By Linda Koco
Contributing Editor, InsuranceNewsNet
March 10, 2011 -- The insurance departments of California and New York issued annuity suitability regulations early this week.
In California, the regulations are open for 45 calendar days of public comment before becoming law. They are posted at the Office of Administrative Law.
In New York, the insurance department issued the rules as emergency regulations. That means they take effect immediately, without undergoing an extended public comment period, says Ron Klug, a department spokesman. “To make the emergency regulation permanent, we will still have to adopt the regulation on a permanent basis,” Klug says.
The state actions came just days after the National Conference of Insurance Legislators (NCOIL) endorsed annuity suitability model regulations developed by the National Association of Insurance Commissioners (NAIC).
The two new state regulations are substantially similar to NAIC’s Annuity Transactions Model Regulations, which NAIC adopted last March.
The NAIC model spells out insurer responsibilities for producer compliance with suitability rules, requires review of all recommended annuity transactions, and increases producer training and education requirements related to annuities. It applies to both variable and fixed annuities.
NCOIL’s endorsement of the NAIC model follows a decision late last year to make annuity suitability a priority area for inquiry. The association soon gave a charge to its Life Insurance Committee, requiring it to explore possible legislative and regulatory models for states to consider.
NCOIL has always been interested in suitability, and particularly annuity suitability, says Executive Director Susan Nolan. But after NAIC amended its suitability model last year, NCOIL decided to see if the association could support it as a group and also support it in the individual states.
Support in the states involves more than NCOIL members taking the NAIC Model to their respective states, Nolan indicates.
NCOIL is also encouraging other organizations of state officials to consider the model for endorsement. These organizations include participants in NCOIL’s State Leaders Summit, Nolan says. Summit participants include NCOIL, the National Conference of State Legislatures (NCSL) and the Council of State Governments (CSG), plus several other organizations.
The goal of this activity is to educate the state legislators and to “let them know that we think this needs to be done,” says Nolan.
When state legislators see that key organizations of state officials are backing the models, and that each organization has an interest in insurance, “it has weight,” she says.
States have some incentives to consider when weighing the regulations.
For one thing, the model provides for better suitability in the sale of annuity products, say experts.
That is of interest to NCOIL members, Nolan says, because “we are trying to make sure we take care of issues that need enhancement or modernization. It’s a way to keep the (federal) wolf from the door. We think the states are best suited to handle regulation of insurance.”
There are monetary incentives, too. These come in the form of grants for which states may apply if the states adopt certain “senior investor protection” standards as spelled out in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The standards relate to suitability and also the use of senior-specific certifications and professional designations.
Specifically, Dodd-Frank says the Office of Financial Literacy of the Consumer Financial Protection Bureau (CFPB) to “shall establish a program under which the Office may make grants to States or other eligible entities” that meet or exceed the minimum requirements of:
· The North American Securities Administrators Association (NASAA) Model Rule on the Use of Senior-Specific Certifications and Professional Designations
· The NAIC Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities; and
· The NAIC Suitability in Annuity Transactions Model Regulation
The grants can be for up to $500,000 a year for each of three consecutive fiscal years, according to Dodd-Frank. States have to adopt all three standards and then apply for the grants in a form and manner that the Office will determine, Nolan points out.
For more details about the grants, see Dodd-Frank, Title IX, Subtitle I, Section 989A (b) through (e). Pages 568-570.
The two newest states to issue the NAIC suitability model – California and New York -- have also issued sales-title models.
More than 10 states have adopted annuity suitability regulations patterned after the new 2010 NAIC Model, according to industry sources.
More than 30 states have adopted previous versions of the model. Leaders in states that have not yet adopted the new version have indicated that they hope to do so later this year.
The NAIC has said that state adoption of the new suitability model is a priority for 2011.
The New York State explanation of the suitability Emergency Measure is available here
The New York emergency annuity suitability measure is available here
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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