What the Heck Is a 'Financial Instrument': Annuity Model Commenter

Teams of state insurance regulators will be working on annuity sales standards and annuity disclosure projects in New York this weekend, at the National Association of Insurance Commissioners’ summer meeting.

(Related: Annuity Index War May Reveal a Data Gap)

The Center for Economic Justice — an Austin, Texas-based organization that seeks to speak up for consumers’ interests in NAIC proceedings — says it continues to have concerns about both projects.

The NAIC is a group for state insurance regulators. The NAIC does not have the direct authority to change state insurance laws or regulations, but states often start with NAIC models, or examples, when drafting their own laws, regulations or procedural rules.

Compensation Disclosures v. Compensation Limits

The Annuity Suitability Working Group will be talking about proposed revisions to the NAIC’s Suitability in Annuity Transactions Model Regulation (Model Number 275), which could serve as a complement to, or as an alternative to, a federal financial services product fiduciary rule, or best interest standard.

Birny Birnbaum, the executive director of the Center for Economic justice, and other center members say the fundamental problem is that the proposed revision would simply require disclosures of sales commissions, not require the elimination of commissions.

“Disclosure is not an appropriate blanket solution for certain categories of compensation-based conflicts of interest,” the center says in a copy of a public comment that the center sent to ThinkAdvisor.

“While disclosure is the default regulatory response to a market failure, it is very unlikely — actually, impossible  —  that additional disclosures beyond the lengthy and complex disclosures already associated with annuities will empower a consumer sufficiently to discipline the insurer’s compensation practices,” the center says.

If insurers are going to use commissions in connection with annuities at all, they should reward agents and brokers for sales of annuity contracts that stay in force over a long period of time, consistent with the role of annuities as long-term investments, rather than focusing mainly or solely on rewarding producers for the initial contract sales, the center says.

The ‘Financial Instrument’ Issue

In another public comment, the center says efforts by the NAIC’s Annuity Disclosure Working Group to update the Annuity Disclosure Model Regulation (Model Number 245) have gone wrong, and could make annuity disclosures worse.

“These revisions not only fail to address the current problem of unrealistic, misleading and deceptive annuity illustrations, but codify the very practice that results in the problematic illustrations,” the center says.

The center is continuing a long-running battle over the time periods used in illustrations of how any investment index included in an indexed annuity has performed in the past. The center says weak illustration rules could help an issuer hide how an index performed around the time of the 2007-2009 Great Recession.

(Related: Index Proposal Could Make Some Annuities Look Too Good: Consumer Group)

In the new comment letter, the center cites another concern: a reference in a draft disclosure update that refers to the illustration rules that would apply if a young index is “a combination of indices or other financial instruments, each of which has been in existence for at least 15 years.”

The center says the use of the term “financial instrument” in that context is “profoundly anti-consumer.”

The model revision itself does not define the term “financial instrument,” but Investopedia says the term could refer to almost any kind of legal agreement involving any kind of monetary value, according to the center.

“In other words, anything goes,” the center says. “Insurance producers will be selling products based on indexes of financial instruments the producer does not understand and is not qualified to sell.”

The center questions the logic of letting producers sell annuities tied to the performance of financial arrangements the producers aren’t able to sell.

“In what parallel universe is that an actual consumer protection?” the center asks.

Resources

Links to information about the Annuity Suitability Working Group’s activities are available here.

Links to information about the activities of the Annuity Disclosure Working Group are available here.

— Read NAIC Acts On Annuity Suitability, Contract Resales, on ThinkAdvisor.

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