Insurance Suitability Regulation Is At The Crossroads
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Tremendous progress has been made by the National Association of Insurance Commissioners on suitability requirements for fixed insurance products. But those efforts hang precariously in the balance.
While much good work has gone into drafting model suitability legislation, its prospects for adoption turn on a few key issues, and perhaps none will be more critical than private right of action.
In some respects, it would be a shame if the NAIC's work on suitability proved to be for naught. Insurance regulators have worked earnestly to create rules similar to suitability requirements for securities brokers. Rosanne Mead of the Iowa Insurance Department, as chair of the NAIC working group finds herself now in the middle of an increasingly difficult task– bridging differences among regulators, insurers, agents, financial planners and consumer groups.
Possibly because suitability is such a nebulous concept, the NAIC initiative has evoked strong emotions and become a lightning rod for market conduct issues. The debate has unleashed sharp criticism by regulators and consumer groups of certain insurance products and sales practices–most notably credit insurance. It also has stirred deep-seated industry fears of potential class action lawsuits.
One might ask what's all the fuss, given six states already have adopted insurance suitability regulations, securities brokers have lived with suitability requirements for the past 40 years, and class action lawsuits today routinely allege breach of fiduciary duty or improper sales practices anyway.
But such a question misses the point. A widely adopted and accepted suitability standard for the insurance industry would fundamentally shift the role of the insurance agent from sales representative to client advisor, and just as importantly, for the first time in effect impose supervision responsibilities upon insurance companies.
Suitability places an affirmative obligation on the agent to recommend only products that meet the customer's insurance or financial needs. It requires an agent to know his or her customer and to document the basis for any recommendation.
While better agents have always conducted sales this way, elevating such practices to a legal requirement–overseen by the agent's firm or insurance company–would have profound and lasting effects on industry sales practices.
The NAIC working group's current suitability proposal is a worthy piece of legislative drafting. Its key provisions are thoughtful and balanced:
"Suitability" is defined sensibly as a recommendation that "assists a consumer in meeting the consumer's insurable needs or financial objectives."
A duty is imposed on agents to obtain "relevant information" from a consumer such as income and insurance needs, but discretion is given to the agent to determine what information is necessary for sale of a given product.
Appropriate exemptions are created to focus the rule on sales by agents to non-sophisticated consumers where protection is needed.
Oversight responsibilities are placed on insurers–but insurers have the ability to delegate those duties to responsible third parties such as brokerage firms, provided the insurer remains ultimately liable for compliance.
