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The Future of Annuity Suitability

The new DOL Fiduciary Rule (“the DOL Rule”) is likely to have a profound effect on the way insurers and agents do business. For annuity business involving retirement plans and IRAs, the DOL Rule will apply and require a host of additional measures to achieve compliance. While the ultimate goal of both the DOL Rule and the state suitability laws is to protect consumers, the methods by which they seek to achieve the goal vary widely.

While the true impact of the DOL Rule won’t be known for some time, one thing is certain – state insurance regulators won’t scale back on the existing suitability regulations. In fact, there has been an increasing focus on annuity suitability by insurance regulators for some time. This means that now is a great time to “level set” on annuity suitability standards. If the industry can demonstrate conscientiousness with regard to annuity suitability, and look after consumers in a consistent and meaningful way, it’s possible we can avoid additional enforcement actions pertaining to the existing suitability regulations by state insurance regulators.

Annuity suitability seems fairly straightforward – make recommendations that are suitable for the consumer. It sounds simple and obvious, especially to experienced producers who have always worked to do the right thing for consumers. So, why has there been an increasing focus on suitability by insurance regulators? You may be surprised to learn that there is pressure coming from both state and federal insurance authorities.

In 2010, the National Association of Insurance Commissioners (NAIC) adopted the most recent version of the Suitability in Annuity Transactions Model Regulation (“the Regulation”). This means it’s been six years since the latest iteration of the Regulation (it was initially adopted in 2003 and revised in 2006) and state insurance regulators, understandably, think that’s long enough for insurers to have established a robust suitability process. Unfortunately, many of these state insurance regulators are questioning how effective the Regulation has been and if insurers have implemented it in a satisfactory manner. To date, 37 states have adopted the Regulation, but there are continuing concerns about disparate standards and processes by insurers.

Beyond state insurance regulators, the Federal Insurance Office (FIO) noted in its 2014 Annual Report on the Insurance Industry, “With unprecedented numbers of seniors reaching retirement age and living longer, annuity suitability standards should not vary based on geography and should meet or exceed a common standard. FIO will continue to monitor and report on the states’ progress toward full adoption of the Model Suitability Regulation.” The next year, the FIO went further in its 2015 Annual Report by stating, “As unprecedented numbers of seniors reach retirement age with increased longevity, and as life insurers continue to introduce more complex products tailored to consumer demand, the absence of national annuity suitability standards is increasingly problematic. FIO recommends that all states adopt a suitability standard at least as rigorous as the NAIC model. In the absence of more uniform adoption and implementation of the Model Suitability Regulation, federal authorities should consider appropriate action.” This makes it clear that there is growing concern at the FIO about annuity suitability. Beyond the FIO, we now have the DOL Rule and questions about whether the SEC will feel pressure to issue its own fiduciary rule.

A robust suitability process is generally viewed by state insurance regulators as essential to protecting consumers at the time of sale and preventing problems in the future (e.g., consumer complaints). An effective suitability process is therefore seen as a core function that will protect consumers and minimize the need for regulatory involvement in the future. States have limited resources and can allocate those resources to other matters if insurers have an effective suitability process in place.

So, what does this mean for insurers? With a renewed focus on suitability at both the state and federal levels, insurers should expect additional questions from state insurance regulators and greater scrutiny of their processes. It is important that insurers have developed a robust suitability program, are following it consistently, and can demonstrate a reasonable system of supervision and control over the process.

What will that translate into for agents and IMOs? If insurers feel pressure from state insurance regulators to enhance their suitability processes, it could lead to a transitional period for insurers’ distribution partners – additional information requested on suitability forms, evolving processes, closer review of suitability information, more insurer questions for agents, etc. Remember, this is all related to a perceived need by state insurance regulators to more closely examine annuity suitability and should be considered at the same time insurers focus their efforts on the additional compliance demands of the DOL rule. The increased scrutiny on suitability by state insurance regulators is unlikely to change in the face of the new DOL Rule. If anything, it’s possible that the NAIC or individual states may feel compelled to elevate existing requirements pertaining to annuity suitability.

The future of annuity suitability will likely continue to evolve over the next several months. However, it has never been more critical to do the right thing for the consumer. It’s not just the right way to conduct business. It’s not just the right thing to do. It is imperative for the industry if it is to continue to thrive in this time of additional regulation.

Roger Hayashi, CLU®, ChFC®, Co-Director: Compliance and Risk Mitigation Assistance Program, brings over 25 years of experience in the insurance and financial services industry. He has held compliance management roles in a number of large insurance companies and broker dealers and leverages this experience to assist clients with their unique compliance needs, including risk assessment and remediation, sales practice issues, policy and procedure development and/or enhancement, training, and other consulting services as requested by our clients. (

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