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Proposed model annuity regulation benefits industry, not consumers, consumer groups say

MoneyState insurance regulators on the National Association of Insurance Commissioners’ Life Insurance and Annuities Committee should reject a proposed industry friendly, anti-consumer annuity model regulation, the Center for Economic Justice and Consumer Federation of America said in a letter to the committee. They should continue work to create a true “best interest” standard of care for insurers, agents, and brokers to use when selling complex annuity products to consumers.

“The fact that all the industry trade associations of insurers and agents selling annuities are euphoric about the proposed revisions while consumer groups are aghast at the anti-consumer nature of the proposal is stark evidence of how biased the proposal is in favor of industry interests over consumers,” said Birny Birnbaum, executive director for the center. “By allowing insurers and producers to falsely claim to be acting in consumers’ best interest when there is no such requirement and when there is no meaningful constraint on conflicts of interest that would compromise advice given to a consumer, the proposal will mislead consumers into expecting protections the rule does not provide.”

The center and federation point to shortcomings in the current draft:

  • It doesn’t impose a true best interest standard. The current draft requires that the producer have a reasonable basis to believe the recommended annuity meets the consumer’s needs. That isn’t a true best interest standard; it’s a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading. In addition, the standard is vague and full of loopholes.
  • It doesn’t rein in the most harmful and wide-spread conflicts of interest. The proposed standard excludes all forms of cash and non-cash compensation from the definition of material conflict of interest. As a result, compensation practices used in recent annuity sales scandals would still be allowed. The associated conflicts wouldn’t need to be mitigated to minimize their harmful impact.
  • Its ban on some sales contests and incentives is too narrow for real reform. The proposed ban on time-limited, product-specific sales contests and incentives looks like a major step toward eliminating some of the most anti-consumer practices common in the industry today. However, its only effect will probably be to force insurers to redesign, rather than eliminate, these practices.
  • It relies on disclosures that are poorly designed and not provided at the right time. In many areas, the proposed standard is satisfied through disclosure, but the committee has failed to test the proposed disclosures to ensure that they’re effective. In addition, because of the proposal’s lax delivery requirements, key disclosures, such as the Producer Relationship Disclosure Form, will probably come too late to benefit consumers. As a result, the disclosures are likely to do more to shield insurers and producers from liability than to inform or protect consumers.

“The Committee obviously drew heavily on the SEC’s Regulation Best Interest in developing its model, despite the fact that Reg BI has been strongly opposed by investor advocates, is the subject of a legal challenge by several state attorneys general, and has been criticized by state securities regulators as inadequate, prompting some to draft their own, stronger regulations,” said Barbara Roper, director of investor protection for the federation. “Worse, although annuities sales are an area in particularly urgent need of reform, the NAIC model is actually substantially weaker than the SEC rule in several important ways.”

Roper said under no circumstances should NAIC adopt the proposal in its current form. “To do so would be a complete dereliction of its duty to protect insurance consumers,” she said.

“There is a massive disconnect between what an average consumer would understand as an insurer or agent acting in the consumer’s best interest and what the proposed model regulation defines as a best interest standard of care,” Birnbaum said.

The National Association of Fixed Annuities – along with seven other industry trade associations including the American Council of Life Insurers, Committee of Annuity Insurers, Financial Services Institute, Association for Advanced Life Underwriting, Indexed Annuity Leadership Council, Insured Retirement Institute, and National Association of Insurance and Financial Advisors – submitted a joint comment letter to the NAIC Life Insurance and Annuities Committee on its model annuity regulation.

The trade groups said they were pleased with the NAIC efforts to date and — with some final fine tuning — they thought model annuity regulation was close to achieving its objective. The industry wants the draft model regulation adopted as soon as possible.

The NAIC’s Life Insurance and Annuities Committee approved the draft model annuity regulation Sunday at the NAIC’s fall conference and sent its recommendation to the Annuity Suitability Working Group, which developed the model ordinance draft and is part of the committee. The working group has scheduled a conference call Thursday on the model regulation.

The NAIC is an organization of state insurance regulators. It doesn’t write state laws and regulations, which is a state government process. However, NAIC models are used by many states when they begin developing their insurance laws and regulations.

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