Regulation And Legislation

NAIC’s proposed suitability regulations irk insurers

Insurance carriers and producer groups are balking at a regulatory proposal that would curb commissions for agents and increase the suitability duties of insurance companies.

The Kansas City, Mo.-based National Association of Insurance Commissioners’ life insurance and annuities committee has posted some proposed revisions to its Suitability in Annuity Transactions model regulation. The group had marked up the regulation during its summer meeting June 12 to June 13, adding a variety of new duties.

Meanwhile, insurance companies and other members of the industry have been submitting their objections in recent days. The rule markup has been available for viewing since July 2, but parties have been submitting comments only since last Friday.

Provisions that rile up industry members include the proposed duty the carrier would have to ensure that all of its recommended annuity sales are suitable. Additionally, the language also requires carriers to avoid issuing a recommended annuity if a consumer fails to provide complete suitability information. In that situation, producers also may not recommend the annuity.

Another section requires carriers to establish systems and procedures to prevent any violations of suitability requirements, and to include a procedure for investigation and disposition of any regulator’s enforcement action against a producer or insurance agency involving the sale of a carrier’s annuity.

There are also supervisory processes for distributors that aren’t members of the Financial Industry Regulatory Authority Inc. of New York and Washington.

In that case, a supervisory staff that’s qualified by the carrier would have to review each recommended annuity sale, and the client wouldn’t be issued the product until the supervision staff determined that the transaction is indeed suitable. That provision is based on a Finra rule that requires principal review of annuity transactions to ensure suitability, according to the rule’s markup.

Carriers were perturbed with the proposed rule changes. “A requirement to conduct reviews of all transactions would needlessly absorb compliance resources in our organizations that are currently devoted to identifying patterns or issues with all of our producers and across all product lines,” wrote Martha Kendler, director of annuity and income markets at The Northwestern Mutual Life Insurance Co. in Milwaukee, and Carla Strauch, director of insurance compliance at Appleton, Wis.-based Thrivent Financial for Lutherans.

They wrote a joint letter to Kim Shaul, chairwoman of the NAIC’s Suitability of Annuity Sales Working Group. Northwestern Mutual estimated that system updates for that level of review would cost $5 million “without a clear benefit to consumers or the company’s compliance record,” according to the letter.

The insurance executives also noted that a single regulatory complaint against a producer doesn’t necessarily warrant deeper review, as entailed in the proposal.

Regulators also requested comment on whether the proposed new rules should include a provision that would restrict producers’ pay if they sell an annuity that isn’t recommended and don’t obtain the client’s suitability data.

The Falls Church, Va.-based National Association of Insurance and Financial Advisors disagreed with that idea. “The presumption that somehow in the circumstance when a recommendation is not made, the producer has not earned a full commission or perhaps ‘any’ commission is an incorrect one,” NAIFA general counsel Ron Panneton wrote in a letter to Ms. Shaul, who also is deputy insurance commissioner in Wisconsin.

Rather, NAIFA asserted that if the annuity is issued to the client, then the producer has earned his or her commission, even if the recommendation is absent or the full suitability isn’t provided — as long as the recommendation is “reasonable,” according to the letter.