that provides for reasonable assurances that sales of its products are suitable,” Martha Kendler of Northwestern Mutual and and Carla Strauch of Thrivent write. “A requirement to conduct reviews of all transactions would needlessly absorb compliance resources in our organizations that are currently devoted to identifying patterns or issues with all of our producers and across all product lines.”
Northwestern Mutual recently looked into updating systems to allow for reviews of all transactions, and it found that would cost about $5 million, Kendler and Strauch write.
Kendler and Strauch also object to a section governing producer compensation.
The provision would prohibit compensation for sales that are not recommended or for which suitability information has not been obtained.
“While the sale may not be recommended by the producer, one should not assume the sale is not suitable for the client,” Kendler and Strauch write.
In some cases, the executives write, an accountant or lawyer might have recommended and reviewed the suitability of a transaction.
“Producers should be compensated for their time even if a particular sale falls outside of the ‘recommended’ framework,” Kendler and Strauch write.
Roland Panneton criticizes the producer comp provision in a letter submitted on behalf of the National Association of Insurance and Financial Advisors, Falls Church, Va.
NAIFA would prefer to see the NAIC keep the current model and issue interpretive guidance and clarify areas of regulatory concern, Panneton writes.
When it comes to annuity producer compensation, NAIFA strongly believes that there should be no restrictions on or prohibitions of commissions when consumers buy annuities without having a recommendation from a producer, Panneton writes.
“The presumption that somehow, in the circumstance when a recommendation is not made, the producer has not earned a full commission or perhaps any’ commission is an incorrect one,” Panneton writes.
“The proposed draft in Section 6(D)(2)(b) allows for an insurer to issue a recommended annuity and for the producer to recommend an annuity when the customer fails to provide complete suitability information–as long as the recommendation is reasonable under all the circumstances actually known to the insurance producer at the time of the recommendation,” Panneton writes.
“The proposed draft should not have any provisions which restrict or prohibit a ‘full’ commission when an annuity is issued when the recommendation ‘is reasonable under the circumstances,’” Panneton writes. “Our position is that if an annuity is issued the producer has earned a full commission even if a recommendation is absent or full suitability information is not provided as long as the recommendation is reasonable under the circumstances.”