Annuity FYI Blog

New York State is the latest to issue legislation adopting the National Association of Insurance Commissioners’ guidelines.  Errol Baddoo of Annuity News Journal discusses the new regulations in “New York Insurance Department Changes Regulations.”  The New York State Insurance Department has two new regulations dealing with annuities and other insurance products.  Both are meant to protect consumers, especially senior citizens, against purchasing products that are not suitable for their particular situation.

The first legislation, Regulation 199, makes sure that advisors and brokers do not use false titles to imply that they have a specialty that doesn’t exist.  This pertains to senior citizens most often because deceptive brokers use titles like “certified senior advisor” to try and attract immediate annuity or life insurance business from senior citizens.  The regulation bans the use of these titles in all advertising materials, including business cards, print ads, and television commercials.

Regulation 187 deals with suitability standards in the sale of annuities and other insurance products.  Salespeople are banned from selling unsuitable products to consumers, especially when the consumers don’t understand what they are buying.  Brokers and advisors must sell consumers the best annuities and life insurance for their particular situation and make sure that the consumers are fully informed regarding the products.  They have to be aware of all fees, tax liabilities, and any surrender charges as well as all other details for the products they are planning to purchase.

The new annuity suitability model was put in place to protect investors and ensure that they get the best annuities for them, but the extra training required for advisors may have a negative impact on the choices offered to investors.  Darla Mercado of Investment News talks about this double-edged sword in “Annuity exam overload could prompt product pruning.” Each annuity sold now requires a state mandated training course and exam in the states that have adopted the NAIC’s annuity suitability model.  So far nine states are using the model, but it is forecasted that all states will adopt the annuities model in the near future.  Because of the extra training required and the hours that the education and exams will consume, it is possible that advisors will work with fewer carriers and offer fewer products to their clients.

There is a general annuity course taken online which lasts approximately four hours.  After that, advisors must take specific training for each type of annuity product they sell.  This includes fixed annuities, variable annuities, and fixed indexed annuities, among others.  Training for each single product will take about an hour.  Advisors will have to show proof of their training in order to sell an annuity in the states who have already adopted the annuity suitability standards model.  Small insurers are worried that advisors will stop selling their annuities because of the extra training required.  It is possible that they will stick to the big companies like Prudential, MetLife, and Jackson National.  As annuities become more specific and are made to meet the needs of specific clients, this extra training may just keep the best annuities for certain investors out of their reach if their advisor hasn’t gone through the training to sell them.  Hopefully the new standards do not negatively impact the annuity industry that they are meant to help.

According to The Street article “Putnam CEO Wants Annuity Oversight Agency” by Joe Mont, Putnam Investments’ CEO would like an agency similar to the FDIC in charge of lifetime income products like annuities.  Not only would he like the agency to oversee these investments, he would also like it to insure the products like the FDIC insures the money in banks.  CEO Robert Reynolds even named the fictitious agency the Lifetime Income Security Agency and he is calling on Congress to adopt his idea.  The agency would have the power to approve or deny all lifetime income products sold in the U.S.

It’s not that far-fetched of an idea, especially since the federal government, under President Obama’s lead, has been pushing Americans to secure their retirement with lifetime income products like the 401k annuity.  As we live longer, many retirees are facing three or more decades of retirement in which they need income to sustain their lifestyles.  He points out that overall sales of annuities have been relatively flat, partially because investors are wary to put so much money in one company whose guarantee lasts only as long as they are in business.  While choosing a top company takes a lot of that risk away, Reynolds argues that government insurance would help bring many more investors to the lifetime income of products like annuities.

Unfortunately some investors are turned off from these excellent investments because of stories they have heard about a few bad companies selling products that were too good to be true and not following through on their promises.  With a government agency overseeing those in the lifetime income business, only legitimate companies and good products would be approved.  This could greatly increase the consumer trust level for products like annuities, draw-down funds, and guaranteed pay-out plans.  Products like these, especially when they have death benefits, can carry Americans through a long lifetime without the worry of how they will pay their expenses in retirement.

The National Association of Insurance Regulators issued new suitability standards this summer that they hope investment advisers will follow.  According to Investment News’ “IRI to launch ‘painless’ annuity training platform” by Mark Schoeff Jr., the annuity sales training will be uniform across the board of investment advisers because one website will handle everything.  While only two states have plans in place to implement the regulations, there are 29 other states committed to beginning the suitability requirement process.  Iowa will be the first state to require the suitability regulations be followed, beginning January 1.  Their investment advisers will be able to use this new website system for their training because it will be up and running on November 22 of this year.

The Insured Retirement Institute worked with RegEd, a compliance company, to get the training program up and running.  Advisers will receive specific training related to the suitability of annuity products to meet the new suitability standard.  The training will include a range of annuities from a 401k annuity to various other types of fixed and variable annuities.  These suitability standards were put in place to protect worried consumers who hear the small percentage of negative stories about annuities from the media.  While the majority of annuity products are not too complex or expensive to begin with, this across the board training is meant to eliminate any abusive practices by advisers.  There are incentives in place to encourage the 19 states who haven’t yet implemented the regulations to do so.

NAIC 2010 puts much more stringent requirements on insurers to ensure that annuities sold are meeting suitability standards.  According to Insurance News Net’s “Prepare for Tougher Annuity Standards,” because state insurance departments won their battle with the SEC over regulating annuities they will now have to comply with stricter rules.  Producers of fixed annuity products will have similar suitability standards to those already in place for variable annuity producers.  Insurers are fully responsible for following these standards and ensuring that the marketing done by their producers follows standards as well.  NAIC 2010, or the NAIC Suitability in Annuity Transactions Model Regulation, has a number of checks and balances to oversee annuities.

First of all, annuity producers have to look at 12 different pieces of information from customers to determine suitability and follow the new suitability requirements.  The product disclosure requirements mean that consumers must be able to understand all facets of information relating to their annuity, including death benefits, all riders attached, and annuity rates.  There will be an independent suitability review done by someone similar to an insurance underwriter to make sure that customers qualify for the annuity, even if they already have the money to purchase their product.  The record keeping and supervision of the record process will entail much more than in the past with states requiring documents to be kept and reviewed anywhere from four to ten years.  All of these new NAIC 2010 provisions are looking out for the best interest of consumers.