NAIC Revised Suitability Model Considered 2-13-2020

NAIC Revised Suitability Model Considered 2-13-2020

February 9, 2020 Off By administrator

On December 30, 2019, the Life Insurance and Annuities (A) Committee approved a revised Suitability in Annuity Transactions Model Regulation (Revised Suitability Model), ending a flurry of activity over the past year. The Revised Suitability Model must be approved by all voting members of the NAIC and then adopted by individual states before it will apply to annuity transactions. Commissioner Ommen, chair of the committee, explained that the Revised Suitability Model aligns the state standard of conduct with the SEC’s Regulation Best Interest and provides more than suitability but does not impose a fiduciary standard.

In with the new year is a best interest standard of care that comprises four components:

Invited to the gala are all producers who have “exercised material control or influence in the making of a recommendation and ha[ve] received direct compensation as a result of the recommendation or sale, regardless of whether the producer has had any direct contact with the consumer.” These producers are subject to the Revised Suitability Model requirements, in recognition that a producer with the consumer relationship may consult with another producer who provides the recommendation.

The Revised Suitability Model enhances the requirement that insurers establish and maintain a supervision system reasonably designed to achieve compliance with the Revised Suitability Model. It also invites other “comparable standards” as safe harbors that are deemed to satisfy the requirements of the Revised Suitability Model.

Below is a summary of the four component obligations, the insurers’ supervision requirement, the safe harbor, and certain notable items.

Care Obligation

The Care Obligation requires four acts, exercised with reasonable diligence, care, and skill, as follows:

  1. Know the consumer’s financial situation, insurance needs, and financial objectives;

  2. Understand the available recommendation options after making a reasonable inquiry into available options;

  3. Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information; and

  4. Communicate the basis or bases of the recommendation.

The Care Obligation contains 10 additional provisions explaining what is, and what is not, required to satisfy these four acts. In general, the producer must consider the totality of the consumer’s information — which the producer has made reasonable efforts to obtain — against the totality of the products available to be sold by the producer, and must conclude that the annuity effectively addresses the consumer’s financial situation, insurance needs, and financial objectives, and that the consumer would benefit from certain features of the annuity.

Items of Note:

  • The importance of the factors relevant in determining whether an annuity…

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