Insurers to be responsible for fixed-annuity suitability

Fixed-annuity sales are about to receive a new layer of supervision from state regulators.

Late last month, the National Association of Insurance Commissioners — whose members are the elected or appointed state officials who regulate insurance companies and agents — adopted new amendments to its suitability regulations calling for carrier review of all fixed-annuity transactions.

The NAIC amendments, which are virtually assured to become law in all 50 states, place greater supervisory responsibility on insurance companies, which will be expected to determine the suitability of agents’ annuity recommendations and document non-recommended transactions, as well as provide agents with additional annuity training.

Sales of fixed annuities through broker-dealers will satisfy the NAIC’s new suitability rules if securities firms follow the variable annuity sales guidelines of the Financial Industry Regulatory Authority Inc.

As a result, the NAIC will allow broker-dealers to handle suitability supervision, while requiring insurers to provide broker-dealers with information and reports necessary to carry out that responsibility. The onus for ensuring that that suitability meets state insurance requirements, however, will be on the insurance carriers, not broker-dealers.

With regard to the new rules, broker-dealers are trying to figure out how they will deal with the additional scrutiny of their sales procedures by insurance companies.

“It technically shouldn’t be all that difficult [for brokerage firms] to add processes for fixed products, but it becomes an issue for firms that aren’t doing a lot of fixed-product business,” said Amy Lynch, founder and president of FrontLine Compliance LLC. “Small independent networks and some mid-sized firms will have a hard time adapting.”

To assess suitability, carriers are requesting more information on their applications and adding more screening.

Insurers are also asking broker-dealers to apply their own suitability processes to screen fixed-annuity applications or to check for suitability at the insurer’s internal home office. Aviva Life and Annuity Co. is using both approaches.

To comply with the new rules, Aviva plans to add suitability questions and processes on risk tolerance, said Maureen Closson, a senior vice president and chief compliance officer.

It currently takes Aviva about 48 hours to process a fixed-annuity sale, including determining suitability; the product is issued within 72 hours of Aviva’s getting the application, said Ms. Closson, who added that the new rule will not lengthen the turnaround process.

For Vanderbilt Securities LLC, a small broker-dealer, adding fixed annuities to its suitability screening will entail merely adding “another software module,” said Stephen A. Distante, chief executive of the firm, whose primary concern is that handling additional forms from the insurance carriers may become a burden.

That also concerns larger broker-dealers.

“I can see such firms saying that they’re going to narrow their list of carriers because they can’t deal with the requirements of all those insurance companies,” said Gerry Gunderson, senior vice president and general counsel of National Planning Holdings Inc., a network of four retail broker-dealers that is an affiliate of Jackson National Life Insurance Co.

Producers who sell fixed products from a variety of insurers also could pare their pro-viders, considering the heavy volume of paperwork associated with the variable annuities they sell, Mr. Gunderson added.

His broker-dealers have supervisory procedures in place for fixed annuities and are working on an abbreviated fixed-annuity new-account form for their reps, he said.

Keeping the rules — and paperwork — straight for both variable and fixed annuities will be a challenge, Ms. Lynch said.

“To say you have one process for fixed annuities and one for variable — that would have to be made clear when you’re training reps,” Ms. Lynch said. “Firms can get tripped up using negative consent forms with variable annuities, so reps need to know which paperwork applies to which product.”

Given their compliance burdens, some broker-dealers are relieved that the suitability responsibility for fixed annuities now clearly falls on the insurer.

“We don’t have the data that’s appropriate to [supervise fixed annuities] in all cases,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network. “The suitability should be on the insurer: They get the paperwork; they know the transactions.”

E-mail Darla Mercado at [email protected].