Suitability in the sale of annuity products has been a topic of state regulation since at least 2003 - well before the federal focus on “Best Interest.” State insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. Many state laws to effectuate this oversight are modeled after National Association of Insurance Commissioner’s (NAIC) Suitability in Annuity Transactions Model Regulation (#275). Model #275 addresses standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are adequately considered. Since the model's original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA).
The Annuity Suitability (A) Working Group was constituted in 2017 and directed to review and revise, as necessary, Model #275 to promote greater uniformity across NAIC-member jurisdictions. Renewed interest in the model was prompted, in part, by work being done at the federal level. In April 2016, the U.S. Department of Labor (DOL) completed regulations broadening its definition of "fiduciary investment advice" under the federal Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). However, the rule was vacated by the 5th U.S. Circuit Court of Appeals in March of 2018 before it took effect.
The U.S. Securities and Exchange Commission (SEC) released a proposed rule package on April 18, 2018, updating the standard of care broker-dealers and investment advisers would be required to provide to retail investors. The NAIC commented on the SEC proposal during the exposure period with the intent of promoting uniformity in approach to regulation. The SEC’s final rule took effect on June 30, 2020.
In 2018, the New York State Department of Financial Services proposed Regulation 187, a new "best interest" standard for agents and brokers licensed to sell life insurance and annuity products in the state aligning with the now vacated DOL "fiduciary rule" for retirement savings. Under the rule, product sales must prioritize customer's interest over sales commissions and agents and brokers' compensation should not be influenced by the products recommended. The rule went into effect in 2019 with regard to annuity sales and encompassed life insurance as of February 1, 2020.
In 2019, the NAIC Annuity Suitability (A) Working Group completed updates to Model #275 which began in November 2017. The goal of the Working Group was to seek clear, enhanced standards for annuity sales so consumers understand the products they purchase, are made aware of any material conflicts of interest and are assured those selling the products do not place their financial interests above consumers' interests.
The NAIC membership approved revisions to Model #275 in February of 2020 clarifying that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumers’ interest in making a recommendation. The model now requires agents and carriers to act with “reasonable diligence, care and skill” in making recommendations. The revisions also include enhancements to the current model’s supervision system to assist in compliance. The Working Group drafted a Frequently Asked Questions designed to provide state regulators and consumers greater guidance on its approach to regulation as the states considered adoption of the revisions to the model.
As of November 2023, 40 states, including New York and New Jersey, have adopted the model revisions requiring that all recommendations by agents and insurers must be in the best interest of the consumer, and that agents and carriers may not place their financial interest ahead of the consumer's interest in making a recommendation. State regulations require that any insurance agent and carrier must act with “reasonable diligence, care, and skill” in recommending an annuity, and the recommended annuity must appropriately address the specific consumer’s insurance and financial situation and objectives. Satisfaction of this standard requires that a producer or an insurer satisfy four obligations:
- Conflict of interest
To satisfy the four obligations, when making a recommendation, producers must:
- Know the consumer’s financial situation, insurance needs and financial objectives.
- Understand the available recommendation options.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives.
- Communicate the basis of the recommendation to the consumer.
- Disclose their role in the transaction, their compensation and any material conflicts of interest.
- Document, in writing, any recommendation and the justification for such recommendation.
The NAIC’s Adoption map reflecting which states have adopted its model act is linked here.
Questions regarding state regulation of annuity sales can be directed to Cynthia Borrelli.