New Annuity Suitability Penalties Announced by States

Advisors, insurance agents and insurance carriers may soon face more stringent compliance requirements and increased liability for making unsuitable recommendations, when selling annuities. The regulatory change will happen at the state level as a result of the National Conference of Insurance Legislators (NCOIL) executive committee voting unanimously on March 6 to adopt the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation(“Model Regulation”).

The Model Regulation affects annuity sales in three primary ways:

1. Before recommending that a consumer purchase an annuity, producers will be required to make “reasonable efforts” to obtain the consumer’s “suitability information” and determine whether an annuity is suitable for the customer. “Suitability information” includes an analysis of the following consumer information:

• age
• annual income
• financial situation
• financial experience
• financial objectives
• intended use of the annuity
• financial time horizon
• existing assets
• liquidity needs
• liquid net worth
• risk tolerance
• tax status

The Model Regulation will hold insurers responsible for prescribing suitable annuity transactions, regardless of whether the insurer contracts with the consumer.

2) Although producers will be responsible for complying with the suitability requirement, the ultimate onus of the requirement falls on the carriers. The Model Regulation will

hold insurers responsible for prescribing suitable annuity transactions, regardless of whether the insurer contracts with the consumer. This means carriers will be responsible for implementing additional producer training and reviewing all “recommended annuity transactions."

3) Because many producers are subject as broker-dealers to the authority of FINRA, the Model Regulation provides a safe harbor under which compliance with FINRA suitability rules will be deemed as compliance with the Model Regulation.