New York issues final best-interest regulation for annuity, life insurance sales

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State insurance commissioners don't include life products in their annuity suitability reform.

New York issued a final regulation Wednesday that would raise the standard of care for sales of life insurance and annuities.

The measure would require insurers to establish policies and procedures that ensure agents and brokers put the interests of consumers ahead of their own when making a recommendation. Under the regulation, financial incentives and compensation should not influence the sales professional.

“Given the key role insurance products play in providing financial security to middle-class New Yorkers, it is essential that a provider adhere to a high standard of care and only recommend insurance and annuity products that are in the consumer’s best interests and not be influenced by a producer’s financial incentives,” New York Financial Services superintendent Maria T. Vullo said in a statement.

The final New York regulation was released just weeks before a committee of the National Association of Insurance Commissioners will convene in Boston to continue work on changing its annuity suitability rule into a best-interest standard. The officials hope to finish their draft proposal at the Aug. 4 meeting.

Some investor advocates are pushing the NAIC to expand its annuity suitability rule to include life insurance products that have investment components.

“We see no rationale for applying a best-interest standard or ‘suitability-plus’ standard of care to a fixed-indexed annuity transaction but not to an indexed universal life insurance transaction, or for applying a best-interest standard of care to a variable annuity transaction but not to a variable life insurance transaction,” the Center for Economic Justice wrote in a June 20 comment letter to NAIC.

The NAIC should follow the New York regulation, according to CEJ director Birny Birnbaum.

“It has many of the same features that we recommend to the NAIC,” he said.

It’s not likely the NAIC rule will encompass life insurance.

“That is outside the scope of our annuity suitability rule,” said Iowa insurance commissioner Doug Ommen, vice chairman of the NAIC annuity suitability working group. “I expect that we will have further discussion about that issue.”

The life insurance industry also is resisting expanding the NAIC rule to life insurance.

“Including life insurance in the model regulation is unnecessary because life insurance sales practices are already subject to comprehensive state laws and regulations which assure that life insurance products are sold consistent with the best interest of consumers,” J. Bruce Ferguson, senior vice president for state regulation at the American Council of Life Insurers, wrote in a May 29 comment letter.

The NAIC launched its annuity suitability review partly in response to the Labor Department’s fiduciary rule that required that brokers act in the best interests of their clients in retirement accounts. Even though that regulation died in court, the NAIC’s goal remains the same.

“In making a recommendation, it is critically important that producers’ interests not be placed ahead of consumers’ interests, as known from their customer profile,” Mr. Ommen said.

But Mr. Birnbaum is concerned that the NAIC proposal is not tough enough.

“There has to be an affirmative responsibility to eliminate or to manage those conflicts of interest in a way that prevents the producer or insurer from putting their interests ahead of the consumer’s,” Mr. Birnbaum said.

The NAIC is striking the right balance, according to Jason Berkowitz, vice president and counsel for regulatory affairs at the Insured Retirement Institute.

“They are seriously working to enhance the model in a way that doesn’t disrupt the industry and make it harder for consumers to get products and advice,” he said.

Now that the SEC has taken the lead on investment advice reform from the DOL and has its own proposal out for public comment, the NAIC hopes to work with the agency to align securities and insurance standards.

The SEC regulates insurance products that are considered securities, such as variable annuities and registered fixed-indexed annuities. State insurance commissioners regulate fixed annuities, unregistered fixed-indexed annuities and most life insurance.

“There does need to be harmonization between the regulatory approaches,” Mr. Ommen said.