State Regulation

Consumer Groups Strongly Criticize State Insurance Regulators for Anti-Consumer Proposed Annuity Sales Standards

CFA and CEJ Decry Orwellian Use of “Best Interest” Label for Standards That Protect Insurers and Agents Engaged In Harmful Sales Practices of Complex Insurance Products, Not Consumers

Washington D.C. – The Center for Economic Justice (CEJ) and the Consumer Federation of America (CFA) are urging state insurance regulators on the National Association of Insurance Commissioners (NAIC) Life Insurance and Annuities Committee to reject a proposed industry-friendly, anti-consumer “Suitability in Annuity Transactions” model regulation and continue work to create a true “best interest” standard of care for insurers, agents and brokers when selling complex annuity products to consumers.

CFA and CEJ made the request after industry trade groups submitted a letter late last month urging the Committee to speed approval of the current draft at an upcoming meeting of the NAIC scheduled for December 8, 2019.

“The fact that all the industry trade associations of insurers and agents selling annuities are euphoric about the proposed revisions while consumer groups are aghast at the anti-consumer nature of the proposal is stark evidence of how biased the proposal is in favor of industry interests over consumers,” said CEJ Executive Director Birny Birnbaum. “By allowing insurers and producers to falsely claim to be acting in consumers’ best interest when there is no such requirement and when there is no meaningful constraint on conflicts of interest that would compromise advice given to a consumer, the proposal will mislead consumers into expecting protections the rule does not provide.”

CEJ and CFA identified the following as particularly critical shortcomings in the current draft:

  • It does not impose a true best interest standard. The current draft requires that the producer have a reasonable basis to believe the recommended annuity meets the consumer’s needs. That is not a true best interest standard; it is simply a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading. Moreover, the standard is vague and full of loopholes.
  • It does not rein in the most harmful and pervasive conflicts of interest. The proposed standard excludes all forms of cash and non-cash compensation from the definition of material conflict of interest. As a result, compensation practices at the heart of a whole host of recent life insurance and annuity sales scandals would be preserved. The associated conflicts would not even have to be mitigated to minimize their harmful impact.
  • Its ban on certain sales contests and incentives is too narrowly drafted to promote real reform. The proposed ban on time-limited, product-specific sales contests and incentives appears, at first glance, to be a major step toward eliminating some of the most anti-consumer practices common in the industry today. However, closer scrutiny reveals that it is so narrowly drafted that its only effect will likely be to force insurers to redesign, rather than eliminate, such practices.
  • It relies heavily on disclosures that are poorly designed and not provided at the appropriate time. In a number of areas, the proposed standard is satisfied through disclosure, but the Committee has failed to test the proposed disclosures to ensure that they are effective. Moreover, because of the proposal’s lax delivery requirements, key disclosures, such as the Producer Relationship Disclosure Form, are likely to come too late to benefit the consumer. As a result, the disclosures are likely to do more to shield insurers and producers from liability than to inform or protect consumers.

“The Committee obviously drew heavily on the SEC’s Regulation Best Interest in developing its model, despite the fact that Reg BI has been strongly opposed by investor advocates, is the subject of a legal challenge by several state attorneys general, and has been criticized by state securities regulators as inadequate, prompting some to draft their own, stronger regulations,” said CFA Director of Investor Protection Barbara Roper. “Worse, although annuities sales are an area in particularly urgent need of reform, the NAIC model is actually substantially weaker than the SEC rule in several important ways. Under no circumstances should NAIC adopt this proposal in its current form,” Roper added. “To do so would be a complete dereliction of its duty to protect insurance consumers.”

Birnbaum added, “There is a massive disconnect between what an average consumer would understand as an insurer or agent acting in the consumer’s best interest and what the proposed model regulation defines as a best interest standard of care.”

A copy of the CEJ-CFA letter is available here.

Birny Birnbaum, CEJ, 512-784-7663
Barbara Roper, CFA, 719-569-9159