By Michael J. Prestwich
Oct. 6, 2010 -- Passage of the federal Financial Reform Bill in July ended the battle between state insurance departments and the SEC over who would regulate indexed annuities. Congress sided with the states as long as they adopt regulations that substantially meet or exceed the minimum requirements established by the 2010 NAIC Suitability in Annuity Transactions Model Regulation (NAIC 2010) by June 16, 2013. Passage of NAIC 2010 means that fixed annuity producers will have to follow similar rigorous suitability standards as those imposed upon variable annuity producers.
NAIC 2010 clarifies that the insurer is responsible for compliance with suitability requirements, including the methods their producers use to market annuity products. The recent news release of how James Otto cost his insurance carrier nearly $800,000 demonstrates how one rogue agent can destroy the honest efforts of dozens of ethical annuity producers. The purpose of NAIC 2010 is to encourage producers to create suitable annuity sales by providing the following checks and balances:
New suitability requirements. The producer must have "reasonable grounds" to believe that the annuity recommendation is suitable based on 12 areas of "suitability information" disclosed by the consumer. This information includes the consumer's age, tax status, intended use of the annuity, financial time horizon, existing assets, source of funds for the annuity, other insurance and annuity products, investment objectives, liquidity needs, liquid net worth, and risk tolerance.
New product disclosure requirements. The producer must have a "reasonable basis" to believe that the annuity transaction is in the best interest of, and can be understood by, the consumer. This includes all of the annuity's features and benefits such as surrender charges, guaranteed interest rates, bonus interest rates, indexed rate crediting methods, tax-deferred growth, lifetime income riders, annuitization options, nursing home benefits, and other living or death benefits. The annuity’s fee structure and cost of each of these policy provisions must be clearly explained and understood by the consumer.
New Independent suitability review. Under the guidelines of NAIC 2010, applicants will need more than just the ability to pay the premium; they will have to qualify to purchase an annuity. An independent, non-marketing entity, similar to a life insurance underwriting department, will have to determine that each piece of submitted annuity business follows all the guidelines for suitability. Insurers are expected to conduct customer surveys and interviews, monitor the products sold by their producers, and to keep a record of suitability recommendations.
New supervision and recordkeeping requirements. Producers must keep a record of any annuity recommendations made for a period of, depending upon the state, between four and 10 years. Insurers must periodically review their producer’s records, provide product specific training, and require a minimum four hour training course on annuities in general.
Passage of NAIC 2010 means that many annuity producers will have to radically change the way they do business. Since insurers are now responsible for compliance with annuity suitability laws, more lawyers than ever before are starting to "educate" the public about the pitfalls of having bought an annuity product.
All a consumer needs to do to sue an insurance company is to say “I didn't understand,” or “I wasn’t told” something. With this kind of legal exposure insurance companies may require producers to document every step used to make an annuity sale. Companies who market annuities are discovering what the medical industry found out long ago: In America, there are thousands of hungry lawyers looking for someone to sue.
I know of several insurance companies who call new customers to make sure that they understand the key elements of the policy before it is issued. This conversation is recorded, transcribed, and kept with the policyholder's other application materials. If it is clear that the customer is uncertain of what they are buying or why they are buying it, the application is rejected and any premium paid is returned.
Annuity producers not only have to make suitable sales, but they must be able to prove that every step of the annuity sale was suitable. In today's litigious world documentation is absolutely necessary. Producers should not be surprised when insurers ask for written copies of correspondence, sales presentations, seminar slides, fact finders, and other materials used to make the sale.
In short, the down side of NAIC 2010 is more paperwork for both producers and insurers. However, software is available that can help annuity producers prove that they asked the right questions, store electronic copies of presentations, illustrations, fact-finders, yellow pad presentations, etc. Do a Google search for “Annuity Suitability Software,” or “Digital Filing Cabinet” to see what is available.
The positive side of NAIC 2010 is that it forces producers to gather all the information they need to match one or more of their products to their customer's specific needs. Matching products to needs requires research and thinking time – it generally can’t be done properly in a single interview.
Making a suitable annuity sale often requires a team approach. Some independent marketing groups (IMOs) specialize in helping their producers find the most suitable products for their customers. The producer spends one or more hours gathering information from the prospective annuity buyer taking extensive notes on a fact-finding form. Some producers use Dragon NaturallySpeaking speech recognition software to dictate written notes about the consumer's financial goals and needs. The producer then electronically transmits this information to his contact at the IMO who helps the producer find the most suitable product mix that helps the customer better meet specific financial goals. Once the sale is completed the producer’s assistant helps the customer complete the application and disclosures. Having at least three people involved in the annuity product selection process and documenting everything along the way helps ensure that the sale will be found suitable if it is ever investigated.
The complexities of NAIC 2010 will drive some producers and insurers out of the annuity business. However, for others it is an opportunity to help consumers understand how annuities may provide them with guaranteed lifetime income, guaranteed interest rates, income tax advantages, benefits to their beneficiaries, safety of principal and competitive interest rates. Producers and insurers who understand that the guiding principles behind NAIC 2010 is to provide consumers with competitive products that meet their needs will thrive in this new age of marketing annuities.
Michael J. Prestwich sold his first annuity in 1975. After seven years he started ImagiSOFT, Inc. which develops life insurance and annuity illustration, marketing, and compliance software.
© Entire contents copyright 2010 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.
