Posted by Pam Reihs ● February 13, 2020
New Annuity Suitability “Best Interest” Training Requirement from NAIC
Which States Will Be the First to Adopt This New Regulation?
On February 13, 2020, the NAIC formally adopted revisions to its Suitability in Annuity Transactions Model Regulation, mirroring FINRA, SEC, and individual state rules to increase consumer protection for financial transactions.
The NAIC’s revised annuity suitability model requires an additional hour of training for active producers previously certified to sell, solicit, or negotiate annuity sales. Most annuity producers have already completed 4-hours of suitability training, followed by carrier product-specific training. This additional hour of training is designed to update active producers on the changes.
New best interest obligations: Care, Disclosure, Conflict of Interest, and Documentation
Four clear duties, or producer obligations, were added to provide a best interest standard. “Best interest” was defined and will be evaluated situationally. When making a recommendation to purchase an annuity, a producer must act in the best interest of the consumer under the circumstances known at the time the recommendation is made without placing the producer’s or insurer’s financial interest ahead of the consumer’s interest.
The producer, in making a recommendation, must exercise reasonable diligence, care, and skill to:
- Know the consumer’s financial situation, insurance needs, financial objectives
- Understand available recommendation options after making a reasonable inquiry into options available to the producer
- Have a reasonable basis to believe the recommendation effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information
- Communicate the basis for the recommendation
Producers must now be very conscious of a “show your work” standard for underwriting compliance as a written record of how the producer got to the recommendation, which must include the “why” (i.e., the client’s need for the product).
Three consumer disclosure form templates were added to the model to verify that specific information is shared with clients to improve transparency between the producer, insurer, and the client.
- Appendix A: Insurance Agent (Producer) Disclosure For Annuities
- Appendix B: Consumer Refusal to Provide Information
- Appendix C: Consumer Decision to Purchase an Annuity Not Based on a Recommendation
Material Conflicts of Interest Obligation
The financial interest of the producer in the sale of an annuity cannot influence a recommendation to a consumer. Cash or non-cash compensation IS NOT included in this definition, as it is addressed in the disclosure statements of Appendix A.
A producer has acted in the best interest of the consumer if he or she satisfies the new obligations regarding care, disclosure, conflict of interest, and documentation. The best interest obligation extends to every producer who has exercised material control or influence in the making of a recommendation and has received direct compensation as a result, regardless of whether there was direct contact with the consumer.
What else changed?
Instead of the existing suitability checklist, the revised model re-defines the previous list of suitability factors, and now refers to their updated list as “Consumer Profile Information.” The following table compares the differences, which were minimal.
What did not change?
Life insurance policies were NOT added to the revised model. New York’s Regulation 187 (Reg 187) took effect for annuity sales in August 2019, and for life insurance sales February 1, 2020. Reg 187 added a consumer best interest standard to its previous non-NAIC interpretation of annuity suitability, and now also includes the sale of life insurance. Reg 187 applies to both new recommendations and in-force transactions. The NAIC chose not to add life insurance products to its model law, and after much debate, did not add in-force policy transactions.
The new producer and insurer obligations are enforceable at the time the recommendation is made, and specific language was added to clarify that the “care obligation” does not mean a producer has an ongoing monitoring obligation unless “such an obligation is separately owed under the terms of fiduciary, consulting, investment advising, or financial planning agreement between the consumer and the producer.”
One point of possible confusion is that the name of the model regulation itself will stay the Suitability in Annuity Transactions Model Regulation. Despite the expansion of existing suitability rules to a best interest obligation, the regulation must remain consistent with federal legislative references in the Dodd-Frank Wall Street Reform and Consumer Protection act of 2010. The name of the model will continue to reference “Suitability” when it might have made more sense to retitle it “Best Interest in Annuity Transactions Model Regulation.”
How did Suitability become a Best Interest standard?
Since 2003, suitability has been the compliance standard for annuity transactions. Because annuities are insurance products, their sale and replacement is governed by state regulation, most of which are based to some degree on the NAIC model as amended in 2006 and 2010.
The Annuity Suitability Working Group’s revision work began in 2017 to address the Department of Labor's Fiduciary Rule (DOL Rule), which sought to impose a fiduciary standard on the sale of all financial products, including annuities. The DOL Rule was vacated by the 5th U.S. Circuit Court of Appeals.
In the aftermath of the Court’s ruling, the Securities and Exchange Commission released its Best Interest rule package, which was approved in June 2019, updating the standard of care for broker-dealers and investment advisors to one of best interest.
The NAIC continually works to establish industry best practices and create a more uniform regulatory playing field for licensed insurance and securities professionals. Their adoption of the 2020 model revisions will help appropriately align FINRA and SEC sales standards with the insurance marketplace.
According to the NAIC’s Center for Insurance Policy and Research1,
“The Working Group [sought] clear, enhanced standards for annuity sales so consumers understand the products they purchase, are made aware of any material conflicts of interest, and are assured those selling the products do not place their financial interests above consumers' interests.”
Insurers and producers will wait to see which states enact the revised Model Law first. As a premier national provider of certification training, A.D. Banker & Company has already created both an online 1-hour Annuity course and a webinar. These courses are ready to submit as soon as states begin adopting these changes.
We also have an updated 4-hour Annuity Suitability and Best Interest course ready for submission to meet the initial training requirements of newly licensed producers.
A.D. Banker & Company is the nations' leading provider for insurance and securities prelicensing training, continuing education, and product-specific certification training.