It has been five years since the NAIC’s updated Suitability in Annuity Transactions Model Regulation was adopted. Today the annuity suitability process is a key focus for state insurance regulators, because there remain questions as to just how effective the model regulation has been, and/or if carriers have implemented it in a satisfactory manner. To date, 35 states have adopted the model regulation, and among those states there are concerns about disparate standards and processes by carriers.
The Federal Insurance Office (FIO) noted in its 2015 annual report to Congress on the insurance industry, that “…the suitability standards for annuities sales are not uniform. The continuing absence of a uniform, national annuity suitability standard is increasingly problematic given the unprecedented number and increased longevity of consumers reaching retirement age and the rising complexity of annuity products. In the absence of national standards and uniform adoption and enforcement of this basic consumer protection regulation, federal involvement may be appropriate.”
In addition to potential inconsistency in standards, some carriers have experienced additional regulatory scrutiny for inadequate oversight of the suitability process. For example, carriers will often delegate the suitability review of their fixed annuity products to a broker/dealer with whom they have a selling agreement. In some instances, the carriers have failed to ensure the broker/dealer has the fixed product expertise, or even the resources, to successfully manage the suitability process and comply with the model regulation. Some carriers also have not actively overseen the suitability process. Regulators have reminded carriers that, while it is acceptable to outsource a compliance function, the carrier is ultimately responsible for adhering to the suitability standards outlined in the model regulation and needs to actively oversee any outsourced functions.
So what does this mean for annuity carriers? With a renewed focus on suitability at both the state, and now the federal level, carriers should expect regulator questions and scrutiny on their process, particularly during market conduct exams. It will be important that carriers have developed a robust suitability program, are following it consistently, and can demonstrate a reasonable system of oversight and control over the process – whether it is performed in-house or delegated to a third party.
If a carrier elects to outsource the suitability review, it is important to choose a third party who has expertise in fixed annuity products, understands and consistently adheres to the company’s suitability standards, and adequately documents the process. In addition, carriers should perform regular oversight of the outsourced suitability function, just as they would any other outsourcing arrangement.
For information on the suitability review services that Currin Compliance Services, Inc. offers to insurance carriers and broker/dealers, please call (518) 692-2494.
For a copy of the Federal Insurance Office 2015 Annual Report on the Insurance Industry, click here.