August, 2008

A Case for Retaining State Regulation

The following is based on a recent article from National Association for Fixed Annuities (NAFA) and outlines its opposition to the recently proposed regulation of the sale of index annuities by the Securities and Exchange Commission.

Christopher Cox, SEC Chairman, shares an anecdote of his father’s unsatisfactory purchase of a fixed indexed annuity.

When asked what states are doing to address unsuitable sales, Susan Nash of the SEC says, “the states are just concerned with company solvency.”

At a Wisconsin committee meeting for index annuity supervision, a member representing the security-distribution channel expresses the need for more product training because the complaints against index annuities are “huge compared to traditional annuities.”

At that same meeting a representative from North American Securities Administrators Association (NASAA) says that the need for supervision is “not because of the product but because how the product is sold.”

While companies in all industries strive for 100% customer satisfaction, most people today understand that this perfection is impossible in our complex and ever-changing financial world. So when we, as an industry, begin to evaluate effective oversight and regulation, it’s best to stick with the absolute facts and not to be unduly influenced by the experience of any single consumer, no matter how well known or how relatable that person may be.

NAFA has always been clear and strident in its stance that inappropriate, unsuitable, fraudulent or misleading sales are bad for the consumer and bad for the insurance industry. But with that in mind, the association opposes the recent SEC proposed rule to police the sale of index annuities because it creates egregious regulation that will adversely impact those consumers for whom index annuities are not only an appropriate product, but also be a unique fit for unique financial circumstances.

NAFA has found that most of the rationale for this proposal has been based on anecdotal theory and not facts and believes that when the facts are equally applied, centralized oversight by a self-appointed federal authority is not necessary, prudent or good public policy.

Theory : States are only concerned with company solvency.

Fact : The National Association of Insurance Commissioners (NAIC), the American Council of Life Insurers (ACLI) and individual states’ insurance commissioners have all taken lead on initiatives involving education, suitability, disclosure, licensing and supervision.

• Education
  The NAIC Professional Designation Program was created in response to requests by regulators for a structured professional-development path based on the NAIC curriculum. To comply with new, more rigorous instructional standards associated with this program, the NAIC’s curriculum has been refined and enhanced to include targeted learning outcomes, interactive teaching strategies, and the latest and most practical information participants need to support critical regulatory initiatives. For more information, go to www.naic.org/education_designation.htm.
• Suitability
  Thirty-one states have adopted the NAIC model suitability regulation, with others following suit. A model Consumer Alert has been developed and the Suitability of Annuity Sales (A) Working Group has been charged to provide insurers with uniform guidance in developing training, supervision and monitoring standards to better protect annuity consumers from unsuitable sales and abusive sales and marketing practices.
• Disclosure
  The ACLI is striving to improve annuity disclosure and has created the CEO Task Force on Annuities to bridge the information gap driven by concern over consumer misunderstanding. The task force’s priorities are uniform adoption of NAIC model regulation and consumer empowerment through simplified disclosure. It also seeks to enhance current disclosure requirements under state and federal laws by using templates for fixed and index annuities that are based on the NAIC disclosure model and templates for variable annuities that follow federal securities laws.
• Licensing
  Uniformity and reciprocity for producer licensing has been a goal of the NAIC for years. The concept of uniformity relates to resident licensing. The NAIC has adopted 37 Uniform Resident Licensing Standards that focus on eight broad areas, including
  1. licensing qualifications;
  2. pre-licensing education;
  3. licensing testing;
  4. integrity and background check standards;
  5. license application process;
  6. appointment process;
  7. continuing education requirements; and
  8. limited lines.
  Reciprocity addresses non-resident licensing. The NAIC has identified four conditions that a state must satisfy in order for the state to considered reciprocal. In 2007, the NAIC identified producer licensing reform as one of its key strategic issues. As a result, the NAIC conducted a national, comprehensive, producer licensing assessment and issued the NAIC Producer Licensing Assessment Aggregate Report of Findings.
• Supervision
  
  • Interstate Insurance Compact
    To date the Compact has been adopted by 31 States and Puerto Rico, representing one-half of the premium volume nationwide. The compact established a multi-state public entity, the Interstate Insurance Product Regulation Commission (IIPRC) that serves as an instrument of the member states.
  • NAIC Unfair Trade Practices Act
    Travel underwriting revisions were adopted at the Life Insurance and Annuity (A) Committee Meeting, March 30, 2008 in Orlando, Florida.
  • State-Level Actions
    Iowa, California, Florida and Wisconsin, accounting for a large percentage of fixed annuity buyers, have developed or are developing disclosure templates, supervision requirements, illustration limitations, designation restrictions and state-specific suitability rules. Alabama developed a task force to investigate annuity sales, particularly as they apply to the suitability of the products sold to Alabama consumers.

Theory : Complaints about index annuities prove the need for change.

Fact : The following information is taken from a March 2008 NAIC report.

This data makes clear that a product representing only 10% of all annuities sold (Source: LIMRA) representing only 1/10^th of a percent of complaints has many satisfied customers.

Theory : It is not what is sold it’s how it is sold.

Fact : According to the same NAIC report referenced above, complaints about marketing or sales tactics made up only about 3% of the total complaints. Bear in mind that the complaint reason is not divided by product and therefore complaints about marketing and sales include all insurance products marketed (i.e. health, long-term care, life and annuities). The most common complaints were in claim handling and underwriting (nearly 70% each year).

It’s impossible to make a fair comparison of this data to similar statistics in the security industry, as there is no such consolidated reporting and analysis of consumer complaints made public by the overseer of security sales or by the security industry. Without accurate and relative data it is inappropriate, and perhaps untruthful, to make this type of comparison.

Basic Facts

The proposed rule makes it clear to NAFA that the SEC is ignoring the unique aspects of index annuities that make them insurance products. And it appears they do not understand that there are state laws in place to

• protect consumers from unsuitable sales,
• prohibit fraudulent and misleading sales practices,
• require full disclosure and free return of unsuitable policies, and
• provide non-forfeiture protection and minimum interest guarantees.

Based on actions that the insurance carriers, state insurance regulators and industry associations have taken — and will continue to take — to eradicate abusive, misleading and fraudulent marketing practices, to ensure suitability supervision and review, and to oversee agent training, education and licensing, NAFA believes the consumers today enjoy a safe and secure environment to consider the purchase of index annuities and a local state insurance commissioner’s office to seek redress if they believe they have been mislead or pressured into buying an unsuitable product. And they further state that if a discussion about the effectiveness of these actions is deemed appropriate, it is in the best interest of the consumer that the discussion be based on factual, empirical data.

Not For Use With Consumers

Standard Insurance Company
Individual Annuities   1100 SW Sixth Avenue   Portland OR 97204   800.378.4578

The above message is only for contracted representatives of Standard Insurance Company, a subsidiary of StanCorp Financial Group, Inc. This information is not intended for use with consumers.

© StanCorp Financial Group, Inc. All rights reserved.
Privacy Policy and Legal Notices.