NAIC Updated Suitability in Annuity Transaction Model Regulation
Issue
The updated National Association of Insurance Commissioners (NAIC) Annuity Suitability Model #275 establishes the Best Interest Standard of Care, which requires a producer, or insurer where no producer is involved, to consider the consumer's needs and financial interests above their own.
Background
Model Regulation #275, known as the Updated Suitability in Annuity Transaction, was initially adopted in 2010. It established the suitability standard of care. However, both industry and consumers began to raise concerns about the "suitability" standard and whether there was a gap between "suitable" and what was truly in the "best interest of the client." Federally, the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) released final rules clarifying that financial professionals must put the clients' interests before their own. (RegBI) As a result, it became clear that the NAIC would need to develop an enhanced standard to align with the DOL and the SEC or risk more unworkable state activity.
In 2017, the NAIC appointed the Annuity Suitability Working Group (A) to review and update the Suitability in Annuity Transaction Model Regulation and charged them to create a workable standard of care for the recommendation and sale of annuities. As a result, revisions were adopted, and the final rule took effect in June 2020. The updates included an elevated standard of care (Best Interest) that provides consumers confidence in guaranteed income products and encourages regulators to adopt sensible and consistent requirements for the industry. Additionally, it provides a workable framework with other applicable federal and state standards of care rules.
The revised NAIC model aligns well with its federal counterpart – SEC's Regulation Best Interest. Together, these two initiatives will significantly enhance protections for consumers across the country who seek guaranteed lifetime income in retirement through annuities. Any proposal of this model that doesn't specifically reference the words "best interest" would create a significant credibility problem and possibly embolden proponents of a fiduciary standard who falsely claim that any such proposal was nothing more than "warmed-over suitability."
Status
Twenty-nine (29) states have adopted the updated model language, with an additional eight (8) currently in the process of adoption.
NAIFA Position
NAIFA encourages states to swiftly and uniformly adopt the revised NAIC Annuity Best Interest Model. Its adoption aligns with the NAIFA’s goal of creating a uniform and standardized sales process for producers across the country. Further, the best interest standard of care aligns with a core component of NAIFA’s producer Code of Ethics.
The revised NAIC model aligns well with its federal counterpart, the SEC’s Regulation Best Interest. Together, these two initiatives will significantly enhance protections for consumers across the country who seek guaranteed lifetime income in retirement through annuities. Any proposal of this model that doesn’t specifically reference the words “best interest” would create a significant credibility problem and would give fuel to proponents of a fiduciary standard who claim that any such proposal really was nothing more than “warmed-over suitability.
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