The case for regulation
By Kim O'Brien
The National Association for Fixed Annuities
We frequently hear from the media and those in the broker/dealer community seeking to have fixed indexed annuities regulated by the SEC that one of the concerns with the product is they are not regulated as securities. This is patently false; and while this article may take some time to read, that very fact repudiates the "less-regulated" claim. It also supports NAFA's position that not only do the states provide robust regulation and reactive oversight, but insurance companies often provide additional layers of consumer protection and suitability processing. Companies do so not only because they want to comply with the laws, but because it is simply good business to retain satisfied, long-term customers. And, the success of their practices is proven by the fact that more than 88 percent of annuity owners still own the first annuity they purchased.1
In addition to rigorous and robust state insurance laws, state insurance regulation is dynamic and responsive to developments in the insurance industry and marketplace. Fixed indexed annuities have achieved greater marketplace acceptance in recent years, and coupled with the emergence of certain recognized sales practice issues, state regulatory authorities and the NAIC (as well as the insurance industry itself) have undertaken a number of targeted initiatives to control sales practices and enhance disclosure for consumers. State insurance law contains an array of sales practice regulations designed to benefit consumers. In fact, four of the more important protections with regard to the sale of fixed index annuities are laws relating to sales to seniors, replacement laws, unfair trade practices laws and advertising laws. Insurance regulation provides these benefits through market surveillance, examinations, complaint-handling requirements and enforcement powers.
Suitability in the sale of annuities is an important tenet of state insurance law. Generally, state suitability laws require producers -- or insurers, when no producer is involved -- to gather substantial information relating to the suitability of the proposed sale and shall have reasonable grounds for believing the recommended annuity is suitable.
State suitability laws also require insurers to supervise and exercise oversight over producers acting on their behalf. The majority of states require insurers to maintain records of the information collected from the consumer and other information used in making the recommendations that were the basis for insurance transactions. The suitability laws explicitly empower the respective insurance departments to conduct examinations of insurers and producers, and to order insurers and producers to take corrective action in the event of a violation of such suitability laws.
State insurance law also imposes rigorous producer licensing requirements, including requirements related to education and background check standards. Moreover, state insurance law provides a number of other important sales practices protections to consumers, including protections specifically targeted to senior populations.
Unlike any other financial product, state insurance law also provides contract purchasers with "free look" rights, which complement state law suitability protections by affording consumers an additional period of time within which to consider the advisability of their purchase, to contact the insurer or the producer for more information, and to return the contract for a full refund if they ultimately decide the contract is not right for them.
State insurance laws also set forth specific requirements for disclosures relating to policy content (e.g., charges and other deductions must be specified in the contract); readability, accuracy, etc.; as well as disclosure in advertising and/or meeting "buyers guides" requirements). State insurance law also prohibits misrepresentations and omissions. Furthermore, state law provides for regulatory oversight and enforcement of these requirements.
Virtually every state requires fixed indexed annuity policies to contain non-forfeiture provisions to protect the policyholder's contributions to the policy. Annuities specifically must stipulate the minimum paid-up annuity benefits, the amounts to be paid in the event of partial or full surrenders of the contract, the minimum number of times such surrenders can be made after issuance of the contract, as well as contain a statement that any paid-up annuity, cash surrender or death benefits that may be available under the contract are not less than the minimum benefits required by any statute of the state in which the contract is delivered.
Additionally, incontestability clauses are statements required of fixed index annuities that stipulate that the insurer cannot contest the validity of the annuity once the policy has been in place for a certain period (usually two years.) Such clauses operate as a statute of limitations, and therefore require the insurer to do any investigations into the application and policy circumstances within the allotted time span.
Once an insurer is licensed, state insurance laws and regulations continue to regulate the operation of the insurer. Under each state's insurance laws, the insurance regulatory authority is granted broad supervisory and administrative powers; not only for the initial licensing, but also as to the maintenance of minimum financial standards and other established standards discussed below. Licensure requires an insurer to meet rigorous financial standards such as reserving, which must be certified by a life insurance actuary; financial statements audited by an independent certified public accountant and strict investment standards, as well as managerial character and trustworthy standards.
Fixed index annuities are backed by state guaranty fund associations. These guaranty fund associations back fixed guarantees under life insurance company products, and stand ready to protect owners if insurers fail. Every state has enacted a guaranty fund law, which requires the payment of the present value of benefits under fixed index annuities. As a condition to obtaining and maintaining a license in each state, insurers are required to become members of the state guaranty fund association in each state in which they seek to do business. Individual state laws vary as to the amount of annuity benefits guaranteed.
Commissioners and the insurance departments of all states have very broad powers to enforce the insurance laws of their respective states. The insurance laws of every state provide procedures relating to consumer complaints against insurers and producers. Ultimately, these procedures are designed to achieve prompt resolution of consumer complaints or to provide a precedent for state insurance department intervention, as well as providing a more global oversight mechanism for insurance regulators to monitor and take appropriate action against instances or patterns of wrongful conduct. Not only do state insurance regulators have the authority to enforce their laws, they (or the state attorney general) have been aggressive in taking such actions for violations of their insurance laws.
As you can see, state insurance laws provide substantial consumer protection. The suitability and advertising regulations at the federal level do not provide more consumer protection. Moreover, there are no federal non-forfeiture laws. The SEC staff recognizes there is no registration form for an insurance product like an FIA. If you would like to have more information about fixed indexed annuities, their regulation, their product features, or the benefits available to financial planning, please contact me using the forum below.
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