The November 14, 2008 discussion draft of the proposed revisions to the NAIC Suitability in Annuity Transactions Model Regulation laudably seeks to ensure that sales of annuities are suitable (see the previous article). It, however, does so in a proscriptive manner requiring substantial changes in annuity issuers’ operations, as well as requiring increased training for producers as to suitability, categories of annuity products and the features of each distinct annuity product sold by the producer.

Under the draft revisions, annuity issuers must establish a supervisory system that requires substantial involvement by annuity issuers beyond a red flag system for identifying potentially problematic annuity sales for further review. Not only must insurers collect from the producer the requisite suitability information that must be considered prior to making a recommendation, insurers must mail within 14 days following each sale this collected information to consumers with a request to make any necessary corrections. To further ensure the information collected is accurate and producers are accurately and adequately explaining the annuity’s material features, including the liquidity features of the annuity, insurers must call a sampling of consumers, as well as all consumers age 70 or older and consumers of flagged sales. There must also be assessments of compliance risks raised by high risk factors.

The draft revisions also require annuity issuers to establish a supervisory organization that is led by a senior executive, who is not responsible for sales or marketing. A supervisory officer must manage the day-to-day operations of the supervisory organization. The supervisory organization would include audit and special investigation units. Annually, the supervisory organization would report to senior management and the board audit committee as to the effectiveness of the supervision system, the exceptions found, and the recommended corrective actions. Moreover, every five years a third party qualified reviewer must review and prepare a report of the effectiveness of the suitability supervisory system.

Numerous commentators, including consumer representatives and regulators, raised questions regarding the proscriptive nature of the proposed revisions. It appears that the Suitability of Annuity Sales (A) Working Group will meet at the Spring NAIC meeting March 15, 2009.