NAIC Annuity Suitability Regulations Explained

  • Originally published December 20, 2011 , last updated November 30, 2016
NAIC Annuity Suitability Regulations Explained

The July passage of H.R. 4173 and the defeat of Rule 151A ensured that regulatory control over fixed indexed annuities would remain squarely in the hands of the insurance industry (state insurance commissions). However, change is still coming to annuity regulation.

As a condition of H.R. 4173, states must adopt regulations that substantially meet or exceed the minimum requirements established by the 2010 NAIC Suitability in Annuity Transactions Model Regulation (NAIC 2010) by June 16, 2013.

What is NAIC 2010?

Drafted by the National Association of Insurance Commissioners, NAIC 2010 establishes a regulatory framework that holds insurers responsible for compliance with suitability requirements. Essentially, it means fixed annuity producers will have to follow similar rigorous suitability standards to those imposed upon variable annuity producers, which means a lot more paperwork, a lot more training and a lot more oversight on each annuity sale.

NAIC 2010 Summary

New suitability requirements. Producers must have "reasonable grounds" to believe that the annuity recommendation is suitable based on 12 areas of "suitability information" disclosed by the consumer:

1. Age
2. Tax status
3. Intended purpose of the annuity
4. Financial time horizon
5. Existing assets
6. Source of funds
7. Other insurance and annuity products
8. Investment objectives
9. Liquidity needs
10. Liquid net worth
11. Risk tolerance

New product disclosure requirements. Producers must have a "reasonable basis" to believe that the annuity transaction is in the best interest of, is understood by, the consumer. This includes all of the annuity's features and benefits such as surrender charges, guaranteed interest rates, bonus interest rates, indexed rate crediting methods, tax-deferred growth, lifetime income riders, annuitization options, nursing home benefits, and other living or death benefits. These policy provisions must be clearly explained and understood by the consumer.

New independent suitability review. An independent entity will determine whether each piece of submitted annuity business follows the suitability guidelines.

New supervision and record keeping requirements. Producers must keep a record of any annuity recommendations they’ve made for a period between four and 10 years, depending on the state. Insurers must periodically review their producer’s records, provide product-specific training, and require a minimum four hour training course on annuities in general.

The Downside of NAIC

With the Passage of NAIC 2010, insurers are now responsible for making sure producers are trained properly and selling compliantly. With this kind of legal exposure insurance companies may take a number of steps:

  • Producers may be required to document every step used to make an annuity sale.
  • Insurance companies may call every new customer to make sure they understand what they bought and why they bought it.
  • Insurers may ask for written copies of materials used to make the sale.

In short, NAIC 2010 means more work, specifically paperwork, for both the insurance company and the producer. That means each sale is going to take more time and more effort, which means you won’t be able to see as many clients.

The Upside of NAIC

Ironically, the major downside of NAIC 2010—that each sale is going to take more time and more effort, which means you won’t be able to see as many clients—might be the major upside as well.

NAIC 2010 will force producers to take the necessary time to research and fact-find to make sure the product they’re recommending matches the customer's specific needs. This is where your secret weapon comes in: an experienced marketer you trust at your independent marketing organization.

Your marketing consultant can go over the case specifics with you and make product or solution recommendations. They can also help you document your decisions in case a carrier does ask for written documentation of why you made a particular recommendation.
The right IMO can help you make better recommendations, save time and stay compliant.

The other upshot to the increased scrutiny on compliance is that some producers will leave the market. For those who stay it will be an opportunity to become a trusted advisor who helps people protect their retirement savings, generate lifetime income, and transfer assets efficiently to their beneficiaries.