Please Don’t Feed The Lawyers
On Monday a senior officer of one of America’s largest insurance companies told me, “Five years ago we had five compliance attorneys; today we have one hundred and twenty five.” I had no idea that annuity compliance had become such a hot topic so I started doing Google searches. Here is what I learned:
In 2006 the National Association of Insurance Commissioners released Model 275 which has been adopted by most states. Here are the main points (italics are mine):
Duties of the Insurance Agent and Agency
· An insurance agent shall have reasonable grounds for believing that any recommendation to a consumer is suitable on the basis of the facts disclosed by the consumer as to their investments, other insurance products and their financial needs.
· Before executing a purchase of an annuity to a consumer, an insurance agent must make reasonable efforts to obtain information concerning the consumer’s financial status, tax status and investment objectives.
· A system to comply with this regulation must be established that includes:
o Maintaining written procedures.
o Conducting periodic reviews of records designed to detect and prevent violations of this regulation.
o An agent or agency must take appropriate corrective action for any consumer harmed by a violation of this regulation.
o An agent or agency must keep records of information collected in making recommendations to consumers for a minimum of three years after the transaction is completed by the insurer.
In short, agents, marketing companies, and insurance companies must be able prove that each annuity sale is made with the consumer’s needs in mind, not because the annuity sold pays the highest commission.
Minnesota Attorney General Lori Swanson, perhaps the most aggressive regulator in the country, has sued the four largest insurance companies who sell fixed indexed annuities. On February 7, 2008, she released this press release announcing a settlement with American Equity. The other companies are still fighting – hence the need to feed more lawyers.
Texas lawyer John R. Fahy has published a 15 page report that outlines the massive legal exposure insurance companies face under Texas’ version of NAIC Model 275 and FINRA’s new Rule 2821. His arguments are convincing, and he is not alone in his beliefs, which is why the company I referenced above hired 120 new lawyers.
How can agents, marketing companies, and insurance carriers protect themselves from this threat? Most companies have tightened up their suitability disclosures taken during the application process, but this protection is limited unless the company can prove the information on this form was asked by the agent before recommending a particular annuity product. The following solution is much less costly than hiring over 100 lawyers:
1. Create a system where agents must ask questions to consumers about (to quote FINRA 2821) their “Age; Annual Income; Financial Situation and Needs; Investment experience; Investment objectives; Intended use of the annuity; time horizon; Existing assets (including investment and life insurance holdings); Liquidity needs; Liquid net worth; Risk Tolerance; Tax status; and Such other information reasonably used or considered in recommending annuities to customers.”
2. Store the above information in a location accessible to the agent, his or her marketing company, and the insurance company for at least as long as the surrender period of the recommended annuity policy.
3. Document that the data gathered was used to determine that the annuity sold satisfied a direct, quantifiable need for the consumer.
4. Require agents to attach a copy of all sales materials, presentations, and illustrations used in making the sale — including scanned copies of yellow legal pad presentations.
5. Require the agent to provide a written summary of why the annuity satisfies the consumer’s need, and why it will better meet the objectives that the present source of funds.
6. Supervise agents and enforce the above for every annuity sale.
Does the above sound too costly and time consuming? These procedures are less costly than hiring a $300 per-hour lawyer. They are certainly less expensive to insurers than paying fines of $250,000 to $2,500,000 (see page 8 of Fahy’s document referenced above) to insurance regulators. How expensive is bad press? How much money does an agent lose when he or she is suspended from selling for six or more months?
Most successful retirement professionals are already adhering to the above procedures because they know that these practices create more sales than they lose. There is no better defense against litigation than a well-trained, ethical, sales force that is armed with the proper tools.
Also see:
NAIC soon to consider working group on annuity disclosure
NAFA Board Supports NAIC Model Regulation 225
Testimony Before the Senate Select Committee on Aging
Idaho House Bill 411 - Annuity Sales
Annuity Suitability Summit Explores How to Best Serve Consumers in a Well-Regulated Marketplace