A common theme emerged when the National Association of Insurance Commissioners asked the industry to comment on possible revisions to its regulation for ensuring annuity transactions are in the best interest of customers: Stakeholders want to see harmonization across regulatory bodies.
That goal has been difficult to achieve as different regulators work to craft a higher standard for investment advice, which includes the annuity transactions many life insurers rely on.
The Department of Labor opted to delay and reconsider major elements of its Conflict of Interest rule, also known as the fiduciary rule, in November 2017, about a month before the rule was slated to take effect. The agency said it would undertake a further review of the rule and decide whether it wants to make additional changes. At the same time, the Securities and Exchange Commission has been engaging the industry on a unified best-interest standard and indicated that it could have a proposal of its own by October. The fiduciary rule would classify financial and retirement advisers under a "fiduciary" standard, which is stricter than the current "suitability" standard.
Meanwhile, comments on the NAIC Suitability in Annuity Transactions Model Regulation were due by Jan. 22.
Industry advocates are focused on harmonization of these standards, according to Jason Berkowitz, vice president with the Insured Retirement Institute, an insurance and investment industry trade organization in Washington. Berkowitz warned of the difficulty of having multiple conflicting standards or one overly prescriptive rule, instead arguing for a flexible approach.
In a Jan. 22 letter to the NAIC, the IRI expressed concern over "impartial conduct standards" incorporated from the Labor Department's fiduciary rule into the NAIC's model because they might inadvertently prohibit a producer or insurer from recommending any annuity where the transaction would result in producer compensation. "Clearly, producers and insurers reasonably expect to be paid for their services," the IRI stated.
The American Council of Life Insurers told the NAIC that it supports a best-interest standard that applies to individualized recommendations to retail customers on the sales of annuities and securities, and a harmonized standard can only happen through a coordinated effort.
In a letter to SEC Chairman Jay Clayton in November 2017, Nationwide Financial Services Inc. President and COO Kirt Walker said the company recommends a best-interest standard that has two elements — a duty of loyalty to the client and a duty of care in assessing customers' investment profiles — but still allows commission-based products and proprietary investment products. In this landscape of multiple regulators, Nationwide believes that the SEC is "best positioned to take the lead" in creating a standard, Walker wrote, calling for coordination with the NAIC and the North American Securities Administrators Association.
Many letters to the NAIC and the SEC mirrored concerns expressed by Nationwide that broker/dealers and other industry representatives could simultaneously be subject to multiple federal regulatory standards resulting in "customer confusion, unnecessary expenses, and unclear regulatory expectations."
Iowa Insurance and Securities Commissioner Doug Ommen is chair of the NAIC's Life Insurance Committee and vice chair of its Annuity Suitability Working Group. In an interview, Ommen said he and his department have been in communication with a number of states as well as SEC staff. He now wants to sit down with the SEC at the commission level to collaborate on a best-interest standard.
When the NAIC started this process with the SEC some time ago, while awaiting the confirmation of SEC Chairman Jay Clayton, SEC staff concluded that suitability and best interest are synonymous, according to Ommen.
"We will see where they are now," he said.
Ommen believes that the final outcome for the industry should be more in line with the state insurance approach of an enhanced suitability standard, which subjects products to review to ensure that they fit customer needs.
"Suitability is a better standard than it gets credit for," he told S&P Global Market Intelligence.
But consumer advocacy groups eviscerated the NAIC's annuity transactions draft, asserting in a comment letter that it "falls far short of a true fiduciary best interest standard. In fact, it remains weaker than the existing securities law suitability standard, let alone [the Labor Department's fiduciary rule] on the crucial issue of managing conflicts."
The consumer groups, which included the AFL-CIO, asked the NAIC to rewrite the proposal so it is not a "watered down" guideline that merely gives "lip service" to a best-interest standard.
New York Department of Financial Services Superintendent Maria Vullo recommended in a Jan. 22 letter that the NAIC adopt her state's proposal for a best-interest standard of care for the sale of annuity and life insurance policies. The recent DFS proposal is similar to sections of the Labor Department's original rule.
Insurers and producers frequently market permanent life insurance products as tax-advantaged growth vehicles that can blur the line between insurance and investment products, according to Vullo. Given the versatility and complexity of these products, the best-interest standard should apply to life insurance products as well, she wrote.
As federal and state regulators jostle with each other and with the insurance industry, it is unclear who will lead the way in defining the standard for insurance and investment product sales. But as Howard Mills, global insurance regulatory leader at Deloitte, remarked on the efforts underway, "no regulator likes to be second."
