NAIC Updates – January 2018

Proposed Revisions to Model Regulation #275

The Annuity and Suitability (A) Working Group of the NAIC Life Insurance and Annuities (A) Committee held its most recent open meeting on Sunday, December 3, 2017 during the NAIC 2017 Fall National Meeting in Honolulu, Hawaii. The Working Group was charged with reviewing the Suitability in Annuity Transactions Model Regulation #275 ("Model #275") and, during the meeting, introduced several proposed revisions. Model #275 was adopted to "set standards and procedures for suitable annuity recommendations, and to require insurers to establish a system to supervise recommendations so that the insurance needs and financial objectives of consumers are appropriately addressed." In drafting the proposed revisions, the Working Group was mindful of the need to have the revised Model #275 successfully passed in each state "without adversely affecting the ability of consumers to plan and have available to them the appropriate annuity products for their retirement needs."

The Working Group exposed the proposed revisions for public comment, with a deadline of January 22, 2018. The Working Group plans to review all comments, and to prepare a further revised model for submission to the Life Insurance and Annuities (A) Committee for its consideration and adoption at the NAIC 2018 Spring National Meeting. The revisions proposed include the following:

Best Interest Standard

The Working Group's proposed revisions introduce a new "best interest" standard, noting that in some instances, an annuity product could be suitable for a consumer, yet not in the consumer's best interest. The revisions do not replace the concept of suitability, instead treating it as a relevant factor in the best interest formulation. The standard is incorporated in several places, including the title of Model #275, which would be updated to the "Suitability and Best Interest Standard of Conduct in Annuity Transactions Model Regulation." In addition, the revisions include a definition of "best interest," developed from language in the U.S. Department of Labor's ("DOL") fiduciary rule, in an effort to create a uniform standard of care across the entire regulated community. Thus, Section 5B "Definitions" of Model #275 would be revised to include "Best Interest" as follows:

"Best interest" means, at the time the annuity is issued, acting with reasonable diligence, care, skill and prudence in a manner that puts the interest of the consumer first and foremost.

"Best interest" does not mean a resulting recommendation is the least expensive annuity product, or the annuity product with the highest stated interest rate or income payout rate, available in the marketplace at the time of the annuity transaction. "Best interest" also does not mean the recommendation is the single "best" annuity product available in the marketplace at the time of the annuity transaction, but based on the insurance producer's judgment acting with reasonable diligence, care, skill and prudence, the producer believes the recommendation is in the best interest of the consumer.

Although some Working Group members felt that the language of the definition was too broad, others noted that individual states can deviate from the model to suit the state's particular needs. Notably, New York's Department of Financial Services ("DFS") has already issued a proposed amendment to its Suitability in Annuity Transactions regulation, 11 NYCRR 224, to incorporate its own, similar, "best interest" standard. The amendment, published by DFS on December 27, 2017, would expand application of the New York regulation to include recommendations regarding in-force annuity contracts as well as life insurance policies, and would impose more expansive consumer disclosure requirements.

Duties of Insurance Producers

The proposed revisions to Model #275 impose certain requirements on an insurance producer, or an insurer when no producer is involved, in making an annuity recommendation.

First, the revised Section 6 ("Duties of Insurers and Insurance Producers") requires that, prior to making a recommendation, an insurance producer "(1) make reasonable efforts to obtain the consumer's suitability information; (2) evaluate the types of financial products which correspond to the consumer's disclosed suitability information and address the consumer's financial objectives; and (3) disclose to the consumer any limitations the producer or insurer has in regard to" the types of financial and annuity products that can be provided, as well as the scope of the producer's licenses and the scope of services provided. In addition, in making a recommendation, the insurance producer or insurer must make several disclosures, including (1) all material conflicts of interest; (2) the percentage of cash compensation above 3% that the producer would receive as a result of a contract for services advising or selling the recommended annuity; and (3) the bases of the annuity recommendation.

Next, a newly inserted Section 7 ("Non-Cash Compensation Disclosure Requirement") requires disclosure of any non-cash compensation tied to the sale of annuities that exceeds the value of $100/year, including, but not limited to, "gifts, meals, trips, entertainment, prizes, marketing, and advertising."

Finally, a new Section 8 ("Prohibited Practices") mandates that an insurance producer or insurer: "(1) [s]hall receive no more than reasonable cash compensation in making a recommendation; (2) [s]hall not make any materially misleading statements regarding the annuity transaction; and (3) [s]hall not base a recommendation on the producer's or insurer's own financial interest."

Other Revisions

In addition to the broader revisions discussed above, the Working Group's draft updates Section 9 ("Insurance Producer Training") to include a new training topic regarding "financial exploitation of seniors and other vulnerable adults," and revises Section 11 ("Recordkeeping") to eliminate the optional...