NAIC Life Insurance and Annuities (A) Committee Ends 2019 With a Big Bang
In with the new year is a best interest standard of care that comprises four components:
- Care Obligation
- Disclosure Obligation
- Conflict of Interest Obligation
- Documentation Obligation
Invited to the gala are all producers who have “exercised material control or influence in the making of a recommendation and ha[ve] received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer.” These producers are subject to the Revised Suitability Model requirements, in recognition that a producer with the consumer relationship may consult with another producer who provides the recommendation.
The Revised Suitability Model enhances the requirement that insurers establish and maintain a supervision system reasonably designed to achieve compliance with the Revised Suitability Model. It also invites other “comparable standards” as safe harbors that are deemed to satisfy the requirements of the Revised Suitability Model.
Below is a summary of the four component obligations, the insurers’ supervision requirement, the safe harbor, and certain notable items.
Care Obligation
The Care Obligation requires four acts, exercised with reasonable diligence, care, and skill, as follows:
The Care Obligation contains 10 additional provisions explaining what is, and what is not, required to satisfy these four acts. In general, the producer must consider the totality of the consumer's information — which the producer has made reasonable efforts to obtain — against the totality of the products available to be sold by the producer, and must conclude that the annuity effectively addresses the consumer’s financial situation, insurance needs, and financial objectives, and that the consumer would benefit from certain features of the annuity. |
Items of Note:
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Disclosure Obligation
The Disclosure Obligation sets forth three disclosure requirements:
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Items of Note:
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Conflict of Interest Obligation
The Conflict of Interest Obligation requires a producer to:
material conflicts of interest, including material conflicts of interest related to an ownership interest. In addition, as part of the Best Interest Obligation, in making a recommendation, a producer must act without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest. |
Items of Note:
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Documentation Obligation
The Documentation Obligation varies, as follows:
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Items of Note:
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Insurer Supervision
The insurer supervision requirements were enhanced by requiring insurers to establish and maintain reasonable procedures in three additional areas:
- To assess whether a producer has provided to the consumer the information required by the Revised Suitability Model.
- To identify and address suspicious consumer refusals to provide consumer profile information.
- To identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.
The Revised Suitability Model also makes clear that the insurer's system of supervision does not need to include a "comparison to options available to the producer or compensation relating to those options other than annuities or other products offered by the insurer."
Safe Harbor
Under the Revised Suitability Model, the safe harbor was expanded beyond compliance with FINRA's suitability and supervision requirements. The safe harbor applies to "all recommendations and sales of annuities made by financial professionals in compliance with business rules, controls and procedures that satisfy a comparable standard even if such standard would not otherwise apply to the product or recommendation at issue." The financial professionals that fall within the safe harbor are:
- A registered broker-dealer or a registered representative of a broker-dealer;
- A registered investment adviser or an investment adviser representative associated with the registered investment adviser; or
- Specified plan fiduciaries under the Employee Retirement Income Security Act of 1974 or the Internal Revenue Code.
The Revised Suitability Model notes that each state must determine whether to extend the safe harbor to state-registered broker-dealers and investment advisers.
While the safe harbor applies, an insurer is still obligated not to issue an annuity unless there is a reasonable basis to believe the annuity would effectively address the particular consumer's financial situation, insurance needs, and financial objectives. The NAIC Executive Committee and Plenary will consider the adoption of the Revised Suitability Model on February 13, 2020.
Now that the festivities are complete, it is time for insurers to start considering their New Year's resolutions to modify their existing policies and procedures for the new requirements of the Revised Suitability Model.
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