NAIC's Revised Suitability in Annuity Transactions Model Regulation

by Anne Shropshire, CLU | Apr 03, 2020
NAIC Annuities

In February, 2020 National Association of Insurance Commissioners (NAIC) approved an extensive update to its long-standing Suitability in Annuity Transactions Model Regulation.  The result is a revised, consumer-focused set of standards and practices that elevate consumers’ best interests as the core component of any and all annuity recommendations and sales.

 Why did the NAIC revise this model regulation?

In 2017, the NAIC established a working group to review and, if necessary, revise its long-standing Suitability in Annuity Transactions Model Regulation.  This was partly in response to significant changes that were taking place in the financial services industry at that time with regard to product suitability standards and efforts to enhance the ways and means by which financial professionals could better meet consumer needs, goals, and expectations.  Earlier, the Department of Labor had redefined its definition of retirement plan investment advice which, in turn, extended the formal obligation of fiduciary duty to many insurance producers.  Though this rule was vacated in 2018, the die was cast and market expectations for enhanced consumer-oriented standards in the financial industry grew.  Around the same time, the Securities and Exchange Commission had begun efforts to heighten standards of conduct specifically for broker-dealers and associated persons.  The result of the SEC’s efforts was Regulation Best Interest which was adopted in June, 2019.  Essentially, this regulation requires broker-dealers and their registered representatives to act in the best of the customer when recommending product purchases or investment strategies. 

What kind of consumer needs and expectations contributed to the revised model?

For many types of financial professionals, including insurance producers, the recognized trend is a demonstrable shift from a role of a “salesperson” to that of an advisor or consultant.  This is in keeping with many changes in the market:

  • Greater consumer service and personalization expectations
  • Increased specialization in the financial services industry
  • Changing financial needs and goals as more and more consumers step into retirement
  • The introduction of more sophisticated -- and complex -- financial products
  • Growing consumer reliance on outside financial advice and guidance
  • More options to address consumer financial requirements and objectives (not all of which would be appropriate for a given consumer)

It was in recognition of these changes and trends that the NAIC decided to raise the bar on the standards by which annuity products are recommended and sold.  Accordingly, the Suitability in Annuity Transactions Model Regulation was thoroughly revised to better reflect the needs of today’s consumers.

Compared to the prior version, what does the revised Suitability in Annuity Transactions Model Regulation change?

The biggest change the model brings about is an upgrade in practice standards and requirements from ensuring the suitability of an annuity recommendation or sale to ensuring that an annuity recommendation or sale meets the consumer’s best interest.  This requirement is more encompassing than the prior suitability standard, but is not a fiduciary standard.  

How does a producer meet the consumer’s best interest?

The revised NAIC model sets forth the following to meet the best interest standard:

  • Put the consumer’s interest first
  • Meet specific duties and obligations concerning care, disclosure, documentation and conflicts of interest

When does the revised NAIC model regulation go into effect?

This depends on the individual states.  The revised regulation must be formally adopted by a state, in accordance with the state’s law, regulation, or rule-making practices. You can review the status of your state on our annuities training page

Stay updated on the Suitability in Annuity Transactions Model Regulation to see if your state is impacted and what steps to take to ensure you stay in compliance. Visit the continuously updated WebCE annuities training page or call us at 877.488.9308. 

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