In 2010, the NAIC enacted the Suitability in Annuity Transaction Model Regulation to promote consumer understanding and help address complexities and improper sales practices in the annuity transaction process. The regulation requires insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed.
States have until June 16, 2013 to adopt the regulation or a similar legislation that substantially meets or exceeds the minimum requirements set forth by the NAIC in order to retain jurisdiction over annuity transactions. Since that time, approximately 25 states have either adopted or are in the process of adopting this regulation or a more stringent form of this regulation for their state. The duties of insurers and insurance producers may be grouped into five key concepts: insurer responsibility, secondary review, safe harbour, supervision and producer training.
Insurer Responsibility–According to the regulation, insurers are ultimately deemed responsible for the sale of a suitable product that meets the needs of a particular consumer. During the sale of an annuity, insurers must ensure the consumer has been reasonably informed of the features and benefits of the annuity, such as the surrender period, surrender charges, and potential tax penalties upon sale. Moreover, insurers are wholly responsible for their annuity transaction review process and are required to make the client whole in the case of unsuitable transactions.
In order to comply with these requirements set by this regulation, insurers must establish a comprehensive program to ensure annuity sales are suitable for the customer and corrective action is taken when they are not. Insurers will be wholly responsible for supervising the effectiveness of the program, regardless of whether all activities are performed in-house or by a third-party. Moreover, insurers will need to determine if application of the model regulation requirements will be carried out across all states (highest common denominator) or if insurer will take a state by state view to comply. If an insurer is establishing requirements uniformly across all states, consideration must also be given for states that deviate from the NAIC regulation (e.g., Florida and California).
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Secondary Review–Insurers must conduct a secondary review of all annuity recommendations and are responsible for confirming that there is a reasonable basis that each annuity transaction is suitable. Compliance with the regulation is contingent upon establishing processes and defining parameters for active monitoring of the annuity transactions. Insurers must identify resources (dedicated internal resources or a third-party reviewer), establish reasonable compliance thresholds and outline review, approval, documentation and escalation procedures. If reviews are conducted electronically, insurers may use a rules-based engine that establishes certain suitability thresholds to flag transactions that require additional review. As an exception to the secondary review process, safe harbor provisions (identified in the next section) will apply if annuities are sold by a broker-dealer and are already reviewed under existing suitability processes.
Safe Harbor–Safe Harbor refers to the provision that a review conducted under FINRA suitability and supervisory rules meets the requirements set forth within this Model Regulation. It applies to fixed annuity transactions in circumstances where the process is subject to FINRA’s suitability and supervisory requirements. Insurers who rely on the FINRA-required broker-dealer suitability review for variable annuities will qualify for the Safe Harbor provision if fixed annuities are reviewed by broker-dealers under the same suitability process. However, transactions falling within the “safe harbor” may still be subject to further regulatory review by the states. Insurers are responsible for assessing their specific fixed annuity programs to determine if the Safe Harbor provision applies, and if such programs will require additional state review.
Supervision–Insurers are required to develop a supervisory system within their monitoring and oversight functions to review, identify issues, and take appropriate corrective action regarding annuity suitability transactions. At minimum, annual reports must be provided to senior management identifying the results of the monitoring and oversight performed to determine the effectiveness of the supervisory system. However, insurers should develop additional periodic reporting and analyze results to enhance operational procedures, producer training and the agent monitoring process.
If a third-party is utilized to perform suitability activities, the insurer must establish service level agreements and obtain annual certification from the third-party representing that the outsourced activities are properly performed. The insurer must also monitor the and audit the contracted third-party, which can be accomplished through the establishment of periodic standards meetings, the development of monitoring reports for periodic analysis and, where appropriate, the performance of planned and impromptu site visits.
Producer Training–The Model Regulation requires insurance producers to have adequate knowledge and training regarding annuity products in order to solicit its sale to consumers. New producers must at minimum complete a one-time, four-credit training course in order to be deemed knowledgeable enough to sell annuity products. Existing producers are also required to complete adequate training, but have a six-month window from the effective date of the regulation in order to do so and can still sell annuity products in the meantime. Brokers and insurers with internal sales departments must determine training requirements for the annuity products they sell, including delivery methods, development or purchase training materials (ensuring compliance with the model regulation requirements) and training delivery. Additionally, insurers must have a system in place to track their producer’s compliance with training requirements, and a control framework to ensure that no annuity sales occur prior to completion of training.
Key Indicators–During regulatory examinations, regulators will focus on the following topics and questions to identify compliance with the Suitability in Annuity Transaction Model Regulation: