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Annuity Sellers Face Unhappy Trails And Regulation Roundups

The decision by Ohio National to abandon service contracts for brokers who sold its variable annuities staggered industry watchers.

It’s not that Ohio National is a big player in the VA market — they are not.

It’s not that they can’t walk away because they probably can — depending on how the contracts are written.

What is causing so much consternation is the precedent that shakes the very core of the relationship between insurers and independent sellers.

For that reason, a strong pushback on Ohio National is likely in the coming weeks and months.

“I have never heard of anything similar to this in the entire 20 years I have served in the insurance industry,” said Sheryl Moore, president and CEO of Moore Market Intelligence.

In addition to the Ohio National stunner, annuity sellers are keeping one eye on various state-level regulations that continue to progress.

To recap, Ohio National informed broker-dealers in a Sept. 28 letter that it will terminate “any and all servicing agreements” on Dec. 12. That means all compensation, specifically trail commissions, stops on that date.

The decision is believed to be the first of its kind in the industry and affects variable annuity contracts purchased with a guaranteed minimum income benefit rider. The GMIB is appealing to clients looking for guaranteed income in retirement. For insurers, the generous VA benefits are a drain on their books in an extended low-interest-rate era.

In a statement, Ohio National pointed to its Sept. 6 decision to exit the annuity business to focus on life and disability insurance.

“This strategy will continue to reinforce our long history of mutually beneficial relationships with broker-dealers and our network of financial professionals,” said Christopher A. Carlson, president and COO.

Legal Challenge?

LPL Financial, the largest independent broker-dealer in the country, quickly grasped the implications and fired back with a strong memo of support for its sellers.

“We are actively challenging Ohio National to reverse their decision regarding compensation,” the memo read.

“We will make it clear to all of our other annuity partners that the Ohio National decision regarding future compensation is unacceptable. We are currently evaluating all annuity sponsor contracts and seeking to identify anything we can legally change or amend in order to protect your commissions in the future.”

It doesn’t take much reading between the lines to see the message here. Industry sources agree LPL or other broker-dealers will likely move quickly to challenge Ohio National and discourage other insurers from following suit.

In the meantime, consumers could be the big losers. Ohio National told brokers they can still serve their clients, but that seems unlikely since their commissions are being taken away.

“If the agent’s not getting any commission, what’s his incentive to properly manage the assets?” Moore said. “How are they acting in their clients’ best interest if they’re cutting their agents’ commission? It’s almost as if they’re saying ‘We want you to get rid of this business.’”

New Jersey Introduces Fiduciary Standard

New Jersey became the latest state to attempt to tighten sales regulations in the wake of the defeated Department of Labor fiduciary rule.

The rulemaking, being initiated by the New Jersey Bureau of Securities, would impose a fiduciary duty on all New Jersey investment professionals, requiring them to place their clients’ interests above their own when recommending investments.

“New Jersey is pursuing state-level regulatory reforms that would enhance the integrity of its financial services industry by holding every investment professional to the highest standard under the law,” Gov. Phil Murphy said.

The governor claimed the forthcoming rule will be the “strongest investor protections in the nation.” The details will determine whether that turns out to be correct, but there are concerns that a patchwork of differing standards could emerge.

There are about 2,120 broker-dealers, plus 205,000 of their agents, registered in New Jersey.

Neighboring New York plans to enforce its best-interest standard beginning Aug. 1, 2019, for annuity contracts, and six months afterward for life insurance contracts.

The New York rules are roughly similar to the hated DOL fiduciary rule, but extending the rules to life insurance sales set an entirely new bar.

“New York, being fairly aggressive on this front, kind of got out in front of everybody as much as they could with the idea they were going to push for their standard to be the nationwide standard,” said William T. Mandia, a partner at Stradley Ronon, a Philadelphia law firm.

That has industry watchers concerned as more and more states ponder their own rules.

“There’s a potential for states to start doing things that conflict,” said Bradford P. Campbell, a partner at Drinker Biddle & Reath, during a recent webcast.

NAIC To Revisit Annuity Sale Rule

After a couple of up-and-down summer meetings on its annuity sales rule, a National Association of Insurance Commissioners’ subgroup was slated to meet Oct. 22-23, after this issue went to press.

The Annuity Suitability Working Group wants to have something resembling a final annuity sales rule to present at the NAIC Fall Meeting in San Francisco Nov. 15-18.

The idea is to create a model law that state insurance commissioners can take to their legislatures for adoption. Commissioners see that as an avenue toward uniformity of industry rules.

To date, however, agreement has been fleeting as more-liberal states such as New York split with more-conservative colleagues in the Midwest.

The working group was to pick up where it left off during an August meeting in Boston, when New York officials challenged the group to favor a tougher standard that includes life insurance.

“Certainly, this committee should keep active in this and not just accept the working group’s report and move on,” said Maria T. Vullo, New York superintendent of financial services. “There’s no reason that the suitability should not apply to both, annuities as well as life insurance.”

The Life Insurance and Annuities Committee must vote to approve anything the working group recommends. Then the full executive committee must adopt.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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