Late last year, the Federal Insurance Office issued a 70 page report about how it would like to modernize the industry. This branch of the U.S. Treasury is important to the insurance industry, including those selling annuities. While they didn’t mandate any kind of standards just yet, they have issued recommendations for the annuity industry. This information comes from Maria Wood of Life Health Pro, in the article “The FIO Report: What it says about annuities.” The Federal Insurance Office recommends that all 50 states adopt the NAIC Suitability in Annuity Transactions Model Regulation by June of this year. There are already more than 20 states that follow this suitability model. It is not yet clear what the FIO plans to do if the remaining states do not start following the NAIC annuity suitability guidelines by June. All they have said is that it is possible they will take federal action if states do not adopt the NAIC rules.
The NAIC model gives guidelines for those selling annuities. Anyone selling an annuity has to have “reasonable grounds” and believe that the annuity is in the clients’ best interest to purchase. Annuity producers have to be well trained on annuity provisions. The carriers also have to go over each annuity recommendation and make sure that the annuity is suitable. The NAIC model also requires variable annuities to be sold under specific FINRA guidelines. These suitability rules come down to basic ethical debates. Do not sell someone a product that doesn’t meet their needs and offer them value. Indexed annuities have been tricky to police because they are exempt from securities laws. In the FIO report, they remind the annuity industry that indexed annuities do have to meet specific requirements to be exempt. The Dodd-Frank Act that says the SEC cannot consider indexed annuities securities stipulates that they cannot have their value change based on a separate account. Indexed annuities can only be exempt if they are sold in a state following the NAIC annuity suitability act or by an insurance company that chooses to follow the guidelines nationwide.
We’ll know in June if the FIO plans to make any requirements to states that don’t start adopting the NAIC annuity suitability guidelines voluntarily. There is some incentive to do so though. Only those states following the NAIC model are eligible for grants that help senior citizens receive protection from unethical sales practices of financial products. These grants are available from the Office of Financial Literacy in the Consumer Financial Protection Bureau, as directed in the Dodd-Frank Act. Around half of the states in the U.S. have already adopted the NAIC guidelines, will the rest follow in the next five months?
Written by Rachel Summit