It may not be a summer blockbuster event, but the latest “suitability script” recently adopted at the NAIC Spring Meeting certainly is a “must read” for insurers involved in annuity transactions. Even though it’s only been a little over two months since the NAIC adopted changes to its Suitability Model Law, there is anticipation that states will move forward in individual adoption of these changes. With over three quarters of the states having Model 275, or its equivalent in place, the groundwork has been laid in terms of prior state adoption of this Model. Some of the more significant changes can be found in the insurer annuity transaction review and the product training requirements (found in Sections 6 and 7 of the Model, respectively.)
The new responsibilities of insurers and producers, as detailed in the referenced Model sections, focus to a great extent on the insurer not issuing an annuity unless reasonable basis exists for the suitability of each annuity based on the prospect’s information provided to the insurer or producer. Additionally, insurers would be required to establish and maintain processes and procedures which provide for a review of every annuity transaction. To the extent these new, or substantially similar, requirements are rolled out across the states, it will be incumbent upon insurers to establish system and processes that are reasonably designed to produce compliance with the revised suitability and recommendation requirements. Defined exceptions do exist for certain annuity transactions in the Model. Insurers may also want to note that there is recognition of the FINRA “Safe Harbor” provision included in the Model. This allows insurers selling variable and fixed annuities in compliance with FINRA requirements to be considered in compliance with the Model. However, the insurer continues to be ultimately responsible for compliance under this Model.
Some steps insurers may want to consider now, in advance of any anticipated state “roll-out,” are a review of the adopted Model changes in light of their existing supervisory systems, an analysis of existing suitability questionnaires to determine their sufficiency in light of the increased compliance responsibilities proposed to be placed on insurers, and an assessment of existing product training for producers. Clearly, one of the primary elements to keep in mind going forward is the importance of a compliant supervisory system with documentation capabilities that are responsive to organizational inquiries and regulatory scrutiny. While the Model allows for the contracting of certain functions, the imperative for ultimate insurer responsibility remains a key theme in this latest revision. Secondly, adding additional questions on suitability now may assist insurers in the required review of each transaction later. Finally, the insurance producer training requirements address the need for adequate knowledge and provide for specific training including topics and credit hours. Insurer verification of training, as well as assuring ongoing product awareness, may require additional processes and coordination. Challenging changes for insurers await in the suitability of annuity sales.
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