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New NAIC Model Would Create New Standard of Care and Other Duties for Agents

The model proposes a broad range of new obligations for insurance agents and includes a handful of provisions that are particularly concerning. Big “I” members and state associations are urged to monitor any developments closely and weigh in as necessary. 
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Two weeks ago, the National Association of Insurance Commissioners (NAIC) adopted significant revisions to its Suitability in Annuity Transactions Model Regulation that could have adverse implications for agents who sell annuity products in the near future and potentially for all agents.

The model proposes a broad range of new obligations for insurance agents and includes a handful of provisions that are particularly concerning. The most notable and troubling element of the NAIC’s proposal is the establishment of a “best interest” standard of care for insurance producers who recommend annuities to consumers.

Requiring an agent to act in a customer’s best interest may seem innocuous and unremarkable, but such a standard would produce uncertainty and other consequences. A requirement of this nature is inherently abstract, vague and subjective, and would place agents in an untenable position because it is unclear what specific actions or compliance measures it requires and what behavior it would prohibit. The lack of clarity and objectivity would also result in uncertainty and inconsistent application. Adding to the confusion and concern is the fact that courts and other observers typically equate an obligation to act in one’s best interest with a fiduciary duty. 

The NAIC model also includes a series of new compensation and other disclosure requirements. It would, for example, require an agent to provide written disclosures outlining:

  1. The scope and terms of his/her relationship with the consumer
  2. The agent’s role in the transaction
  3. The types of relevant products the agent is authorized to sell
  4. Whether the agent has access to the products of one insurer or multiple companies

In addition to banning some forms of incentive compensation, the proposal would also require disclosure of the sources and types of compensation an agent would receive from the purchase of a particular annuity and mandate that an agent provides an estimate of compensation upon request. Finally, the model would require an agent to make a written record of the reasons why an annuity recommendation was made and communicate the basis of the recommendation to the consumer. 

The Big “I” argued against imposing an amorphous best interest standard and establishing other vague and unnecessary mandates during the development of the model. The association asserted that certain elements of the proposal do not benefit consumers or enhance the regulatory framework and that those obligations are likely to create higher compliance costs and result in fewer professionals offering annuities. The Big “I” also expressed concern about such obligations possibly being extended to other lines of insurance and ultimately to every agent and every insurance transaction. 

One of the most frustrating aspects of the NAIC’s development of this proposal was the lack of a justification for the sweeping proposed changes in law and the absence of any consideration of whether there are marketplace problems or regulatory gaps that truly need to be addressed in this manner. 

Some proposals seemed to operate under a misguided and unsubstantiated belief that insurance agents routinely recommend the purchase of products based on their own self-interest and to the detriment of consumers. Other proposals argued that securities industry-specific rules should be extended to and foisted upon insurance producers despite the differences between the two financial sectors and the disruptive effects this could have for many agents and consumers.

The Big “I” opposed the most troubling aspects of the NAIC model and was often the lone voice doing so. During the proposal’s development, the association was especially concerned that the unnecessary references to a best interest obligation would create new litigation exposure for agents and allow private plaintiffs to utilize the vague standard of care to bring unwarranted lawsuits.

Amendments to help address this concern proposed by the Big “I” were incorporated into the final model, and the association was grateful for their inclusion. These revisions make clear that the proposal is to be enforced exclusively by regulators and clarify that it should not be interpreted to create or imply causes of action and civil liability that do not exist today.

NAIC models do not have the force of law on their own and operate only as recommendations to state policymakers. Proposals such as this must be adopted by states in order to take effect, and it will be up to each individual jurisdiction whether to implement this model as recommended by the NAIC to revise it or to ignore it altogether.

The NAIC is encouraging state insurance departments to adopt this particular proposal by regulation but the Big “I” believes the nature and magnitude of these public policy changes are so significant that they should be considered by state legislators. 

The debate over this NAIC model and the recommendations contained therein now moves to individual state legislatures and departments of insurance. Big “I” members and state associations are urged to monitor any developments closely and weigh in as necessary. 

Wes Bissett, Big “I” senior counsel, government affairs.