Taking on the next steps in annuity regulation

Companies, distributors, regulators and consumers — we’re all trying to keep pace with the changes in the marketplace, particularly when it comes to annuities. And even more changes came when the National Association of Insurance Commissioners recently convened its fall meeting in National Harbor, Md., and yet again considered whether and how to address the evolving needs of the many stakeholders with interests in how annuities are sold and to whom.

To understand how we got here and where we’re going, it’s important to understand where we’ve been. There long have been significant differences how state and federal regulators carry out their responsibilities for overseeing registered variable annuity products, and registered reps and broker-dealers. Conversely, the world of fixed and indexed annuities until recently has been subject solely to state insurance regulation as coordinated by the NAIC.

In the late 1990s, as the insurance marketplace tried to address negative press and declining consumer trust, much debate ensued about the suitability of some annuity sales. In 2003, that debate resulted in the NAIC’s adoption — after a three-year public process — of the Suitability in Annuity Transactions Model Regulation, which essentially told insurance companies and those selling on their behalf that if an annuity was being sold to someone 65 or older, it had better be suitable and state regulators would hold them accountable. But there was a catch — enforcement of these requirements was contingent on each state’s adopting the model regulation.

As individual states began adopting it, some dropped the 65-plus provision in the belief that annuities sales should meet suitability requirements for all customers. Open discussion and comparison of Financial Industry Regulatory Authority Inc. standards, versus the incremental adoption of the NAIC model regulation (with modifications in some states) ensued.

After some subtle chiding comments from Finra, the NAIC removed the 65-plus provision as a step toward bringing regulations into line. In a feat rarely accomplished with normal NAIC models, 41 states have adopted the model regulation. As states began to implement and enforce their newly adopted regulation, there were considerable differences in interpretation of the rules, particularly in states that had little past experience. More and more consumers, companies and producers have been engaged in real-life transactions as this debate has dragged on.

To help address these issues, in March 2008 and last March the Insurance Marketplace Standards Association co-sponsored annuity suitability summits in Washington at which the Securities and Exchange Commission and Finra helped explain to state regulators how they addressed suitability and supervision.

A collaborative effort was launched among the IMSA and eight states that led to the development of a compendium of leading practices employed by companies and distributors to fulfill the business and regulatory requirements regarding the supervision and monitoring of those in the independent distribution channels.

It set forth the range of successful practices in the marketplace being used by those companies familiar with Finra requirements, and with compliance and risk management infrastructures. It is being used by those states and the regulated industry to guide their respective work.

Meanwhile, the NAIC in March 2008 launched a working group to consider whether the states need more tools and guidance or a new and better regulation to protect consumers. Since then, this working group has gone in some conflicting directions, creating uncertainty among industry groups, consumer advocates, and the regulatory community itself. Much of the time was devoted to discussing a proposed major rewrite of a model regulation already adopted by many states.

In early 2009, the IMSA consulted further with many in the consumer, industry and regulatory communities to determine what would best meet their various needs to help them comply with regulatory expectations.

With that input, it was proposed to the NAIC that it could achieve its goal of greater consistency and predictability by providing prompt guidance and direction to the 41 states already responsible for enforcing the regulation on their books. In particular, the IMSA proposed specific language that would bring the states’ approach in line with Finra Rule 2821 for the benefit of industry and consumers.

To the relief of many within the regulatory, consumer and industry communities, the NAIC last month decided to abandon its 18-month effort to overhaul the model regulation already adopted in 41 states — and to focus instead on bringing it into line with the approach of Finra Rule 2821. It may take another year before the NAIC formally adopts changes to that model. In the meantime, many NAIC member states, the industry and consumers await guidance and direction regarding enforcement of the current regulation.

To paraphrase an old axiom, perfection is the enemy of the good. The NAIC and 41 states have a good model whose enforcement can be further enhanced through the use of regulatory tools to replicate Finra’s approach better.

Fortunately, nearly half of the nation’s consumers have been getting the benefit of annuity suitability protections since Jan. 1, 2008, when the IMSA began requiring all of its certified member companies to abide by its suitability standards — which incorporate both Finra’s supervision and monitoring requirements, and the NAIC provisions. A significant portion of the industry has shown that it will watch out for consumer interests in all states, even while the NAIC struggles to define and reach a moving definition of perfection. Progress was made by NAIC — but the jury is still out as to whether state regulators can keep pace with the marketplace and the needs of those in it.

Brian K. Atchinson is president and chief executive of the Insurance Marketplace Standards Association.