When state insurance commissioners adopted a model regulation to curtail the abusive use of senior designations recently, it highlighted the ongoing efforts regulators are currently making to ensure seniors are not victimized.
Those efforts come at a time when oversight of products sold by insurers such as indexed annuities has been criticized and when a proposal made by the Securities and Exchange Commission could whittle away state authority over indexed annuities.
The SEC's proposed rule 151A is the most recent example of the tug-of-war going on over whether insurance oversight should be at the state or federal level. The original comment period for 151A ended on Sept. 10, but the SEC recently reopened the comment period, which will now end on Nov. 17, 2008.
Comments filed the first time around with the SEC by state regulators on 151A largely fell into 2 camps: state securities regulators who support the proposal and state insurance commissioners who oppose it.
Four state securities regulators filed comments saying the product needs to be treated as a security.
Eleven state insurance commissioners filed comments, including 7 who said indexed annuities should remain under the authority of state insurance regulators because they are insurance products that are well regulated by state insurance departments. Four asked for an extension of time to consider the issue as did the National Conference of Insurance Legislators, Troy, N.Y.
In addition, regulators pointed to efforts underway to safeguard seniors during discussions held at meetings of the National Association of Insurance Commissioners, Kansas City, Mo.
Those efforts include: the reopening of a senior suitability model for annuities; additional work on indexed annuity disclosure by states such as Iowa, Minnesota and Wisconsin; new work planned for annuity disclosures by the NAIC; consumer buyer's guides; and a new consumer alert and bulletin to parallel passage of the senior designations model.
Products such as fixed and variable annuities are "bedrocks of financial planning" and need to have suitability requirements in place to monitor how they are sold, says Eric Dinallo, New York Superintendent and chair of the NAIC's Life & Annuities "A" Committee.
Insurance is one of 3 pillars of a consumer's financial plan that also include bank or savings deposits and investments, he notes.
New York does not currently have suitability provisions in place. Dinallo and members of a blue ribbon panel in New York have discussed suitability protections and the panel is looking at how to develop suitability guidelines.
Scott Rothstein, executive director of the panel, says there needs to be more of a holistic approach toward suitability. For instance, he explains, there needs to be suitability oversight over debt and mortgage products as well as insurance and related products.
Matt Gaul, the panel's special counsel, says a suitable product need not be measured by a fiduciary standard of what is absolutely the best product but by a standard of whether the product is appropriate for the consumer.
When asked about 151A, Gaul says that even if it is approved by the SEC, the product would still be regulated by state insurance regulators as well as by state securities regulators and the federal government.
Dinallo says he wants to make sure that there is no duplication in suitability requirements among federal and state regulators, which can end up being burdensome. If 151A advances, he adds, state insurance regulators want to make sure they are closely coordinated with it to prevent duplication and regulatory gaps.
Sean Dilweg, Wisconsin insurance commissioner and the "A" Committee's vice chair, says the suitability issue is going to become even more important than it is now because "Boomers are going to need to know they can safely put their money into annuities."
And because of this, it is important that regulators continue to look into the suitability of products so that a person in their 80s is not being sold annuities with long surrender periods.
Dilweg says his department has seen a number of cases of unsuitable sales complaints. In some cases, he says, producers are trying to "bilk" clients, but a significant number of these cases result from agents who do not understand complex products.
Hopefully, red flags can be established in company programs to raise an alert when more agent training is needed, he continues. Dilweg says that although dedicated agents in companies can be more closely monitored, there are companies that have effective programs to monitor brokerages with which they conduct business.
Variable annuities are dually regulated and both insurance and securities regulators seem to work well together, he says. And, a number of states have combined financial services regulators, he notes. So, he says he believes it is possible for different regulatory agencies to work together to oversee indexed annuities.
He says he also recognizes that the suitability model is only in place in approximately 30 states, not all states.
But even if others argue that additional regulation is needed, proposed rule 151A is "too broad" and can draw in straight fixed annuities by interpreting parts of the contract such as an inflation rider to be a security, he notes.
Dilweg says, however, that a "broad-based" approach to regulation could apply and that all parties including trade groups interested in suitability should work together.
"While it is hard to comment on a proposal until we see how it plays out, in general, any increased attention to annuities is very good," according to Brenda Cude, a NAIC funded consumer rep and a professor at the University of Georgia.
Any attempt to coordinate regulation of annuities is also a good thing, she adds. "As long as we continue to carve up regulation of annuities, regulation will be fragmented and consumers will get a fragmented message," Cude says.
