A proposed stranger-originated annuity (STOA) model bulletin has been getting generally favorable reviews from commenters.

The Life Insurance and Annuities Committee at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., recently posted a STOA bulletin model exposure draft on its section of the NAIC website.

A STOA is a transaction initiated by an agent, investors or others who pay a fee for the right to use an individual’s identity to buy an annuity offering high returns. The originators of the transactions prefer to use ailing individuals with short life expectancies as the annuitants, the NAIC says.

A STOA originator often will try to increase annuity returns by adding a bonus rider or guaranteed minimum death benefit option to the base contract, and agents may buy a number of annuities with the same annuitant, according to the NAIC.

The model bulletin would urge carriers to review chargeback policies, to ensure that agent commissions are adjusted if a policy is annuitized within the first year; create procedures to identify agents who may be involved in STOAs; and ensure that agents ask annuitants for information about their health

and how the annuitants will be paying for the annuities they hope to buy. Carriers also should establish methods for reviewing questionable applications and reporting potential STOA contracts to the appropriate state regulators, according to the model draft.

STOA bulletin draft commenters say they support the goals of the drafters, and most have recommended relatively modest changes to the text.

Gary Sanders of the National Association of Insurance and Financial Advisors (NAIFA), Falls Church, Va., said NAIFA fully supports NAIC efforts to protect consumers from STOA arrangers.

NAIFA would like the wording of the draft bulletin changed to emphasize that only a very small portion of the producer community is involved in STOAs, Sanders says the NAIFA comment letter.

NAIFA also would like to see the NAIC acknowledge that some policyholders with unique needs might have legitimate reasons to annuitize a policy within the first year of a contract being issued, Sanders says.

“Therefore,” Sanders says, “NAIFA recommends that the first item in the bulletin under suggested company actions–”Review chargeback policies to ensure agent commissions are adjusted if a policy is annuitized within the first year of the contract.”–either be deleted or revised to read “Review chargeback policies and revise as necessary to provide that agent commissions may be adjusted if a policy is annuitized within the first year of the contract and other evidence conclusively indicates that the policy is being used to facilitate a stranger-originated annuity transaction.”

Ted Kennedy, an assistant general counsel in the Austin, Texas, office of SunAmerica Life Companies, a unit of American International Group Inc., New York (NYSE:AIG), says he would like to see drafters be more clear about whether the guidelines in the model are suggested or mandatory, and he also would like drafters to clarify that the annuity and life underwriting processes are different.

There is a concern that failing to adopt the guidelines in one bullet point could be used against a company in litigation, Kennedy says.

In addition, if that bullet point were adopted, “it appears we would be required to revise and re-file all of our applications,” Kennedy says. “We urge removal of this bullet-point.”