A new conduct model governing annuity transactions moved closer to reality after winning the approval of a key National Association of Insurance Commissioners' (NAIC) committee.

The NAIC Life Insurance and Annuities Committee adopted a model that the NAIC says requires agents to make annuity recommendations with their customers' best interest in mind. That claim has been a subject of controversy, however, with consumer groups and other critics claiming the model does not prescribe a true "best-interest" standard.

In approving the annuity suitability conduct model, the committee kicked certain disclosure provisions back to a working group for further work, albeit with a tight deadline.

The committee is scheduled to meet again via conference call to review and approve the work of the annuity suitability working group and vote the entire model up to NAIC’s Executive Committee and Plenary for consideration at the group’s January conference.

The commission is hoping the set of rules—which by themselves hold no legal authority—will be used as a model by state regulators.

Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, predicted that many states will be eager to adopt the new annuity model.

“We’ll be pushing for this to be adopted across the country," he said. "I think you will see an early rush of states that will want to get out on this quickly."

The model should also dovetail with best-interest standards being proposed by the SEC, said Bruce Ferguson, American Council of Life Insurers senior vice president for state relations.

“Together, these two initiatives will significantly strengthen protections for consumers seeking guaranteed lifetime income in retirement through annuities,” Ferguson added.

Once the NAIC Executive Committee and Plenary approve the annuity sales rule, it becomes an official NAIC model law and is sent to the states for adoption.

The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure, to the chagrin of consumer groups. Instead, the model requires that agents must be able to show that recommendations are in consumers' best interests.

The model articulates the best-interest standard by instituting four obligations: care, disclosure, conflict of interest and documentation.

From an agent's perspective, two changes could result from the new rules. The first is extra work and documentation to establish the consumer's profile. Agents will need to find out and document things like a consumer's financial situation, insurance needs and financial objectives.

The rule also requires producers to disclose and describe the types of compensation they are receiving. If requested by the consumer, agents must also disclose the amount of compensation they are receiving.
Consumers must be given a disclosure alerting them to the right to request the amount of compensation, according to the NAIC model.

Importantly, sales contests, bonuses and trips might be a thing of the past in states that adopt the new rules. The rule requires insurers “to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.”

Consumer groups, however, don’t believe the NAIC model goes far enough to protect consumers from conflicts of interest. “The current draft does not impose a true best-interest standard,” the Center for Economic Justice and the Consumer Federation of America said in a comment letter.

“The current draft requires that the producer have a reasonable basis to believe the recommended annuity meets the consumer’s needs,” the consumer groups wrote. “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.”

The current draft would also exclude all forms of cash and non-cash compensation from the definition of material conflict of interest, the consumer groups wrote.

“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,” the consumer groups said.