Jackson National suspends fee-based annuity sales in New York due to best-interest rule

Others insurers are also poised to pull out of the New York market given the tougher sales standards

Sep 3, 2019 @ 4:51 pm

By Greg Iacurci

Jackson National Life Insurance Co. has suspended sales of fee-based annuities in New York in response to a new rule that imposes tougher standards on brokers and life insurance agents selling insurance products in the state.

The insurer, which was the No. 2 seller of individual annuities in the U.S. last year, halted sales Aug. 12 in response to a specific consumer disclosure that the New York Department of Financial Services requires as part of Insurance Regulation 187.

The rule requires sales of annuity and life insurance products to be in consumers' best interests. It took effect Aug. 1 for annuity sales and will take effect Feb. 1 for life insurance products.

Jackson isn't alone — many other insurers are also gearing up to pull annuity and life insurance products from the New York market due to the rule, according to industry experts familiar with these deliberations.

Lawrence Rybka, president and CEO of ValMark Financial Group, said he's meeting this month with two advisory firms that are currently affiliated with an insurance company. The insurer, which he declined to name, is pulling out of the New York market because of the new rule. Affiliating with a different advisory firm will allow those advisers to keep selling in the state.

"It's a watershed change," Mr. Rybka said of the New York regulation. "It's the largest change I've seen in 33 years in the life insurance business."

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The rule, experts said, will likely have more of an effect on brokers and agents who sell life insurance — especially non-variable products like whole and indexed-universal life insurance — rather than annuities.

Annuities and variable-life products are supervised more stringently than so-called general-account life insurance products as a result of standards overseen by the Financial Industry Regulatory Authority Inc. and state insurance regulators.

Conversely, those selling general-account life-insurance products "have not had to do anything," Mr. Rybka said. "I can tell you whatever I want, get you to borrow a bunch of money from the bank and put it into a life insurance contract. There are some pretty bad practices on the life insurance side."

New York's best-interest rule is part of a movement among some states to raise sales standards for brokers and financial advisers following the death of the Department of Labor fiduciary rule, an Obama-era regulation that aimed to increase the standards in retirement accounts like 401(k)s and IRAs. It was overturned by an appeals court last year.

Massachusetts, New Jersey and Nevada are in various stages of rolling out their own fiduciary standards. But New York's, which was upheld last month by the state supreme court, is the only one that touches life insurance sales.

Kevin Walsh, a principal at Groom Law Group, said the language that New York uses in its rule is arguably tougher than the DOL's fiduciary rule, which was overwhelmingly supported by consumer advocates.

"It's a new articulation," Mr. Walsh said. "I think that's the frustration industry has right now."

Significantly, insurers will have some skin in the game when it comes to transactions and recommendations. When faced with an unsatisfied consumer, insurers had previously taken a buyer-beware stance, pointing out that they had laid out relevant provisions in the client's contract.

Now, insurers must collect 13 data points for each client — such as age, annual income, financial objectives and tolerance of non-guaranteed elements, such as variability in premiums and fees, for example — before making a product recommendation.

Advisers and insurers must also discuss negative product features in addition to positive ones. For example, they must articulate that an interest-rate cap, currently at 6%, can be reduced to 3% at an insurer's discretion or that a transaction will lead to a new surrender charge.

A failure to prove the recommendation is in a client's best interest would mean a refund for the client in a customer-dispute situation.

In addition, producers selling annuities or life insurance can't use the title of "financial planner," "financial advisor" or a similar title unless they have the proper licenses for these designations and provide securities or "non-insurance financial services" to clients, according to the rule. Producers also can't say an insurance transaction constitutes comprehensive financial planning or advice if they don't have the proper designations.

Though the rules appear more stringent for life insurance, they're also clearly having an effect on annuity sellers such as Jackson National.

The insurer, which expects its suspension to be temporary, takes issue with a requirement that insurers offering both fee- and commission-based products provide consumers with a comparison showing the differences between the products. Jackson National is seeking clarification around how the company and its distributors can satisfy the disclosure.

Observers believe the insurer suspended fee-based as opposed to commission sales because its commission sales are far larger, as they have been historically for the broader annuity industry.

"We remain committed to delivering helpful and relevant disclosures to consumers and distribution partners and to resuming sales of our advisory products in New York as soon as possible," a company spokesman said.

In some ways, the New York regulation doesn't sting as much as it may have if it were issued in another state. Many insurers already shun the New York market because its rules have historically been tougher than in other jurisdictions. But the new insurance rules in New York could be a harbinger of similar rules down the road in other states.

"I'm looking at New York as a pilot program for the rest of the country," said Sheryl Moore, head of insurance consulting firm Moore Market Intelligence. "This is kind of a precursor to what's to come."

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