Minnesota is the 31st state to enact the National Association of Insurance Commissioners (NAIC) model regulation governing the suitability of annuity transactions, with some modifications (the Suitability Rule). The Suitability Rule will take effect on June 1, 2013 and will be codified as Minn. Stat. §§ 72A.2031-72A.2036. Insurers and insurance producers who sell annuity products to consumers must be prepared to understand and comply with the Suitability Rule, or face the possibility of rescinded transactions, penalties, or other administrative sanctions.
The Suitability Rule requires insurers and insurance producers to collect and analyze a number of data points and factors to determine if an annuity product is a suitable purchase for the customer. The insurer or producer must then analyze the data provided and have a “reasonable basis” to believe that the recommended annuity is suitable.
At a minimum, insurers and producers must collect the following information from a customer:
- Annual income, including material changes in income
- Financial situation and needs, including how the annuity purchase will be funded
- Financial experience
- Intended use for the annuity
- Financial time horizon
- Existing assets, including investments and life insurance
- Liquidity needs
- Liquid net worth
- Tax status
- Existence of a reverse mortgage
However, these factors are not exclusive. Insurers and producers should also be prepared to record and analyze any additional information that would affect the insurer’s or producer’s determination whether a particular annuity is suitable. Additional information may include, for example, the customer’s risk tolerance or other investment experience. All information collected from the customer should be recorded and made available to the customer at his or her request.
Importantly, the point of the Suitability Rule is not simply to collect this information and store it away in a file cabinet. Rather, the Suitability Rule contemplates that insurers and producers will review all available information and conduct a case-by-case analysis of each customer’s situation. Insurers and producers are expected to use their judgment when making recommendations to customers about the purchase of annuities.
Once a customer’s data has been collected and analyzed, the Suitability Rule requires the insurer or producer to have a “reasonable basis” to believe that a recommended annuity is suitable for the customer. Generally, a recommendation is considered suitable under the following circumstances: (1) the customer has been “reasonably informed” of the annuity’s features, charges, penalties, fees, and risks; (2) the customer will experience a “tangible net benefit” from the purchase; and (3) the particular annuity (or transaction in the case of an exchange or replacement), as a whole, is suitable. When an exchange or replacement is at issue, the insurer or producer must also consider any surrender charges, the age of the customer, the benefit to the consumer of the exchange/replacement, and whether there was an exchange/replacement within the prior 60 days.
For better or worse, the Suitability Rule does not provide any bright lines in analyzing suitability. Instead, the touchstone is reasonableness: does the insurer or producer have a reasonable basis to believe, after a reasonable inquiry and analysis of the totality of the circumstances, that the recommended annuity is suitable for the customer?
The Suitability Rule also addresses compliance procedures, which are modeled after supervisory regulations imposed on broker-dealers. Similarly, insurers are expected to have reasonable procedures in place to ensure compliance with the Suitability Rule. Supervisory systems must include, at a minimum, the following: (1) procedures for recording and maintaining data on customer’s disclosures and recommendations made; (2) training procedures that train producers on the Suitability Rule and how to comply with its requirements; (3) product-specific training for insurance producers; and (4) internal procedures that dictate how the insurer will review each recommendation and provide for elevated review of recommendations to customers age 65 or older.
Compliance procedures should be designed to educate producers on how to prevent making unsuitable recommendations in the first place. The Suitability Rule contemplates, however, that not all recommendations will be suitable, and insurers must have procedures to ferret out unsuitable recommendations. Procedures may include customer surveys, interviews, or confirmations letters.
What This Means For You
The Suitability Rule is especially important for insurers and producers to understand, as an insurer’s or producer’s failure to comply with any of the new rules can result in rescinded transactions, penalties, fines, and other enforcement actions against the producer or the insurer.