A welter of new annuity requirements are roiling insurers, who must now deal with the added burden of making sure annuities are suitable for customers.
The National Association of Insurance Commissioners in March adopted amendments to the annuity suitability model making carriers responsible for ensuring that all annuity transactions are appropriate for customers. The new rules also require insurers to establish a system to supervise recommendations made by sellers of annuities, and to make sure suitability standards are consistent with those of the
Financial Industry Regulatory Authority Inc., when feasible.
Many representatives and agents say the new rules add to the already complex layers of review required by Finra.
“The big change is that it requires a complete secondary review somewhere in the chain of the distribution line up to the company,” said Jim Mumford, first deputy insurance commissioner and securities administrator in Iowa. “It's clear in this model that the company is always responsible for the product issued, no matter where the follow-up took place,” he added.
But the road to compliance has also been a bumpy one for the companies in charge of the review, who say manufacturers ought to contend with the new requirements as well.
The NAIC suitability rule allows carriers to contract out the review to a third party, like a broker-dealer. That method is far from foolproof, however. “If you're delegating the responsibility, how do you know that the process is in place?” asked John T. Doscher, vice president for insurance compliance at The Prudential Insurance Company of America.
In the past, insurers tried to steer clear of suitability rules by selling through broker-dealers. The new rules, however, put insurers on the hook for representations made by retail sellers. “You have marketing materials and wholesalers who position the product a certain way,” Mr. Doscher advised. “You need to make sure you're comfortable with how people are selling the products.”
To keep a closer eye on the retail broker-dealers, insurers like Prudential have started programs to monitor how the firms were selling the products and to detect worrisome sales patterns, such as an unusually high number of annuity sales to seniors. Using this method, insurers can reach out to firms that are generating a questionable pattern of sales and find out what's going on. If the pattern becomes problematic, the insurer can cut its selling agreement with the broker-dealer.
“Some insurers will reach out to broker-dealers and ask for a sample of case files to review for suitability,” said Mr. Doscher. “Don't sit back and say that you rely on the broker-dealer and that you don't have a review process; you have to demonstrate a reasonable review process.
For broker-dealers, worries on suitability are twofold — especially with replacement annuities — as they contend with Finra's Rule 2330, the variable annuity suitability rule. In February, the last two parts of the rule went into effect, requiring that annuity transactions be reviewed by a principal within seven days.
Though many firms had been following the rule since the first part of it went into effect in May 2008, firm executives report that compliance still isn't necessarily easy: “We start the [seven-day principal review] clock based on the client's signature. It increases the challenge; you're dealing with postage delay,” said Jason B. Hyslop, senior compliance advisor at
Raymond James & Associates Inc.
To stay on top of the reps' activity,
Raymond James looks at its advisers on an individual basis, and searches for trending data. One red flag: if advisers are constantly recommending the same product or the same rider to clients, Mr. Hyslop said. The firm also ensures that reps are aware of product changes, particularly now that annuity benefits are more expensive and less beneficial.
“As part of your review, you talk with your reps and ask them to explain the benefit.” he said. “It's basically constant training.”
