Selling Suitably in 2012
December 28, 2011 by Nicholas C. Gerhart and Patrick C. Reeder
December 21, 2011
By Nicholas C. Gerhart and
Patrick C. Reeder
InsuranceNewsNet Magazine, October 2011
Annuities
continue to play an important part in retirement income discussions, just as
regulators have been strongly focused on the product and how these products are
sold. For example, the NAIC adopted a revised Suitability in Annuity
Transactions Model Regulation in March 2010. As a result of this new model, which
has already been adopted in more than a dozen states, many carriers and
producers have revised their annuity suitability procedures.
As Scottish
philosopher Thomas Reid observed, “The rules of navigation never navigated a
ship.” It is also true for annuity suitability. Good rules are necessary;
however, it is those that live them that bring them to life.
For example,
as a result of the enhanced suitability model, insurance producers often gather
significant information about their clients’ financial situation, needs and
risk tolerance in order to make suitable recommendations. One of the unintended
consequences of these new rules is that in order to meet their suitability
obligations, insurance producers may have to learn about clients’ securities
holdings. This has led to questions about what an insurance producer, who is
not also securities licensed, can ask or recommend in advising clients on
suitable sources of funds for insurance policies. In June, the Iowa Insurance
Division continued its leadership in the annuity regulatory arena and released
two bulletins which give guidance as to what is permitted, and prohibited, by
insurance producers and those holding securities licenses.
The Iowa
bulletins apply to producers selling annuities and life insurance. In addition,
they draw a distinction between an “insurance-only person” (one who has a valid
insurance license, but not one for securities) and a “securities-only person”
(one who has a valid securities license, but not one for insurance).
In order to
comply with Iowa’s requirement that an insurance producer must have reasonable
grounds for believing that the recommendation to purchase, borrow against,
exchange or replace an annuity or life insurance is suitable for the consumer,
an insurance-only person is permitted to discuss the consumer’s risk tolerance,
financial situation and needs.
An
insurance-only person may discuss:
• Financial experience.
• Financial objectives, including need for
guarantees and minimum lifetime income stream.
• Risk tolerance.
• Need to balance and diversify risk.
• Tax status, including the use of tax
deferred vehicles.
• Existing assets, including investments and
insurance holdings.
• Sources to fund the annuity or life
insurance.
• Liquidity needs and liquid net worth.
• Financial time horizon.
• Intended use of the annuity or life
insurance.
An
insurance-only person may NOT:
• Discuss risks specific to a consumer’s
securities portfolio.
• Provide advice on or compare a consumer’s
specific investment performance with other financial products.
• Recommend or identify specific securities
that could be liquidated to fund an insurance product.
• Recommend specific allocations between
insurance and securities products.
• Offer research, analysis or recommendations
to a consumer regarding specific securities.
• Complete securities forms, except for forms
generally relating to or forms required as part of an insurance transaction.
• Hold him or herself as an investment
advisor, securities agent or investment advisor representative.
An
insurance-only person can talk about the stock market “in general terms”
including “market risks and recent or historic economic activities that are
generally known to the public and regularly discussed in public media” and have
“general discussions about balancing risk, diversification, etc., that support
an insurance position within a consumer’s financial plan.”
They are
permitted to give advice as part of a financial plan; however, he or she must
identify him or herself as an individual who holds a producer license and that
he or she “is authorized to sell annuity or life insurance products and not
sell, recommend or provide advice about securities.”
As millions
of baby boomers are preparing to retire, the insurance industry continues to
promote the importance of annuity products as part of an overall retirement
plan. The guarantees within fixed annuities, combined with the ability to
convert one’s accumulation value to a lifetime income, will likely contribute
to continued sales growth in the fixed annuity space. With this increasing
demand for a product that may be entering its “golden age,” sales practices of
annuities will remain under the regulatory microscope. State departments of
insurance will continue to regulate fixed annuity products and enacting the
enhanced model suitability in annuity transactions is a top priority in many
state departments of insurance.
We expect
more new issues to arise. Insurance-only producers need to use care when
determining the appropriateness of an annuity transaction for a customer and
balance between doing a proper suitability analysis and offering investment
advice without a license. Thanks to Iowa’s leadership, we have a solid outline
on sales activities that insurance-only producers may complete in determining
whether an annuity is suitable for a customer. We can also expect states like
Iowa to bring their solutions to the NAIC for broader adoption by other states.
Producer
Requirements
The 2010 NAIC
Suitability in Annuity Transactions Model Regulation offers three core
requirements:
1) A
producer who recommends the purchase or exchange of an annuity must obtain
“suitability information” from the consumer, which includes:
• Annual income.
• Existing assets, including investment
and life insurance holdings.
• Financial situation needs, including the
financial resources used for the funding of the annuity.
• Age.
• Financial experience.
• Financial objectives.
• Financial time horizon.
• Intended use of the annuity.
• Liquidity needs.
• Liquid net worth.
• Risk tolerance.
• Tax status.
2) A
producer must have reasonable grounds for believing that the producer’s
recommendation is suitable based on facts disclosed by the consumer, including
the consumer’s suitability information.
3)
The producer must have a reason able basis to believe the following:
a. The consumer has been reasonably informed
of various features of the annuity.
b. The consumer would benefit from certain
features of the annuity, such as tax-deferred growth, annuitization or death or
living benefit.
c. The particular annuity as a whole, the
underlying sub-accounts to which funds are allocated at the time of purchase or
exchange of the annuity, and riders and similar product enhancements, if any,
are suitable.
d. In the case of an exchange or replacement
of an annuity, the exchange or replacement is suitable.
Nicholas
C. Gerhart is vice president of compliance/regulatory affairs for Sammons
Financial Group/Midland National Life/North American Company Life and Health,
where he handles corporate compliance and market conduct issues and manages
regulatory affairs. He can be reached at Nicholas.Gerhart@innfeedback.com.
Patrick
C. Reeder is Of Counsel in Stradley Ronon’s Insurance Practice Group. Based in
the Washington office, Mr. Reeder advises a broad range of clients in
regulatory compliance, government affairs and strategic business transactions
with a focus in highly-regulated industries. He can be reached at Patrick.Reeder@innfeedback.com.
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