Momentum picks up for state-level best interest rule on annuity sales

The new year is beginning with momentum for a state-level regulation designed to strengthen consumer protections surrounding annuity sales.

Last week, Arkansas and Michigan became the more recent states to adopt the rule, which is based on a model measure approved last February by the National Association of Insurance Commissioners. Other states that have approved the rule are Iowa, Arizona and Rhode Island.

The rule amends the NAIC annuity suitability rule to clarify that annuity recommendations by insurance agents and carriers must be in the best interests of consumers and that salespeople cannot put their financial interests ahead of those of the consumer. The model rule requires that salespeople act with “reasonable diligence, care and skill.”

The model rule is similar to the Securities and Exchange Commission’s new investment advice standard for brokers — Regulation Best Interest — that went into force on June 30. The SEC rule does not cover transactions involving insurance products.

Michigan Gov. Gretchen Whitmer signed an annuity best interest law on Dec. 29, while the Arkansas Department of Insurance approved a rule on the same day.

The state-level annuity rule aligns with Reg BI and is “creating a strong state and federal network that protects consumers,” said Michelle Carroll Foster, regional vice president for state relations at the American Council of Life Insurers. “The [annuity] model rule is protecting more and more consumers across the country with a best interest standard of conduct.”

The NAIC model rule must be adopted legislatively or through the regulatory process by each state. The COVID-19 pandemic hit just as the state-by-state effort was being launched. That slowed down the process, which picked back up later in the year.

“We are very pleased with the momentum coming out of 2020,” said Liz Pujolas, director of state affairs at the Insured Retirement Institute. “Not only did industry have to pivot and work in a remote environment, so did legislators and regulators. This has been tremendous. I anticipate an active first quarter.”

Variable annuities are often cited by investor advocates when they illustrate the harmful results of financial advisers’ conflicts of interest. The products provide something most investors want — a guaranteed income stream during retirement — but also can be complex and carry high fees that can enrich the insurance agents and brokers recommending them.

The Center for Economic Justice and the Consumer Federation of America said the NAIC model rule is insufficient for curbing conflicts of interest related to annuity sales.

The annuity sales rule “does not impose a true best interest standard,” Birny Birnbaum, executive director of the Center for Economic Justice, and Barbara Roper, director of investor protection at the Consumer Federation of America, wrote in a December 2019, letter to the insurance commissioners. “It is simply a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading. Moreover, the standard is vague and full of loopholes. The current draft remains considerably weaker than even the vague and ineffective SEC rule.”

Alabama, Delaware, Kentucky, Maine, Nevada and Ohio are currently considering legislation or regulations that would implement the NAIC annuity sales model rule.

Separately, the New York State Department of Financial Services promulgated a best interest rule for the sale of life insurance and annuity products that was fully implemented last February. It requires insurance professionals to place the interests of their customers ahead of their own and not to make product recommendations based on the compensation they'll earn.