More than a year after first circulating a draft guidance on compliance expectations for its best interest standard for annuity sales, regulators are nearing a final version. The National Association of Insurance Commissioners adopted the Suitability in Annuity Transactions Model Regulation #275 update in 2020 to strengthen state regulation over annuity sales. The draft guidance provides details for insurers regarding their obligations when they rely on third parties, such as broker-dealers, investment advisers, or ERISA fiduciaries, to comply with the annuity suitability model.
In March 2024, Iowa Insurance Commissioner Doug Ommen first noted that reviews of compliance with #275 turned up “deficiencies” in producer monitoring. Ommen chairs the Annuity Suitability Working Group, which is behind the draft guideline. Reviews “disclosed several ways in which companies’ safe harbor implementation is failing to rise to the level of monitoring the relevant conduct of the financial professional, including inadequate board onboarding of new broker-dealers to sell for the insurer,” Ommen said then, referring to the issues as “systematic deficiencies.”
How to Monitor
The guidance recommends three key practices to effectively and “actively” monitor the supervising entity:
The contract. When the supervising entity is handling the compliance obligations for an insurer, “a written contract reduces misunderstanding between the parties as to who is doing the supervising,” the guideline states.
Onboarding. The insurer should perform onboarding due diligence that includes a review of policies and procedures and regulatory actions, the guideline states. The review of policies and procedures should ascertain whether the policies apply to registered and unregistered annuities with appropriate modifications for product differences.
Ongoing monitoring. The guideline defines “ongoing monitoring” as including: due diligence questionnaires; periodic engagement with the supervising entity on compliance; risk analysis of sales activity, including sales to older consumers, free-look cancellations, early surrenders, and replacements; a strong audit program of adequate sample size on a frequent, risk-based basis; and meaningful annual certifications that are “detailed and active.”