States may strengthen rules for selling annuities

Under a draft proposal being considered by insurance commissioners, agents would be required to put "the interests of the consumer first and foremost."

State insurance commissioners this weekend will consider a draft proposal to strengthen the rules for selling annuities, an effort to put the marketing of the products more in line with the trend toward heightened investment advice standards.

But a supporter of the Labor Department’s fiduciary rule said the insurance regulators’ initial attempt falls short of the DOL measure’s conflicts-of-interest protections.

A National Association of Insurance Commissioners committee will consider the proposal Dec. 3 at the NAIC meeting in Honolulu. The draft document revises the NAIC’s current annuity suitability to make it a best-interests standard for sales of the products, which provide an income stream in retirement but can be complex and costly.

Under the proposal, an insurance sales professional would be required to put “the interests of the consumer first and foremost.” It declares what “best interest” is not, including selling the least expensive annuity product or the “single best annuity product available in the marketplace.” Rather, “best interest” is “based on the insurance producer’s judgment acting with reasonable diligence, care, skill and prudence.”

Dean Cameron, Idaho insurance director and chairman of the NAIC’s annuity suitability working group, said the proposal is stronger than the current suitability rule. Investment advisers meet a best-interests standard, while brokers and insurance agents adhere to a suitability standard, which requires them to sell products that fit a customer’s objectives and risk tolerance but allows them to recommend ones that generate the highest revenue for themselves.

“There’s no question that we increased the responsibility of both the [insurance] producer and the [insurance] carrier in marketing these products,” Mr. Cameron said. “A product can be suitable but not in the best interest of the consumer. We’ve tried to make it clear that the producer has a responsibility to determine whether a product is suitable and also whether a product is in the best interest of the consumer.”

But Barbara Roper, director of investor protection at the Consumer Federation of America, said the proposal is a weak alternative to the DOL regulation, which requires brokers to act in the best interests of their clients in retirement accounts. Supporters assert that the DOL rule mitigates broker conflicts.

“The most you can say about this proposal is that it is a modest improvement over the existing suitability standard,” Ms. Roper said. “If their goal is to develop a standard that could substitute for the DOL rule, they still have a long way to go.”

The NAIC outlines what best interests is not, but not what it is, according to Ms. Roper.

“Best interest is your belief that it’s in the client’s best interest,” she said. “There’s no there there.”

Mr. Cameron defended the draft, while pointing out that it likely will be modified as the NAIC takes public comments and conducts its rulemaking process.

“I think we do define what is the best interest,” Mr. Cameron said. “That doesn’t mean the definition can’t be made stronger or more clear. It’s a matter of interpretation whether it meets the Department of Labor standard or not.”

The NAIC proposal “could be workable,” said Gary Sanders, counsel and vice president of government relations at the National Association of Insurance and Financial Advisors.

“It’s not harming the client but it is recognizing that there are a tremendous number of products out there,” he said. “You can’t consider price in a vacuum. This is a starting point.”

The NAIC’s work on an annuity sales standard could dovetail with the DOL’s reassessment of its regulation and the Securities and Exchange Commission’s effort to promulgate its own fiduciary rule. All three groups have vowed to work together on an investment advice standard.

“This is the NAIC trying to figure out what they’re going to bring to the table for those discussions,” said Jason Berkowitz, vice president and counsel at the Insured Retirement Institute.

Ms. Roper hopes the proposal is not the NAIC’s opening bid in those talks.

“This should not set the bar for what a coordinated standard looks like,” she said. “It is not leading us to a harmonized standard for all accounts. What it does is give the industry a best-interest standard in name only that they’ve been lobbying so hard for.”