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Is Suitability Being Pushed Aside?

Dwight Carter paused mid-sentence, acknowledging that what he was about to say could sound boastful: “I’ve never had a complaint in 49 years.”

But he did not say it for bragging rights — he was demonstrating that the suitability standard is effective. The key is approaching every annuity sale with the right intentions, said Carter, 71, who owns Financial Security Associates, a regional independent marketing organization based in Raleigh, N.C.

Carter describes Financial Security as a regional IMO, or “a very small fish in a very large pond.” For many years, business was good and steady — 100 to 150 regular agents writing the bulk of $350 million in annual annuity sales.

Then the regulators got busy. By the time a three-year fight to knock down the Department of Labor fiduciary rule was finished, Carter had lost nearly 30 percent of his annual business.

Worse than that, the federal regulators unleashed Game of Thrones-level warfare in the IMO world. And the smaller shops like his own were the least prepared for combat, Carter said.

Bigger IMOs “started telling my guys long before the initial implementation of the DOL rule that this rule is coming and you need to move to us because your guy is not going to be able to support you,” Carter recalled. “So there was a run on our agents early on and hard.”

The DOL rule was tossed out by a federal appeals court last summer. But it was a brief reprieve. State lawmakers from New York to Arizona are considering, or have passed, annuity sales rules. The National Association of Insurance Commissioners is debating a national model.

The blizzard of best-interest activity leads to a natural question: Is suitability destined to die? The answer is dividing the insurance industry into two camps — those who want to preserve the current suitability standard and those who accept one that is closer to the fiduciary standard.

Carter remains a steadfast member of camp No. 1.

“Nothing angers me more than somebody saying ‘We might as well accept it,’” he said.

‘Suitability Isn’t Quite Enough’

Suitability was destined to be short-lived, said Bruce Ashton, who has more than 35 years’ experience monitoring regulatory matters, currently as a partner for the law firm Drinker Biddle & Reath. As simple annuities morphed into indexed annuities and life insurance took a similar route, regulators concluded that consumers are vulnerable, he said.

Defenders of suitability point to very low complaint numbers. The NAIC investigated 6,040 life insurance and annuity complaints in 2018, or 5.88 percent of the total complaints across all coverage lines.

But while perception might not be reality, the “groundswell” for tighter regulations of insurance is probably not going away, Ashton said.

“Seems to me the concern is that suitability isn’t quite enough,” he explained. “Yes, you have to make sure the insurance broker, the insured and the company have to determine that ‘Yes, this is a suitable product’ for somebody. But that doesn’t mean you’re acting in their best interest.”

Regulators across the board are now involved, which makes it harder for industry opponents to mount a coordinated fight. The DOL rule was tossed out in March 2018 after trade associations joined forces and planned to get its appeal sent to the Fifth Circuit Court of Appeals. The Fifth Circuit is known to favor limited government.

The DOL rule took partial effect in June 2017, requiring advisors and agents to act as fiduciaries, make no misleading statements and accept only “reasonable” compensation.

When the rule was killed by the courts a year later, it left a vacuum. Several states launched independent rulemaking efforts, while an NAIC working group tackled an annuity sales model law. The Securities and Exchange Commission produced a tentative rule covering brokers.

The onslaught of rulemaking seemed to fracture the industry alliance. On Jan. 14, frustrated IMO executives sent a fiery letter to leading industry trade associations expressing frustration at their lack of pushback.

“We have been … scratching our heads why our trade associations seem to be going along with the NAIC proposal and not fighting against warrantless regulations,” the letter reads. “This has made us worry about the direction of our industry, the future of our businesses, and the protection of our clients.”

They did not speak for the entire industry — or even the IMO set. A separate group of 10 IMOs representing “approximately 40 percent of fixed indexed annuity sales in the independent market” sent their own letter to NAIC.

“We support a framework that can realize a best interest standard through a clearly and explicitly defined process that would include appropriate disclosure, thorough needs analysis and a well-supported recommendation,” their letter reads.

Making Lemonade

The NAIC letter was signed by Denny Southern, president of annuities and retirement planning for AmeriLife Group, based in Clearwater, Fla.

AmeriLife is a giant in the IMO industry — one that works with 140,000 independent agents and advisors across all channels. The company spent between $2 million and $2.5 million adapting its sales processes for the DOL rule, said CEO Scott Perry. Those expenses included developing a proprietary “Amerilyzer” software tool to document client contacts and keep electronic records.

Once the DOL rule was tossed, AmeriLife dropped everything and went back to its old way of doing business, Perry said. But uncertainty costs money, and it is something the company wants to avoid, he added, even if that means making concessions on regulations.

“We can’t just ignore the winds that are blowing in a certain direction,” Perry said. “To push back on every other regulatory body dipping their toe in this water seemed to us to be a little naïve.”

So AmeriLife is supporting the NAIC working group. It would be a major problem for the company, Perry stressed, if states splintered off into a variety of regulatory concepts.

“We certainly aren’t in favor of a patchwork approach and to the degree that we feel we can get a uniform approach, the best place we think we can get that, especially for the insurance products and the insurance industry, is at the NAIC,” he said.

Everyone in the industry is keeping a close eye on the New York Department of Financial Services. For starters, New York regulators are far ahead of the game, with annuity sales rules set to take effect in August. Life insurance sales must comply by February 2020.

Secondly, the New York rules are very tough and would essentially do away with the suitability concept. The rules require producers always to place the customer’s interests ahead of their own. Insurers are responsible for establishing a training regimen for their producers, who will be expected to keep substantial documentation.

Former DFS Superintendent Maria Vullo challenged NAIC officials to adopt New York regs in their model annuity sales rule. If that happens, it would not be the first time that New York regulators pulled the NAIC in its direction.

New York State Of Mind

New York previously adopted tougher cybersecurity standards than the NAIC was considering at the time. The NAIC’s final cybersecurity model ended up resembling the New York rules.

Although some insurers vow not to sell products in New York, Perry said AmeriLife will adapt.

“We’re going to take the lead from the carriers who do business in New York, and we’re going to follow what they believe they want their distribution to follow,” he said. “Our attitude is we would do what we need to do to continue to do business there.”

New York regulators are not without industry support. Valmark Financial Group is an umbrella company with an independent broker-dealer, as well as insurance and registered investment advisor divisions. CEO Larry J. Rybka favors making New York standards the law of the land.

“Maybe this change is really a good thing for the life insurance industry,” Rybka said, adding that he opposed Dodd-Frank and the DOL fiduciary rule. “And for the pro-life-insurance people who want to sell real life insurance to real people, using real money to pay for it.”

The New York regulations treat producers and distributors more fairly, Rybka said.

“I think this falls on insurance companies much more than on distribution,” he said. “And if you look at DOL, that was really all on distribution; it wasn’t on companies at all.”

Still, significant opposition to the New York rules remains. A pair of lawsuits has been filed to stop the New York rule — one by The Big I and the Professional Insurance Agents of New York, and one by the National Association of Insurance and Financial Advisors-New York State.

The Big I has several concerns, said Scott Hobson, director of government relations for The Big I New York, in a December interview. Specifically, they are concerned that state regulators will be able to “unilaterally” extend the best interest rule to all insurance transactions.

Otherwise, “you’re opening up a tremendous amount of legal risk on agents and brokers,” Hobson explained. “We expect that many decisions would be second-guessed, resulting in litigation, claims and stuff of that nature.”

The next battleground might be New Jersey, which published a “pre-proposal notice” in October and is seeking comments. The New Jersey plan is short on details but would impose a fiduciary duty on all investment professionals in the state.

Not Giving Up

Dwight Carter refuses to let the assaults on suitability go unanswered. He is a central player in the Fixed Annuity Consumer Choice campaign, a group of agents and IMOs lobbying to preserve fixed annuity sales.

Tougher regulations will lead to “the elimination of the fixed products that particularly help consumers with a low amount of assets. We’re going to lose a lot of product availability,” Carter said. “I have a great fear that the availability to those consumers will be virtually eliminated, as will many of the insurance-licensed-only agents who sell a lot of this stuff.”

Many IMOs would be eliminated as well, analysts say, as a repeat of the DOL rule frenzy plays out. The premise is simple: big companies can better absorb costly regulation compliance and accompanying liability.

Carter still doesn’t like it.

“This rule is going to give rise to further aggregation of contracts, with the sole goal of eliminating the smaller ones who can’t keep up the pace,” he said. “The industry is already in the crosshairs of litigation from attorneys around the country anyway, so if we’re going to hand them a tort litigation on a silver platter, then we’re just dead.”

Meanwhile, AmeriLife is “absolutely” looking to grow, Perry said. AmeriLife completed three acquisitions in the latter half of 2018, and added Dallas Financial Wholesalers in February. That addition pushed AmeriLife to $3 billion in annual annuity premium.

“We see those pressures in the marketplace creating opportunities for us,” Perry said. “We are actively open to talking to folks who are looking for a potential partnership.”

While regulation pressure is the main driver of merger and acquisition activity among IMOs, it is not the only one.

“IMOs can no longer offer just a commission and a product,” said Scott Hawkins, director of insurance research at Conning. “They need to offer extra services for digital support around marketing, or around sales coaching or around electronic application and delivery around services, in order to attract producing agents.

“So IMOs need to make those investments and cover those costs. The smaller IMOs might be the ones feeling the pressure the most, as opposed to the extremely large ones.”

September Deadlines

The regulation picture could potentially come further into focus in September. Reportedly, that is when the DOL and the SEC plan to release their respective rules that cover most all annuity sales.

Staff from both offices are said to be working together on rules that harmonize standards. There is a potential to offer a blueprint of sorts for the industry, Ashton said.

“What I would prefer to see is the SEC and the DOL get their act together and create a model for the rest of us to look at,” he added. “Almost no matter what the SEC comes out with, my guess is we’re going to see litigation.”

The state insurance departments are another story. With many states having wildly divergent political philosophies, as well as differing levels of insurance industry presence, any harmonizing across state lines is unlikely, Ashton said.

“I think it’s going to be a mixed bag.”

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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