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.
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.
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.”
An October 2011 Ohio exam provides a discussion of multiple issues:
- During the review, acts by the agents that would generate concern were noted. These acts included: blank suitability forms, unreported replacements, form letters signed by the annuitant to prevent the company from trying to conserve the business, frequent movement of funds from one company to the next and then back again, and questionable signatures. It was also determined that there was no conservation program in place to attempt to prevent any individual from making an unsuitable decision to replace their current annuity.
- It was also noted that the company should require completion of the suitability form on all applications. Without this information, the company cannot protect itself from potential abuses by agents. If the company continues its policy of allowing applicants to decline to provide suitability information, the form should be revised so that the “opt out” choice is at the end of the form where it would have less prominence. Another option would be to eliminate the question entirely as many other companies have chosen to do.
- The company was also advised to include appropriate questions on the suitability form so that the suitability of the purchase is clearly documented. This would include, but is not limited to: age, annual income, net worth, liquidity needs, risk tolerance, risk objectives, sources of funds and surrender charges. Procedures, controls and audits should be implemented to assure receipt, completion and review of suitability forms with all annuity applications.
Also in Ohio, an August 2011 exam revealed that a number of files “did not have sufficient suitability information to determine if the sale was suitable.” And in a May 2012 exam, the state determined that a company “failed to maintain or make available to the superintendent documentation in its records that established reasonable grounds for suitability as required by Ohio Administrative Code 3901-6-13 (G) and (J).”
Information gleaned from these market conduct exams’ criticisms and comments can quite easily become part of a rigorous audit checklist for an insurer seeking to assess the compliance levels of its own processes. Alternatively, this information can also serve as a framework for those insurers currently developing systems to bring those organizations into compliance with the current version of Model 275.
Both the criticisms and exam commentary are particularly relevant to insurers as compliance professionals need to know not only what the examiners are looking for, but also what has been determined to be less than adequate in other companies. This allows insurers to be more effective in managing their own compliance programs and in preparing for future market conduct examinations.
As the road to annuity suitability revisions continues, compliance across the board for all states and all affected insurers becomes inevitable. States that don’t adopt standards that meet or exceed the requirements addressed in Model 275 will not be in conformity with the senior investor protections in Sec. 989A of the Dodd-Frank Wall Street Reform and Consumer Protection Act. With each state’s adoption of these requirements, insurers will continue to face challenges in successfully implementing policies and procedures designed to effectively mitigate these compliance risks.
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