State insurance commissioners consider strengthening annuity sales rules

State insurance regulators are considering strengthening investor protections surrounding sales of annuity products.

The National Association of Insurance Commissioners launched an annuity suitability working group April 8 at the organization’s spring meeting in Denver. The panel will review the NAIC’s model regulation for annuity transactions, a measure that was initially adopted in 2006 and revised in 2010.

The time has come to take another look at the model, according to Dean Cameron, Idaho insurance director and head of the working group. Part of the impetus is the Department of Labor’s fiduciary rule, which requires financial advisers to act in the best interests of clients in retirement accounts and encompasses annuity sales.

Annuity transactions currently must adhere to a less-stringent suitability standard rather than a fiduciary standard. But Mr. Cameron uses the term “best interests” when describing where the NAIC’s annuity rule could be headed.

“It was always the NAIC’s intent to take into consideration what is in the client’s best interests. Our model act needs to be strengthened in that respect,” Mr. Cameron said. “There will be a strong element of disclosure. There will be a strong element of oversight to make sure the best interest of the consumer is taken into account.”

The current NAIC model regulation requires that a recommendation for an annuity purchase be suitable for a client based on his or her investment objectives, time line, net worth, liquidity needs and risk tolerance, among other criteria.

Insurance is regulated at the state level. The NAIC model rule has been adopted by 40 states, either through legislation or regulation. In 2013, the Treasury Department expressed concern about varying annuity sales standards among states and recommended that the NAIC rule be implemented nationwide.

Annuity sales totaled $211.4 billion in 2016, a 7.6% decrease from 2015, according to the Insured Retirement Institute.

The products provide the security of a lifetime income stream that many retirees seek. But variable and indexed annuities have a reputation for being costly, complicated and opaque. Their high commissions often make them targets of investor advocates.

Knut Rostad, president of the Institute for the Fiduciary Standard, doubts that the NAIC will make the kinds of changes he says are required to bolster investor protection in annuity sales.

“There is no way for the industry, practically speaking, to tweak and adjust to meet a fiduciary standard,” Mr. Rostad said. “This is a matter of knocking everything down and starting from scratch in terms of rebuilding a compensation system that doesn’t look like any variable-annuity compensation we see today.”

But Cathy Weatherford, president and chief executive of the Insured Retirement Institute, praised the NAIC effort.

“The NAIC’s expertise in the regulation of insurance products and sales practices will be critical to the development of consistent, workable and effective standards that will help all Americans achieve a secure and dignified retirement,” Ms. Weatherford said in a statement.

The Labor Department took aim at variable annuities. Former Secretary Thomas Perez used inappropriate sales of the product as examples of why the fiduciary rule was needed to protect workers and retirees from conflicted investment advice.

Implementation of the DOL rule has been delayed while the agency conducts a review of the measure called for by President Donald J. Trump. The regulation could be modified or repealed after the reassessment.

Insurance industry groups have filed suits against the DOL rule, claiming it would deeply disrupt the industry.

“We’re trying to protect consumers, but we’re also trying to make sure consumers have an opportunity to invest and save for their retirement,” Mr. Cameron said.

Related Topics: National Association Of Insurance Commissioners (NAIC)