The report warned that federal regulation of the insurance industry may be necessary if states don’t take appropriate steps to modernize their regulatory systems.

It didn’t call for a broad federal role in insurance regulation, noting many of the areas where the FIO recommended reforms are areas where states already have been working to make changes.

The report refers to the NAIC’s latest version, the Suitability in Annuity Transactions Model Regulation of 2010, which applies to the sale of annuities to all age groups, not just senior citizens and the elderly, industry experts said.

A federal threat always motivates states to help consumers, said J. Robert Hunter, director of insurance at the Consumer Federation of America. “Sizable parts” of the insurance industry don’t want any federal regulation or takeover, Hunter said, noting they’ll go to the states and say “you’re going to lose your turf,” and that motivates action. In the debates on state versus federal regulation, states share a fear of losing their taxing authority, Hunter said, noting that among their greatest sources of income is the premium tax.

The NAIC’s 2010 model is intended to stop misleading practices by financial sales professionals, insurance agents and brokers when they sell these retirement savings and income products by requiring insurers establish a supervisory system.

Under pressure from insurance companies in their states, at least half of the states that haven’t enacted the 2010 NAIC model will enact it this year, Hunter predicts.

Lee Covington, general counsel at the Insured Retirement Institute, said the IRI supports the FIO report’s recommended reforms.

The report recognizes that consumers should have the same level of protection across the country, he said, adding that the IRI supports the 2010 NAIC model because uniformity is good for insurers, regulators and consumers.

It also states that any federal action that could be taken would involve imposing a national suitability requirement, Covington said. However, “we’re relatively confident” that the remaining states will move to the 2010 model over the next few years, he said.

Given that many seniors are retiring every day and that these products are important to securing a retirement income, having a national standard for suitability of sales “makes a lot of sense,” said Iowa Insurance Commissioner Nick Gerhart, a member of the NAIC life insurance and annuity committee. Thirty states have enacted the 2010 model, which means 20 don’t have this latest version of the model, Gerhart said.

States Targeted

Under the federal Dodd-Frank Act, incentives were supposed to be available to the states from 2011 to 2015 with an investor protection grant program through the Consumer Financial Protection Bureau, Gerhart said. But that grant process was never set up.

The FIO report notes Dodd-Frank providing these incentives for state insurance regulators to enact a national suitability standard, Gerhart said.

Alabama State Rep. Greg Wren, president of the National Conference of Insurance Legislators, says his group works with the NAIC on its models and the NAIC works with NCOIL on its models.

In 2014, when it comes to annuity suitability laws, “we are directly targeting on the map the states that have had zero activity in the area of even introducing and we’re moving quickly to find legislative champions in those states to go ahead and introduce the legislation,” Wren said. He added that he challenges “every federal entity” involved with the insurance market to include U.S. state insurance legislators going forward.

Standard Needed

Barbara Roper, director of investor protection for the Consumer Federation of America, called it “shocking” there are states that don’t have the suitability standard for annuities, an investment-type product, which she called an “absolute basic minimum” standard. The FIO is trying to reach the “floor” that already exists for securities products, including stock market-linked variable annuities.

Any time a salesperson is presenting themselves to the consumer as an objective adviser, they ought to be subject to the higher legal fiduciary standard to act in the best interests of the customer, Roper maintains.

A fiduciary duty is needed for annuities because they’re complex, she said. “What consumer is going to understand that a variable annuity is a security and an equity-indexed is insurance?” Roper said.

“Across the board, in all financial services industries, any sale ought to be covered by at least a suitability standard; any advice ought to be subject to a fiduciary duty.”

Meanwhile, Sheryl Moore, president and chief executive officer of Moore Market Intelligence, said indexed annuities remain protected from securities regulation by “Safe Harbor 151.”

These products are issued by corporations that are subject to supervision by state insurance commissioners, she said.

The insurer, not the purchaser, assumes the investment risk under these contracts. “Plus, indexed annuities are not marketed primarily as an investment, but as insurance contracts,” Moore said.

The Financial Industry Regulatory Authority has oversight over some indexed annuity sales, she said. FINRA, then known as the NASD, issued a notice in 2005 that suggested broker-dealers and member firms treat indexed annuities as if they are securities.

The NASD further suggested that these firms developed an “approved list” of indexed annuities from which the firms’ registered representatives could sell, she said.

Although the Harkin Amendment under Dodd-Frank “eliminated the questionable securities status” of indexed annuities, and finalized their fixed insurance regulation, this notice still stands, Moore said.

No one has formally challenged FINRA about this notice, so member firms must continue to abide by it, she added. “For this reason, FINRA continues to have oversight over indexed annuity sales through registered reps.”

Mike McGlothin, executive vice president in charge of annuity distribution for Ash Brokerage, a brokerage general agency, said FINRA “will really try to regulate the sales process” associated with indexed annuities. As a result, broker-dealers will be forced to treat them just like a security with the same level of suitability and due diligence that they would on the sale of a variable annuity or mutual fund, McGlothin said. He noted that Ash’s primary line is indexed annuities and its primary accounts are with independent broker-dealers.

By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com