In the aftermath of the 151A victory, there have been many questions from agents and brokers asking what’s next. It seems that, following the industry’s huge success, some really don’t believe that the fight is over. And based on what we’ve been reading in the securities-fed media, they’re right.
Insurance in general, and fixed annuities in particular, have never been the darling of the financial industry. Clients buy insurance for two reasons: safety and protection. Talking about buying or selling insurance isn’t very sexy, and it can certainly clear out a room almost as quickly as yelling “fire.” But those of us who have spent our professional careers building, distributing, or selling annuities understand their role and the need to help consumers consider them for their financial plan.
Helping the regulators regulate
We learned many lessons during the 151A fight: the need to market our products better, the need to train better, the need to explain our products to the public better. The industry is working together using many different outlets and venues.
But as a major deliverable to Congress and the SEC, these bodies were reassured that state insurance regulation would provide the best oversight for protecting consumers, and that the 2010 Suitability Model would be a major step toward ensuring that producers sell retirees suitable and appropriate annuities. That means more scrutiny on sales practices, marketing approaches, disclosure, and licensing and certification status.
Another significant lesson that we cannot forget is the need to help regulators – both state and federal – understand annuities and their distribution in the private marketplace. Why? While legislators and regulators may come and go, they are all too often entrenched for a significant period of time – and, more importantly, their staff is, too.
What does this mean for annuity regulation? Think about it. If you were a staff member working for a government regulator, how often would you personally interact with an independent insurance professional or advisor about protecting assets other than your home and car? Very few of them understand the life and annuity insurance marketplace that services small businesses and individuals without employer-sponsored savings plans. But all that is changing, with more than 10,000 baby boomers hitting retirement age daily and looking for ways to manage their employer-sponsored retirement accounts and income needs. More and more will be seeking the protection and safety of fixed deferred and income annuities.
Fixed annuity focus
Another aftermath of the 151A victory is the inclusion of all forms of fixed annuities in rules and regulations issued by insurance departments. With indexed annuities definitively and unambiguously ensconced within state insurance regulation, regulators are proposing language that does not delineate by interest crediting or deferred or immediate status.
One specific issue we are watching across the country is state-specific adoption of the 2010 NAIC Suitability Model Regulation. Understand that an indexed annuity that doesn’t meet the “Harkin Test” does not automatically make it a security; it just doesn’t receive protection as a non-security. The early results are in, and as of this writing, eight states have adopted some form of the NAIC 2010 Suitability Model, with another dozen pending or in discussion.
Also as expected, depending on the state and its regulatory climate, NAIC Model variations are already beginning to emerge. The variations mostly center on the main elements of the model – secondary review process, suitability review for replacements versus new sales, producer training and annuity continuing education, carrier training programs, and training verification.
The secondary review process requires that all fixed annuity sales include a suitability review by the insurance company in addition to the suitability review required before the agent makes a recommendation to buy an annuity. Most indexed annuity carriers already require suitability review prior to the recommendation, and many have been reviewing the suitability of the sale before issuing a policy for the past few years. So indexed annuity sellers have already adapted to the change, but sellers of traditional fixed annuities will likely see new forms and rules in place as carriers that hadn’t required the same suitability review of their non-indexed products interpret and adopt compliant practices.
However, producers and advisors should anticipate changes to replacement sales because of the heightened focus and specific language on annuity replacements in the new model. The model’s replacement definition may cause more carriers to put additional standards of suitability review and review processing in place for sales of annuities that are replacing another annuity.