State insurance regulators want to strengthen rules for annuity sales by requiring they be conducted with the consumer's interest as the priority, rather than the insurance professional's compensation.
Members of the National Association of Insurance Commissioners hammered out the
latest draft of their annuity transactions suitability model regulation earlier this week in Chicago. Their goal is to
raise the standard of care for sales of the products, which can provide an income stream in retirement but also can be complex and costly.
Dean Cameron, director of the Idaho Department of Insurance and chairman of the NAIC working group, said the proposal would require insurance firms and agents to concentrate on the client.
"We don't want agents or insurers to put their interests ahead of the consumer's," Mr. Cameron said. "The consumer's interest should be first and foremost."
Unlike the Securities and Exchange Commission's proposal to raise the broker standard of care — the so-called
Regulation Best Interest — the annuity proposal doesn't refer to "best interest," a point that draws criticism from a consumer advocate.
"It's unclear exactly how this is an improvement," said Birny Birnbaum, director of the Center for Economic Justice, who attended the NAIC meeting. "It adds language about the consumer's interest, but it doesn't say the consumer's best interest. Just talking about the consumer's interest doesn't add any requirements. It doesn't elevate the standard of care."
For Mr. Cameron, "best interest" is no panacea.
"The term best interest has been so politicized, and it's poorly defined," he said. "In the consumer's interest means you're focusing on their needs and desires ahead of your own."
The proposal also would require an insurance agent to act with reasonable diligence, care, skill and prudence — factors not included in the current suitability rule.
"Adding that language does significantly raise the bar for producer conduct," said Jason Berkowitz, vice president and counsel for regulatory affairs at the Insured Retirement Institute, a trade association that represents insurance companies. He also attended the NAIC meeting.
The proposal includes required disclosures about cash and non-cash compensation and material conflicts of interest that give more heft to the underlying suitability rule, according to Bruce Ferguson, senior vice president for state relations at the American Council of Life Insurers.
"We have a robust regulatory framework that's now being enhanced in key areas," said Mr. Ferguson, who also attended the meeting. "That adds up to acting in the best interest of consumers when giving advice about retirement savings products."
But Mr. Birnbaum said the working group sidestepped a key issue: whether to apply a new standard to recommendations about annuity products that are already in an investor's portfolio, in addition to new sales.
"It's interesting all the contortions the working group is going through to avoid a clear standard," he said.
Mr. Cameron acknowledged there is a difference of opinion among panel members on so-called in-force recommendations.
"That's still a contentious issue," he said. "We're still grappling with the language."
The proposal will be discussed again at the NAIC fall meeting in San Francisco in November. But a final model rule, which would have to be approved by state legislatures, is a long way off, Mr. Cameron said.
The short-term goal is to use the proposal as the foundation for talks with the SEC about harmonizing advice standards. The NAIC probably won't act until
after the SEC does.
"We want to see the final rule the SEC puts forth," Mr. Cameron said. "There are places where we should look for commonality and uniformity."
