Disclaimer
The views and opinions expressed in this
presentation do not necessarily reflect those
of the National Association of Insurance
Commissioners (NAIC) or the National
Insurance Producer Registry (NIPR).
COMPLIANCE & ETHICS FORUM FOR LIFE INSURERS
NAIC E-Reg
Annuity Suitability Discussion
Kelly Ireland
April, 29, 2015
Overview
• This session will provide a panel discussion on
current suitability issues and how states and
companies are working to promote annuity suitability
compliance in the marketplace.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 3
Objectives
• Provide a better understanding of the regulatory framework for
promoting suitable annuity transactions.
• Discuss how the suitability standards imposed by the Financial
Industry Regulatory Authority (FINRA) reduce regulatory
duplication under the Suitability in Annuity Transactions Model
Regulation.
• Explore how insurance company practices are reasonably
designed to review the effectiveness of the annuity suitability
supervision system.
• Gather regulatory perspectives on insurance company annual
reports to senior management and product specific producer
training.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 4
NAIC Suitability in Annuity Transactions
(SAT) Model Regulation
• April 2015 marks the fifth anniversary of the adoption of the
2010 revisions to the SAT Model Regulation.
• Guidance offered in the Executive Summary of the SAT Model
Regulation, highlighted the following three goals:
– Establish a regulatory framework that holds insurers responsible for
ensuring that that annuity transactions are suitable, whether or not the
insurer contracts with a third party to supervise or monitor the
recommendations made in the marketing and sale of annuities.
– Require that producers be trained on the provisions of annuities in general,
and the specific products they are selling.
– Where feasible and rational, to make these suitability standards consistent
with the suitability standards imposed by the Financial Industry Regulatory
Authority (FINRA).
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 5
SAT Model Regulation – Relevant Sections
• Section 6. Duties of Insurers and Insurance Producers
– F. (1) An insurer shall establish a supervision system that is reasonably
designed to achieve the insurer's and its insurance producers' compliance
with the regulations, including, but not limited to, the following:…
•
(c) The insurer shall provide product-specific training and training materials which
explain all material features of its annuity products;…
•
(d) The insurer shall maintain procedures for review of each recommendation prior to
issuance of an annuity that are designed to ensure that there is a reasonable basis to
determine that a recommendations is suitable. Such review procedures may apply a
screening system for the purpose of identifying selected transactions for additional
review and may be accomplished by electronically or through other means including,
but not limited to, physical review. Such an electronic or other system may be designed
to require additional review only of those transactions identified for additional review by
the selection criteria;…
•
(f) The insurer shall annually provide a report to senior management, including to the
senior manager responsible for audit functions, which details a review, with appropriate
testing, reasonably designed to determine the effectiveness of the supervision system,
the exceptions found, and corrective action taken or recommended, if any.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 6
SAT Model Regulation –
Adoption and Implementation
• 31 states have adopted the SAT Model Regulation.
• It is the primary regulation governing most life insurers’
suitability programs.
• Effort made during drafting to avoid being prescriptive,
recognize there are a variety of annuity distribution channels.
• Many companies have implemented policies and processes
designed to comply with the SAT Model Regulation in all states.
• Life insurers developed unique annuity suitability review
processes tailored to the different types of distribution systems
utilized by the company to distribute their annuity products.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 7
SAT Model Regulation – Compliance
• Product specific training (PST)
– Provided upon appointment and confirmed/attested to prior to solicitation.
– Many insurers will ‘push’ or require PST when new products are rolled out
or when there is a material change to product offerings.
– May be conducted through web-based training, or in-person, primarily
internally, though some companies may use an outside vendor to provide
PST.
– Insurer required to provide PST, but no specific requirement to provide
‘proof.’
– Producer under obligation to have ‘adequate knowledge’ before soliciting.
– Insurers have indicated that tracking producer compliance with training
requirements of SAT Model Regulation can be a challenge. Establishing a
central repository for tracking completion could benefit insurers.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 8
SAT Model Regulation - Compliance
• Review of Recommendations to Determine Suitability
– Range of practices for conducting “secondary review.”
– Some life insurers will review each application. Others may require third–
party review of each application.
– Increasingly, automated screening processes are used to evaluate annuity
suitability.
– Systematic review to identify applications outside established thresholds for
heightened review.
– May involve interaction with producer or consumer.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 9
SAT Model Regulation - Compliance
• Reports to Senior Management
– Majority of companies provide detailed reports to senior management.
– Required annually, but may be done quarterly or semi-annually.
– Metrics (e.g. volume of cases that are approved, returned as unsuitable,
auto-approved, or where consumer elected to waive suitability) are used to
measure effectiveness of supervision system.
– Compliance Department is largely involved in reviewing reports/making
reports to senior management.
– Often identify specific issues and action items that may be used by life
insurance companies to improve processes.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 10
SAT Model Regulation – FINRA Safe Harbor
• S. 6 H. (1) Sales made in compliance with FINRA requirements
pertaining to suitability and supervision of annuity transactions
shall satisfy the requirements under this regulations. This
subsection applies to FINRA broker-dealer sales of variable
annuities and fixed annuities if the suitability and supervision is
similar to those applied to variable annuity sales. However,
nothing in this subsection shall limit the insurance
commissioner's ability to enforce (including investigate) the
provisions of this regulation.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 11
SAT Model Regulation – FINRA Safe Harbor
• FINRA Rules 2111 (Suitability) and 2330 (Variable Annuities)
served as a basis for the creation of the SAT Model Regulation.
• FINRA examines BDs for compliance with FINRA rules.
• In order to eliminate duplicative regulatory requirements, state
insurance regulators need to be familiar with operation of the
“safe harbor” and know what to look for when examining for
suitability compliance when a BD is supervising suitability of
annuity recommendations.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 12
SAT Model Regulation – FINRA Safe Harbor
• Broker-Dealers already subjecting VAs to FINRA suitability
review, insurers may incorporate a suitability amendment to
their selling agreement where the BD has elected to perform
suitability review for fixed annuities.
• Insurers still responsible for ensuring obligations are met, may
do so through:
– Review of BDs suitability forms and procedures.
– Oversight based on regular internal monitoring and random sampling of
submitted business.
– Obtaining certification of compliance (e.g. may require BD to enroll in the
CEFLI Clearinghouse for Suitability Certification).
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 13
SAT Model Regulation – Impetus for Change
• CEFLI’s 2015 Suitability Benchmarking Survey confirmed that
the 2010 revisions to the SAT Model Regulation prompted many
life insurers to develop enhanced annuity suitability review
processes that may not have been in place prior to introduction
of the Model Regulation.
• The goals of the drafters of the SAT Model Regulation have, in
large part, been fulfilled through the dedication of compliance
professionals throughout the life insurance industry to establish
appropriate strategies to meet these new requirements.
• Regulatory review practices may need to evolve as well, to
reflect the more risk-based approach embedded in the SAT
Model Regulation.
© CEFLI 2014. All Rights Reserved.
April 29, 2015 • 14
Questions?
Kelly Ireland
Vice President - Compliance
T • 240 744 3023
E • [email protected]
© CEFLI 2013. All Rights Reserved.
April 29, 2015 • 15
Compliance & Ethics Forum for Life Insurers
P.O. Box 30940
Bethesda, MD 20824
www.cefli.org
© CEFLI 2012. All Rights Reserved.
April 30, 2015 • 16
Annuity Regulation
April 29, 2015
Doug Ommen – Iowa Insurance Division
iowa
insurance
division
Risk-based Approach
Model Annuity Regulation
• Systems
• Compliance
• Internal Controls
• Self Audit
Retirement is a Growth Industry
Growth and
Sales Trends toward Fixed
$250
$200
$150
Total Sales
Variable
Fixed
$100
$50
$0
2012
in billions of $
2013
2014
Increasingly Complex Annuity Sales
in billions of $
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Fixed Index
Income Annuities
2013
2014
What is happening?
Low Interest Environment
Income Riders
Insurancenewsnet
SEC Member Calls FIAs Dangerous, Wants
Fed Scrutiny
4/16/2015
2:35:00 PM
WASHINGTON – A Securities and Exchange Commission
member is calling on all securities regulators to focus more
attention to the sale of complex securities, including what he
called “equity indexed” annuities, or what the industry calls, “fixed
index” annuities, to retail investors.
“The protection of retail investors is paramount and demands
immediate attention,” SEC Commissioner Luis A. Augilar said in a
speech Tuesday at the annual meeting of the North American
Securities Administrators Association (NASAA) and the SEC,
held in Washington, D.C.
Iowa Approach
• Producer Professionalism
Duty of Producer
• Supervision Systems and Controls
Duty of Insurers
Producer Professionalism (Duty of
Producers)
• Reasonable grounds to believe recommendation is
suitable for particular needs of consumer
• Reasonable basis to believe consumer has been
reasonably informed of features
• Model disclosure rule – Illustrations
• Training and knowledge
Supervision Systems and Controls (Duty of Insurers)
• Reasonably designed to achieve producer compliance
• Reasonable procedures to detect unsuitable
recommendations (i.e. confirmation of suitability
information, systematic customer surveys, interviews,
confirmation, internal monitoring)
• Established standards for producer training
• Report to senior management with testing reasonably
designed to determine effectiveness of system
Iowa Development
Insurance regulator responsibility to monitor systems and internal controls
calls for:
1. Center of responsibility and intense collaboration – 56 jurisdictions in
simultaneous review of the same reports / control systems is not an
efficient use of our resources
2. Increased quality and speed in policy and disclosure review
3. Solid understanding of broker-dealer suitability systems and cooperation
in our shared role with FINRA
4. Uniform implementation of the Annuity Disclosure Model Regulation
(MDL-245)
5. Development of Risk-based Audit Procedures, which complement – and
do not duplicate – the internal control systems required of insurers
Questions?