Alaska, Hawaii, Minnesota, North Carolina, and South Dakota have recently adopted the National Association of Insurance Commissioners (NAIC) updated Suitability in Annuity Transactions Model Regulation (“2020 Model Regulation”), with the relevant effective dates noted:
- Alaska, 11/23/2022 (training effective date 1/15/2023)
- Hawaii, 1/1/2023
- Minnesota, 1/1/2023
- North Carolina, 1/1/2023
- South Dakota, 1/1/2023
They join a growing number of states where the regulation is already in effect. The 2020 Model Regulation and corresponding state insurance regulations will require insurance professionals submitting annuity applications in these states to comply with a Best Interest (BI) standard for annuity sales.
Please note: Recommendations of variable products, including annuities, are required to comply with the Securities and Exchange Commission Regulation Best Interest (SEC Reg-BI), regardless of the state of sale. SEC Reg-BI has significant differences from the NAIC’s 2020 Model Regulation, but broker-dealers and insurers may determine that compliance with SEC Reg-BI is sufficient to satisfy the NAIC disclosure requirements for variable annuity sales. Variable-registered insurance professionals should check with their broker-dealer’s compliance officers for more information.
All insurance professionals doing business in any state referenced above should familiarize themselves with the new BI standards described below.
Do you know the basics of what the new 2020 Model Regulation requires for annuity sales? The answer is best explained by comparing the differences and similarities between the new 2020 Model Regulation and the existing 2010 Model Regulation.
The Existing Model Regulation was published in 2010 in order to set standards for suitable annuity recommendations and to require insurers to establish a system to supervise these recommendations, taking into consideration the collection of all suitability information to ensure the needs and financial objectives of consumers were being addressed. Over the last 10 years, most states have adopted this model (refer to the Annuity Map).
The adoption of the 2010 Model Regulation changed the way annuity business was conducted by requiring:
- Annuity training and product training for licensed insurance professionals;
- The collection/documentation of all required suitability information for consideration by the producer; and
- Supervision and oversight of annuity sales, applying a suitability standard, by the issuing carrier or their contracted delegate.
The New Model Regulation was first adopted in 2020 in order to set standards for annuity recommendations that are in the best interest of the consumer. It continues to require insurers to establish a system to supervise these recommendations, taking into consideration the collection of all consumer profile information to ensure the needs and financial objectives of consumers are addressed. Refer to the Annuity Map for a summary of all state adoptions. The adoption of the 2020 Model Regulation changes the way annuity business will be conducted by requiring:
- Additional training for current licensed insurance professionals and updated training for insurance professionals newly licensed after the state’s corresponding effective date;
- The collection/documentation of expanded consumer profile information;
- Insurance professionals to make annuity recommendations using a best interest standard to include a care obligation, disclosure obligation, conflict of interest obligation, and documentation obligation; and
- Supervision and oversight of annuity sales, applying a best interest standard, by the issuing carrier or their contracted delegate.
Take some time to understand how these new requirements affect your ability to proceed with annuity sales in Alaska, Hawaii, Minnesota, North Carolina, and South Dakota. Please also access the BI Carrier Bulletin to review specific carrier requirements regarding this regulation.
Insurance professional readiness includes compliance with the following requirements:
Best Interest Training and Product Training
- Best Interest Training applies as follows and must be completed prior to an application being signed:
- For insurance professionals licensed before the state’s corresponding effective date and in compliance with the current annuity training, an additional one-hour best interest training course must be completed. States vary as to when this course must be completed (most states require this additional hour be completed within 6 months of the effective date) and this requirement may be met if the course was already completed to satisfy another state’s requirement. Please review and satisfy the corresponding training requirements if you are licensed in the states that have adopted the 2020 Model Regulation.
- For insurance professionals first licensed on or after the state’s corresponding effective date, the required four-hour training incorporates the new best interest training component into this course.
- Insurance professionals should not delay in taking the required training. Most states require the additional one-hour course be completed within 6 months of the effective date.
- Insurance professionals should continue to comply with carrier-approved training vendors when completing any new or additional training. Please follow the applicable course instructions for completing the correct training course. Refer to the BI Carrier Bulletin to review specific carrier requirements regarding training.
Collection and Documentation of Consumer Profile Information
- Annuity carriers have updated their forms to include the additional consumer profile information that must be collected under the 2020 Model Regulation.
- Insurance professionals need to use the updated application package beginning on or after the corresponding state’s effective date to ensure the appropriate Client Profile or Suitability documents are being used.
- Refer to BI Carrier Bulletin to review details regarding a specific carrier’s requirements.
Best Interest Obligations
- Care Obligation—The insurance professional, when making a recommendation*, shall exercise reasonable diligence, care, and skill to:
- Know the consumer’s financial situation, insurance needs, and financial objectives;
- Understand the available options;
- Have a reasonable basis to believe the options effectively address the consumer’s situation, needs, and objectives for the life of the product; and
- Communicate the basis of the recommendation.
- Disclosure Obligation—The completion of certain disclosures as applicable for fixed or fixed indexed annuity business including:
- Insurance Agent Product Disclosure for Annuities (or Appendix A Disclosure) must be completed for every annuity application taken on or after the corresponding state’s effective date. If the carrier does not include this disclosure in their application package, Tellus maintains a version that can be used. We suggest submitting a copy of the completed disclosure to the carrier even though not all may require the submission of this disclosure.
- Please Note: Variable annuity recommendations may still rely on distributing Form CRS Disclosure, as permitted under the SEC Reg-BI requirements. Variable-registered insurance professionals should check their firm requirements, if applicable, to ensure compliance.
- Consumer Refusal to Provide Information (or Appendix B Disclosure) must be completed if the consumer refuses to provide any consumer profile information. Many annuity carriers will not accept business if this disclosure is used, as their oversight is dependent on the collection of all this information. If the carrier allows sales with this disclosure, please use this up to date version.
- Consumer Decision to Purchase an Annuity NOT Based on a Recommendation (or Appendix C Disclosure) must be completed if the consumer wants to purchase an annuity that is not recommended by the insurance professional. Many annuity carriers will not accept business that is self-directed by the consumer. If the carrier allows sales with this disclosure, please use this up to date version.
- Conflict of Interest Obligation—An insurance professional shall identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest. The Insurance Agent Product Disclosure can be used to disclose any conflicts of interest.
- Documentation Obligation—Written documentation of any recommendation and the basis for the recommendation must be made and maintained by the insurance professional, including any of the disclosures used with the recommendation.