A draft of guidance on annuities conflicts of interest being considered today by the nation’s insurance regulators does not require agents and advisors to disclose most forms of annuities cash and noncash compensation as conflicts of interest, according to a consumer advocate.

The lack of disclosure outlined in the National Association of Insurance Commissioners (NAIC) draft FAQ on its annuities suitability model is a concern for investors seeking to understand what motivates agents to sell certain products, said Barbara Roper, director of investor protection at the Consumer Federation of America.

The NAIC will meet today “to explain the inexplicable: why it excluded most compensation from the requirement for annuity sellers to identify, reasonably manage and disclose material conflicts of interest.” Roper said.

“Taking the position that how insurance producers are paid doesn’t create a material conflict of interest is simply indefensible, when you consider both the wide range of payouts among different types of annuities. No one who approaches the issue from the consumer viewpoint would take that position,” Roper said.

The NAIC’s draft FAQ defines "material conflict of interest as a financial interest of the producer that a reasonable person would expect to influence the impartiality of the recommendation.” But the FAQ then goes on to say, “The model regulation also specifically excludes ‘cash and non-cash compensation’ from the requirement for material conflicts of interest.”

The NAIC explained the exclusion by saying, “The NAIC determined that most forms of routine compensation do not create a material conflict of interest and that most conflicts of interest that might be created by compensation arrangements can be addressed through the Insurance Agent Disclosure of Annuities, required by the model regulation to be provided to the consumer and which includes a section ‘How I’m Paid for My Work.’”

The draft FAQ continued, “The NAIC determined that general incentives regarding the sales of a company’s products with no emphasis on any particular product do not create a material conflict of interest. The NAIC identified some types of compensation arrangements that likely create a material conflict of interest and requires the insurer to identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific annuities within a limited time frame."

In a separate form, “How I’m Paid for My Work,” the NAIC does require agents to disclose compensation and to prominently notify the consumer of the right to additional cash compensation information, but does not identify payments as potential conflicts of interest.  NAIC also concluded that sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific annuities within a limited time frame should be avoided.

According to Roper, the NAIC’s lack of conflicts disclosure means the group’s model annuity rule “can never satisfy the DOL’s advice rule, which as recent guidance makes clear demands serious restrictions on conflicts.”

Total U.S. annuity sales rose to $58.7 billion in the last three months of 2020, up 2% from $57.6 billion during the same period in 2019, according to Limra’s Secure Retirement Institute. While the burgeoning no-load sales commission market for annuities is growing, commission-based products still dominate.

The “Securing a Strong Retirement Act for 2021,” or SECURE 2.0, which is heading toward a House vote, contains provisions that would make it easier to include annuities in retirement plans and IRAs. Meanwhile, consumer and fiduciary advocates press for stricter conflict-of-interest amendments to the Department of Labor’s advisor rule and the Securities and Exchange Commission’s best-interest rule.

NAIC regulators are scheduled to meet on the FAQ today. A request to the NAIC for comment was not immediately answered by deadline.