State regulators approve best-interest standard for annuity sales

Now individual states must adopt the measure through legislation or rule-making

State insurance commissioners approved a model regulation Thursday that would require insurance professionals to act in the best interests of their customers when selling annuities.

The Suitability in Annuity Transactions Model Regulation would prohibit insurance agents and carriers from putting their own financial interests ahead of the interests of the consumer. The model rule requires that they act with “reasonable diligence, care and skill” in making recommendations, according to a statement from the National Association of Insurance Commissioners.

According to a draft of the rule from late December, an insurance salesperson would have to “identify and avoid or reasonably manage and disclose material conflicts of interest” and would have to maintain a written record explaining the basis for the recommendation. A customer would have to sign a disclosure document that outlines the products insurance agents can sell and how they’re paid.

The rule contains a safe harbor that allows registered representatives of broker-dealers who sell annuities to be in compliance with the NAIC annuity rule if they are in compliance with the Securities and Exchange Commission’s Regulation Best Interest, which is meant to raise the broker advice standard.

The NAIC rule is designed to update the current annuity suitability regulation so that it is similar to Reg BI. The NAIC began its work several years ago, when the Department of Labor promulgated the now-defunct fiduciary rule for investment recommendations in retirement accounts. The NAIC opposed the DOL rule.

In late December, the NAIC draft annuity rule was passed by a committee. It has now been approved by the entire organization.

“These changes underscore the commitment of U.S. insurance regulators to protecting consumers purchasing annuities,” Ray Farmer, NAIC president and South Carolina insurance director, said in the NAIC statement. “Nearly every state has adopted the model, which has been protecting consumers for 15 years. I encourage my colleagues to work with their legislatures to pass these updates to provide even stronger protection.”

Each state must adopt the model regulation either through legislation or a rule-making process, which could take months or years to unfold.

The Insured Retirement Institute said in a statement that it “expects many states will be eager to adopt the new annuity model.”

Annuities can offer a lifetime income stream to retirees. But they’re also complex products that often come with high fees. Investor advocates assert that inappropriate annuity sales are a leading cause of investor harm.

The NAIC model rule does not improve on the suitability standard of care, Birny Birnbaum, executive director of the Center for Economic Justice, said in a recent interview.

“The likely result of the model will be to unleash more unsuitable annuity sales,” Mr. Birnbaum, who served on the NAIC committee that hammered out the rule, wrote in an email. “What will change is that insurance producers will now be able to falsely claim they are acting in a consumer’s best interest when they have no legal obligation to do so.”