Gorilla (Photo: Thinkstock)

State insurance regulators are trying to polish a document that could eventually provide a middle annuity sales standards option.

The regulators, who are members of the National Association of Insurance Commissioners’ Annuity Suitability Working Group, are trying to update an existing sales standards model to reflect concerns about annuity sellers’ potential conflicts of interest.

An updated NAIC suitability model could serve as an alternative to “best interest” proposals from groups that want to restrict everything, and proposals, or resistance efforts, from groups that want to allow everything.

(Related: State Regulators Push Annuity Sales Standards Project One Step Forward)

The existing suitability standard requires that the annuity recommendations made suit the needs of the client. The revised model could include a best interest standard that would require an agent or broker to act in the best interest of the consumer, under the circumstances known at the time.

The NAIC is a group for state insurance regulators. It does not have direct authority to change states’ sales standards. But states often start with NAIC models when developing their own insurance and annuity laws and regulations.

The Annuity Suitability Working Group recently collected a final round of public comments on the draft and is preparing to push the draft out to the rest of the NAIC model review pipeline.

The most influential comment may be a “joint trades” letter that came from a group of 8–pound “interest group gorillas” that includes the American Council of Life Insurers, the Committee of Annuity Insurers, the Financial Services Institute, the Indexed Annuity Leadership Council, the Insured Retirement Institute, the National Association for Fixed Annuities, the National Association of Insurance and Financial Advisors, and the Association for Advanced Life Underwriting.

Those groups are the biggest, best-established life and annuity sector organizations, and their letter represents what appears to be a consensus of the views of representatives for both insurers and for financial professionals.

The 24-page PDF appears to be the longest of the seven comments the working group has posted.

Even if the working group or another NAIC panel rejects the gorillas’ recommendations, those recommendations could continue to reverberate in the background, because of the influential nature of the group’s member organizations.

Here are five recommendations from the joint trades letter.

1. The Definition of Recommendation

The joint trades want to change the definition of “recommendation” to refer to “advice provided by a producer to an individual consumer to purchase an annuity in accordance with that advice,” from advice provided “that was intended to result or does result in a purchase, an exchange or a replacement.”

The change will clarify that a recommendation is the advice provided, while ensuring that the model regulation requirements apply regardless of the result of the advice being given, the joint trades write in their letter.

2. In-Force Sales

Some annuity contracts include provisions that let consumers make purchases, exchanges or replacements based on contractual rights.

The joint trades want the working group to avoid applying the new suitability model to transactions resulting from features in in-force products.

“Owners of annuities can act on contractual provisions without a recommendation and it is likely to be difficult, if not impossible, for an insurer to prohibit a consumer from exercising a contractual right,” the joint trades say. “Recommendations could have been made many years previously at the time of sale of the contract, such as, a recommendation to consider adding a rider at year 6 of the contract to generate income; making additional purchase payments; re-allocating investment allocations under variable annuity contracts and certain fixed index annuity contracts; withdrawing cash value from an annuity contract; adding, replacing or terminating riders under an annuity contract; and modifying beneficiaries.

“Customers that we serve could very likely react disapprovingly if a producer or insurer performs a best interest review, when the customer is simply contacting the insurer or producer in an effort to exercise a contractual right. ”

3. Selling Multiple Insurers’ Products

The joint trades are asking the working group not to require insurers to try to regulate how their affiliated producers handle disclosures for other companies’ products.

“When a producer is engaged in activities relating to the sale of other insurers’ products, an insurer does not have the requisite knowledge or control over the producer to gauge compliance with the disclosure requirements,” the joint trades say.

4. “Materially Participated”

Regulators have proposed applying the suitability requirements to anyone who “materially participates” in the sale of annuities.

The joint trades say that they believe drafters included the language to keep senior producers from trying to hide behind junior producers when distancing themselves from transactions that concern regulators.

The current language is vague and will create uncertainty about when a producer is considered to have materially participated in a transaction, the joint trades say.

The joint trades say drafters should cut that phrase out and use existing regulatory authority to punish senior producers when junior producers violate the suitability requirements.

5. Training

If new suitability standards take effect in a state, the joint trades want that state to create a quick, simple, one-time course that producers who have already received suitability training can use to meet the new suitability training requirements.

Related

Links to documents related to the working of the NAIC’s Annuity Suitability Working Group, including the draft comment letters, are available here. The comments on the draft revision are posted under the Related Documents tab.

— Read What If Annuity Prospects Hate All Those Questions?, on ThinkAdvisor.

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