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September 12, 2012 at 12:35 PM
It has been more than two years since the National Association of Insurance Commissioners (NAIC) revised its Suitability in Annuity Transactions Model Regulation (Model 275), creating an unprecedented degree of additional annuity suitability requirements for insurers. As states continue to adopt these new provisions, insurers are dealing with implementing new policies and procedures that are designed to ensure compliance with insurer review of all annuity transactions.
In fact, when one looks at the recent adoptions by some states of the revised model act, it becomes clear that some of the primary new compliance risks facing insurers are aligned with the following risk statements:
- Failure to establish a supervision system that is reasonably designed to achieve the insurer’s and its insurance producers’ compliance with state requirements;
- Failure to maintain procedures for review of each recommendation prior to issuance of an annuity that are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable; and
- Failure to maintain procedures to detect recommendations that are not suitable.
Reviewing some of the recent market exams that were focused on these revised model’s annuity suitability requirements provides insight into the current state investigations and determinations, and highlights areas of compliance concern for insurers.
California
As recently as June, California examiners found that an insurer “failed to provide the Department with a copy of the procedures that it stated were in place to determine whether a replacement was appropriate for the insured. Additionally, the 99 files reviewed contained no evidence that procedures existed or were followed in determining that a replacement sale was not unnecessary and that the replacement contract would confer a substantial financial benefit to the purchaser over the life of the contract.” In this case, the existence of the insurer’s fundamental supervisory system and procedures were questioned and the company was found to be significantly lacking in the implementation of compliant processes.
Ohio
A review of several Ohio exams finalized in 2011, which were targeted at evaluating compliance with that state’s annuity suitability provisions, provides additional insight into the compliance risks faced by insurers. A December 2011 exam recommends that the insurer “…should review all current versions of suitability forms being used to assure that all broker/dealers are using suitability forms that encompass all facets of financial information as required by the revised version of OAC 3901-6-13 (E)(9) and (F)(1)(2) effective July 1, 2011. This will eliminate the inconsistency of information gathered and should reduce the amount of missing information.”
