The recent regulatory settlement agreement (Regulatory Settlement) involving Allianz Life Insurance Company of North America reemphasizes the need for insurers to be diligent about compliance with state regulations concerning annuity suitability and the use of senior certifications. Through the Regulatory Settlement announced by the Florida Office of Insurance Regulation on September 4, 2012, Allianz agreed to (1) pay a $10 million fine to various regulators conducting the examination of its annuity sales practices, (2) implement a remediation plan as to its suitability review procedures and (3) evaluate consumer complaints involving suitability issues and offer annuity owners a refund, where appropriate.

Suitability in Annuity Transactions

“Suitability” refers to the process whereby the insurance producer, or the insurer where there is no insurance producer involved in the transaction, gathers specific information about the consumer purchasing the particular annuity product and then makes a recommendation, based on the consumer’s needs as well as certain other designated regulatory criteria, that the annuity being sold is “suitable” for that consumer. Whether the annuity is “suitable” depends on whether the consumer (1) has been informed of the various features of the contract, including surrender charge periods and the impact of any replacement; (2) would benefit from certain of these features, such as tax-deferred growth, living benefits, etc.; and (3) would benefit from the purchase of the product as a whole based on the specific suitability information provided by the consumer. Insurance producers, or the insurer where there is no insurance producer involved in the transaction, must make a record of the recommendation given to the consumer and secure a signed statement from the consumer where the consumer (1) refuses to provide the suitability information necessary to make a recommendation and (2) decides to buy an annuity that is not recommended by the insurance producer.

The National Association of Insurance Commissioners (NAIC) issued a revised version of its Suitability in Annuity Transactions Model Regulation (NAIC Suitability Regulation) in March 2010. The revised regulation placed more responsibility on insurers in that carriers now had to establish a system to supervise the recommendations made by their producers in the sale of annuity products. Approximately 30 states have adopted regulations similar to the NAIC Suitability Regulation, including New York, which finalized its Regulation 187 on September 7, 2012.

The NAIC Suitability Regulation sets forth specific elements that the insurer supervision system must contain. To ensure suitability, these components focus on producer product training as well as the development of insurer procedures for review of each recommendation prior to the issuance of the contract. Such procedures can be accomplished by sampling methods. An insurer may contract with a third party to perform this supervision function, but the insurer will remain responsible for the suitability analysis. Additionally, insurers must verify that any producer who sells an annuity product has completed the annuity training course mandated by the regulation.

This supervision system has in effect imposed new standards on insurers from the time of product development until after the contract is issued. Specifically, as new annuity features are being considered by the product design department, consideration must be given to what specific consumer need is being addressed by such feature. Additionally, the contract issue department must set up a mechanism for determining whether the producer has been properly trained to sell the annuity before the annuity contract is issued. Also, the compliance department should adopt self-audit procedures to ensure that the requirements of the regulation are being satisfied.

Senior-Specific Certifications

“Senior- specific certifications” are designations that have been used by insurance producers when selling annuity products to seniors. These certifications range from “retirement planner” to “certified senior advisor” and imply a level of expertise that can be misleading to senior citizens purchasing life insurance and annuity products.

To combat this problem, the NAIC adopted its Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities (NAIC Senior Certification Regulation) in 2008. This regulation deems the use of senior-specific designations as an unfair trade practice where such designation indicates or implies in a misleading manner that the insurance producer has special training or knowledge in advising or servicing seniors in the purchase of life insurance or annuities. In determining whether any such designation indicates or implies such special training, the NAIC Senior Certification Regulation identifies certain words that have the potential to create this impression. The regulation also provides a so-called “safe harbor” for designations that are not primarily applied to sales or marketing and where the designation has been accredited by The American National Standards Institute, The National Commission for Certifying Agencies or any organization that is on the U.S. Department of Education’s list entitled “Accrediting Agencies Recognized for Title IV Purposes.” The majority of the states have promulgated regulations either prohibiting the use of misleading designations or listing the designations that are permitted for use.

The use of misleading senior-specific certifications is part and parcel of the suitability analysis. The FINRA Investor Education Foundation, Senior Fraud Risk Survey, 2007, conducted by the Financial Industry Regulatory Authority (FINRA), asked seniors whether they would be more likely to purchase an annuity from an individual using a designation. The survey demonstrated that almost half of the respondents would be more likely to rely on the advice of a person using one of these types of designations. In effect then, the recommendation made by individuals using one of these designations may prompt a senior to purchase the annuity based on the “authority” of the designation rather than on the suitability of the annuity for the senior’s needs.

While the NAIC Senior Certification Regulation as well as state regulation prohibits an insurance producer from using such designations, insurers can monitor producer compliance with this regulation through advertising guidelines that are imposed on producers. Specifically, insurers require producers to obtain approval of agent advertising, and as a result can determine whether any noncompliant designations are being used by producers.

 Allianz Regulatory Settlement

The Regulatory Settlement was the result of a multi-state market conduct examination that began after Allianz agreed in 2008 to pay more than $10 million to the state of California for marketing unsuitable annuities to seniors. During the latest market conduct review, Allianz was instructed to amend a number of its business practices related to suitability reviews. Moreover, annuities sold during the examination period that were the subject of a consumer complaint had to be evaluated for suitability based on specific criteria contained in the Regulatory Settlement. Where the annuity is found to be unsuitable, Allianz must offer the annuity owner the right to rescind the contract and receive a refund. Monetary penalties, along with the corrective actions being imposed by regulators, demonstrate the need for strict compliance with annuity suitability requirements.