Texas mulls rule to enhance disclosures for annuities

The Texas Department of Insurance is mulling a regulation that would mandate disclosure for annuity buyers, but advisers are questioning how effective it would prove to be.

Among the details that insurers would have to reveal to consumers is the initial crediting rate for the purchased annuity, as well as a list of a specific dollar amount or percentage regarding charges and fees.

There are no existing regulations that govern disclosure of annuities, but the product has to be suitable for the client, and misleading information can’t be used to make a sale.

“Simply giving students more homework does not insure they are any more informed,” John Hetzel, vice president of investment management at JWA Financial Group Inc. in Dallas, wrote in e-mail. “It just means they have more paperwork to take home.”

Disclosures, however, can serve as proof that certain subjects have been covered with a client.

“If there are disclosures and proof that they have been made, then your clients are less likely to say that they weren’t made,” said Burk Rosenthal, president and principal of Rosenthal Retirement Planning LP in Fort Worth.

The firm has its own internal documents for annuities to ensure that clients know what they are buying. Without documentation, investors can claim that certain topics were never covered, and then it is the agent’s word against the client’s, Mr. Rosenthal said.

But mandated disclosures don’t guarantee that a client reads the documents or understands the product. One way to help ensure that disclosures are read is to keep them short.

“My feelings would be that if you want to do anything, keep it to one page. The more you give them, the less likely they are to read it,” said Kimberly Ann Nourie, senior vice president of Cross Financial Services Corp. in San Antonio.

She mentioned a consumer buyer’s guide for long term care insurance that was 50 pages long., which clients are unlikely to read.

“We can say that we have to disclose all this information and give consumers these documents, but if they won’t read it, you haven’t solved the problem,” Ms. Nourie added.

Adoption would make Texas the 28th state to follow the Kansas City, Mo.-based National Association of Insurance Commissioners’ annuity disclosure model regulation.

The proposed Texas regulation began as legislation that was championed by the American Council of Life Insurers in Washington, and it was sponsored by state Rep. Craig Eiland, a Democratic litigation attorney. But mandated disclosures don’t guarantee that a client reads the documents or understands how a product works.

Originally, the ACLI supported the measures as a way to encourage more states to adopt annuity disclosure rules and to encourage states to use the council’s consumer disclosure templates that are in effect in Iowa, New Jersey and Ohio.

The original legislation was well-received by Texas’ Senate Committee on State Affairs, garnering unanimous approval from all nine members, and it also received the nod from seven out of nine members of the House Committee on Insurance.

BILL VETOED

However, last month, Texas Gov. Rick Perry vetoed the bill because it established punishments for agents and insurers that failed to make the mandated disclosures or to give the client the buyer’s brochure.

Those who failed to follow the legislation’s terms would be breaching the state’s Deceptive Trade Practices Act, allowing clients to sue for up to three times what they had lost.

“Although the bill establishes standards of transparency and improvements that are important, I believe it will do more harm than good,” Mr. Perry wrote in his veto statement.

“This legislation designates any violation of these standards as an unfair or deceptive act or practice, which would expose agents and insurers to private claims for damages, attorney fees and costs for any such violation,” he wrote. It “creates greater opportunities for frivolous litigation,” Mr. Perry wrote.

E-mail Darla Mercado at [email protected].