Arkansas Rule 82 & Florida Senate Bill 2082 Analysis

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Arkansas Rule 82 & Florida Senate Bill 2082 Analysis

  1. 1. 1 MEMORANDUM TO: Christine K. BenefieldFROM: Clarence F. MitchellDATE: March 2, 2010RE: Arkansas Rule 82 & Florida Senate Bill 2082: Review and summarize key points/Compare andcontrast with the NAIC Suitability in Annuity Transactions Model Regulation and point out any significantdifferencesSuitability In Annuity Transactions-Arkansas Rule 82: requires insurers to be responsible for ensuring thatany producer that markets its product has received at least four (4) hours of annual training that addressessuitability requirements for the State of Arkansas and the mechanics of annuity products. These requiredhours are part of, and not in addition to, the regular continuing education requirement. Training may beprovided in either a classroom setting or via home study (print textbook, CD or online).Within this rule, the outlined requirements of annuity and life insurance requirements as they pertain to thesuitability of the recommended product to the needs of consumers, duties of insurance agents indetermining the objectively-reasonable basis for recommendations of annuities; additionally the agentresponsibility to provide a comparison of different annuity contracts is outlined, including potential taximplications and disclosure of risk factors.This trend of states requiring annuity suitability training can be expected to accelerate over the next year.The reason for this new requirement is a finding by the Insurance Department that many producers, whoare the face of the insurance company whose products are being sold, when investigated regarding annuitycomplaints cannot articulate the state requirements related to suitability and do not show a clearunderstanding of the products. The training provision was adopted to assure that Arkansas citizens arepresented with professional advice. Insurers must design and adopt a procedure enabling them to certifythat the producers to whom they entrust the sales of their products have the necessary knowledge prior tomarketing annuities to the public. Insurers have great flexibility in determining whether the producer hasbeen presented with this training and that they have the knowledge necessary to present accurate andeducated information related to annuities.The annual training is not a requirement for licensure. However, failure to complete annual training couldresult in sanctions against both the producer and insurer. All producers selling annuity products musthave completed the four hour training by July 15, 2010. Annual Annuity Training may be provided at thecompany level and may be eligible for continuing education credit if the program has been pre-approved bythe Department. The training may also be obtained from an approved licensed Continuing EducationProvider. The program must be cumulatively at least four hours in length and address the mechanics ofannuity products, the types of annuity products, and how to determine suitability of annuity products. Theprogram should also address requirements related to placing or replacing annuity products in Arkansas.Currently the following list, which is not inclusive, defines ways to meet the four hour training requirement: • Continuing Education Seminars offered either by an insurance company or a private provider who have pre-approved the program with the insurance department; • Live presentations by an insurance company or private trainer; • Pre-recorded presentations by an insurance company or private trainer; or • Telephonic or Web broadcasts by an insurance company or private trainer.
  2. 2. 2Should a producer be appointed with two or more insurance companies offering annuities, the insurer mayaccept in lieu of administering its own training program to the producer a certified statement from theproducer affirming that four training hours have been completed with another company. This certificationshould include a letter or some other document from the insurer providing the training verifying that theproducer has completed the Annual Annuity Training. Both the insurer and producer should maintain thisdocumentation for a period not less than seven (7) years. Insurers are directed to furnish a copy of thisBulletin to their appointed producers in Arkansas.Regarding the unlawful sales practices pertaining to annuities for seniors, the Arkansas InsuranceDepartment issues further authority that directed to remind life insurers and life insurance producersconducting business in this state about required compliance with Ark. Code Ann. §§ 23-66-206(2) and 23-66-307, Bulletin 8-2004, and Arkansas Rule 82. Please be advised that the Department interprets thereplacement requirements of Ark. Code Ann. §§ 23-66-206(2) and 23-66-307 and Arkansas Rule 82 toapply to annuities. Therefore, insurers and producers are expected by the Department to insure to the bestof their abilities that their clients understand the overall expenses or charges for the contract. Furthermore,the Department will expect that producers and insurers have reviewed and are familiar with Ark. Code Ann.§ 23-66-206, 23-66-307, Arkansas Rule 82, and Bulletin 8-2004, as well as the insurer’s own guidelines forproduct sales and solicitations to the elderly.Insurers and producers will be expected to be able to show that prior to recommending to a seniorconsumer the purchase or exchange of an annuity there existed reasonable grounds for believing that therecommendation was suitable for the senior consumer on the basis of the facts disclosed by the seniorconsumer as to his or her investments, other insurance products and his or her financial situation andneeds. Communications with the consumer forming the basis for the suitability determination must bedocumented in a written memorandum, which may be supplemented by other records, and should includeinformation concerning:• The age of the person for whom the product will be purchased;• The senior’s financial status and current assets, including any existing life insurance contracts;• The seniors risk tolerance (when considering a fixed annuity versus a variable annuity);• The senior’s investment objectives;• The senior’s monthly financial needs;• The likely need of the contract owner to access cash values in the near future;• That the senior was notified that there may be tax implications to the sale or exchange and that he shouldcontact his personal tax advisor;• A breakdown of any fees, costs, features, and surrender or penalty charges associated with partialwithdrawals and surrenders, and any limits or conditions for waiving those penalties or charges;• The amount of the premium enhancement to be credited;• The trade-off between bonus credits, if any, and product fees and charges must be explained to thesenior;• Information provided by the senior;• Whether the senior decided to enter into the transaction against the advice of the producer;• Any other information that may reasonably show suitability of the product for the senior.Additionally, agents/producers will also document the following information when replacing an existinginvestmentor life insurance product with an annuity:• Notice sent to the existing contract provider;• The death benefit, subaccount choices, withdrawal privileges, liquidity, and special features of eachcontract;• A comparison of costs, fees, features, surrender charges and benefits associated with each contract andhow a bonus feature, if any, may affect these features.• The rate of return for each contract, if available, or the guaranteed rate of return for each contract, ifapplicable.• The current value of the existing contract compared to the initial value of the replacing contract;
  3. 3. 3• An explanation as to why the replacing contract will better serve the interests of the senior;The Department also reminded insurers and producers that pursuant to Ark. Code Ann. § 23-66-307 andArkansas Rule 82, written memoranda, which may be supplemented by other documents to reflect theabove required suitability requirements, is required to be maintained for a period of five (5) years. Recordsrequired to be maintained by this regulation may be maintained in paper, photographic, microprocess,magnetic, mechanical or electronic media or by any process that accurately reproduces the actualdocument. Any violation may be deemed to be an unfair method of competition or an unfair or deceptive actand practice in this state, in violation of Ark. Code Ann. §§ 23-66-201, et seq. However, annuities that arefor an amount less than $15,000.00 for the sole purpose of funding prepaid funeral contracts or contracts forfunerals and related funeral expenses shall be exempted from these requirements. If a senior consumer hasquestions and wishes to gain outside information before purchasing an annuity, producers shouldencourage and facilitate the involvement of adult family members, this Department’s Life and HealthDivision personnel at 501-371-2800 or 1-800-224-6330, any of the local Arkansas Area Agencies on Aging(AAAs) counselors, attorneys, or other appropriate assistance. Producers should never attempt to dissuadeseniors from seeking further assistance from their regular insurance producer, family member, friend, or thetypes of agencies noted above.Effective Date / Compliance Date to comply with the new educational requirement is July 15, 2009. Inreference to UNLAWFUL SALES PRACTICES PERTAINING TO ANNUITIES FOR SENIORS dated onDecember 6, 2006. The Arkansas Insurance Department (“Department”) issues that Directive to remind lifeinsurers and life insurance producers conducting business in this state about required compliance with Ark.Code Ann. §§ 23-66-206(2) and 23- 66-307, Bulletin 8-2004, and Arkansas Rule 82. Please be advised thatthe Department interprets the replacement requirements of Ark. Code Ann. §§ 23-66-206(2) and 23-66-307and Arkansas Rule 82 to apply to annuities. Therefore, insurers and producers are expected by theDepartment to insure to the best of their abilities that their clients understand the overall expenses orcharges for the contract. Furthermore, the Department will expect that producers and insurers havereviewed and are familiar with Ark. Code Ann. § 23-66-206, 23-66-307, Arkansas Rule 82, and Bulletin8-2004, as well as the insurer’s own guidelines for product sales and solicitations to the elderly.Insurers and producers will be expected to be able to show that prior to recommending to a seniorconsumer the purchase or exchange of an annuity there existed reasonable grounds for believing that therecommendation was suitable for the senior consumer on the basis of the facts disclosed by the seniorconsumer as to his or her investments, other insurance products and his or her financial situation andneeds. Communications with the consumer forming the basis for the suitability determination must bedocumented in a written memorandum, which may be supplemented by other records, and should includeinformation concerning:• The age of the person for whom the product will be purchased;• The senior’s financial status and current assets, including any existing life insurance contracts;• The seniors risk tolerance (when considering a fixed annuity versus a variable annuity);• The senior’s investment objectives;• The senior’s monthly financial needs;• The likely need of the contract owner to access cash values in the near future;• That the senior was notified that there may be tax implications to the sale or exchange and that he shouldcontact his personal tax advisor;• A breakdown of any fees, costs, features, and surrender or penalty charges associated with partialwithdrawals and surrenders, and any limits or conditions for waiving those penalties or charges;• The amount of the premium enhancement to be credited;• The trade-off between bonus credits, if any, and product fees and charges must be explained to thesenior;• Information provided by the senior;• Whether the senior decided to enter into the transaction against the advice of the producer;• Any other information that may reasonably show suitability of the product for the senior.Additionally, agents/producers will also document the following information when replacing an existinginvestment or life insurance product with an annuity:
  4. 4. 4• Notice sent to the existing contract provider;• The death benefit, subaccount choices, withdrawal privileges, liquidity, and special features of eachcontract;• A comparison of costs, fees, features, surrender charges and benefits associated with each contract andhow a bonus feature, if any, may affect these features.• The rate of return for each contract, if available, or the guaranteed rate of return for each contract, ifapplicable;• The current value of the existing contract compared to the initial value of the replacing contract;• An explanation as to why the replacing contract will better serve the interests of the senior;The Department also reminds insurers and producers that pursuant to Ark. Code Ann. § 23-66-307 andArkansas Rule 82, written memoranda, which may be supplemented by other documents to reflect theabove required suitability requirements, is required to be maintained for a period of five (5) years. Recordsrequired to be maintained by this regulation may be maintained in paper, photographic, microprocess,magnetic, mechanical or electronic media or by any process that accurately reproduces the actualdocument. Any violation may be deemed to be an unfair method of competition or an unfair or deceptive actand practice in this state, in violation of Ark. Code Ann. §§ 23-66-201, et seq. However, annuities that arefor an amount less than $15,000.00 for the sole purpose of funding prepaid funeral contracts or contracts forfunerals and related funeral expenses shall be exempted from these requirements. If a senior consumer hasquestions and wishes to gain outside information before purchasing an annuity, producers shouldencourage and facilitate the involvement of adult family members, this Department’s Life and HealthDivision personnel at 501-371-2800 or 1-800-224-6330, any of the local Arkansas Area Agencies on Aging(AAAs) counselors, attorneys, or other appropriate assistance. Producers should never attempt to dissuadeseniors from seeking further assistance from their regular insurance producer, family member, friend, or thetypes of agencies noted above.Specifically in this case, American National Insurance Company will not issue Arkansas annuity businessfrom a producer who has not met this requirement by July 15, 2010. This regulation imposes responsibilityon the Company to ensure that Arkansas-licensed annuity producers meet this educational requirement.The following three online providers discussed above earlier meet the criteria and have an annuity trainingcourse that (1) fulfills the Arkansas annuity training requirement, and (2) provides the necessary tracking ofcourse complete to allow the Company to fulfill its state-mandated tracking and record-keepingrequirements. Therefore it is strongly recommended that producers complete the required annuity trainingcourse from these three approved providers: Brokers Education Sales & Training Inc., Kaplan Financial andWebCE.In comparing and contrast with the NAIC Suitability in Annuity Transactions Model Regulation, the NAICitself has established a Regulatory Modernization Working Group that is charged with the responsibility ofdeveloping a general framework proposal for a model or a compact for states to join. Usurping stateauthority, however, is ripe with logistical and operational consequences that would lessen the nation’s graspon good, industry-specific insurance practices.Much like the American Constitution itself, the sustaining value in the state-by-state regulatory system is itsflexibility and adaptability. It can be improved, but the foundation itself is strong and a worthy baseline fromwhich to advance. In general, suitability requirements are more specific and enforcement remedies aremore likely to be specifically prescribed by securities regulators, or those who have a conduct of businessmandate limited to seniors’ directive 2-2006; bulletin 11-7-2007/11-2009.In the final analysis; since this model was adopted in 2003, it has become increasingly apparent thatproblems identified in the NAIC white paper are now expanding to include consumers under 65.
  5. 5. 5The Florida Senate Bill 2082 is based on the NAIC Suitability in Annuity Transactions Model Regulation, asamended in 2006, which requires that life insurance companies ensure that their annuity products aremarketed and sold to suitable parties. Named the “John and Patricia Seibel Act”, this bill increases penaltiesfor specified unfair or deceptive insurance practices related to the sale of life insurance and annuitycontracts. It also strengthens the standards for making recommendations to seniors about theappropriateness of purchasing annuities. Among other things, SB 2082:· Requires persons selling life insurance to complete a continuing education course on suitability inannuity and life insurance transactions;· Provides administrative fines and criminal penalties for engaging in misleading representations,fraudulent comparisons or omissions, or the use of fraudulent signatures;· Incorporates direct or indirect purchases made for the purpose of earning fees or commissions intothe offense of “churning;”· Increases the time allowed for unconditional refunds on annuity products;· Requires that agents obtain financial information from senior consumers prior to executing sales orexchanges of annuity products;· Requires agents to perform and document a suitability analysis; and· Requires agents to provide consumers with information about surrender changes and taxconsequences.Florida Senate’s Banking and Insurance Committee for unanimously passing legislation (PCS/SB 2082) thatcomprehensively addresses the issue of annuity fraud, including strengthening penalties against agentswho target Floridians, especially seniors and the mentally-disabled, using predatory annuity and lifeinsurance practices. Florida consumers, and especially seniors, are commonly targeted through the use ofunfair or deceptive life insurance practices and annuity sales practices known as “twisting” and “churning.”Twisting occurs when an insurance agent knowingly makes misleading representations or materialomissions regarding insurance policies to induce a consumer to take out an insurance policy with anotherinsurer. Churning is similar, but involves the surrender of a current policy to buy a policy from the sameinsurance company.Specifically, the legislation makes twisting and churning a third-degree felony, and in instances where apattern or practice exists of victimizing consumers age 65 and older or who suffer from a mental incapacity,penalties under the proposed legislation are increased to a second-degree felony. The bill also prohibitsinsurance agents from submitting applications or policy-related documents bearing fraudulent signatures toinsurers, making such a violation a third-degree felony. Increases fines (administrative penalties) for thesepractices: • 5,000 for each non-willful violation (currently $2,500), up to a maximum aggregate amount of $50,000 (currently $10,000). • $30,000 for each willful violation (currently $20,000), up to a maximum aggregate amount of $250,000 (currently $100,000). • Makes it an unfair or deceptive insurance practice for an agent to use designations or titles that falsely imply that he or she has special financial knowledge or training.The legislation also strengthens suitability criteria and requires increased disclosure from the agent sellingthe annuities or life insurance policies. The new suitability criteria will require agents to establish an
  6. 6. 6objectively reasonable basis that the policies they recommend are suitable for the consumer, and todocument their suitability determination in writing prior to making any sale. The agent will also be required todisclose important information about the new product, including a comparison of the consumer’s current andproposed new policy, and to document for the consumer any surrender charges he or she will suffer as aresult of the proposed transaction.During the past several years, there are a growing number of cases where Florida seniors have beenpersuaded to purchase a life insurance or annuity product that is harmful or financially devastating. Florida’sDepartment of Financial Services opened 351 investigations related to annuity transactions during the2006-2007 fiscal year, a 41 percent increase over the previous year. Since July 1, 2007, Department ofFinancial Services has already opened more than 260 annuity-related investigations, which point to a trendthat is indicative of a 58 percent cumulative increase since the 2005-2006 fiscal year.During June 2006, the NAIC returned to the “wide-reaching standard” draft of the Suitability Model andamended it to make it applicable to purchases and exchanges involving annuity consumers of all ages.During Florida’s regular 2008 legislative session, Florida lawmakers reviewed Florida’s version of theSuitability Model. Ultimately, they declined to adopt the NAIC’s amendments. Rather, the Florida Legislaturedetermined to enhance significantly the existing standards by which an agent must determine the suitabilityof annuity transactions with seniors, convert a subjective measure to an objective standard for determiningwhether the agent properly applied these standards, require that the agent’s suitability analysis bedocumented, and invoke various other procedures. Florida would then move by alternate legislative andadministrative means to expand suitability analysis into product sales to other segments of Florida’spopulation.Florida’s new legislation amended the state’s 2004 suitability law effective on January 1, 2009.Florida and Connecticut rules retain the same suitability standards as the 2004 Florida law and theamended Suitability Model. Here within this state example, the Insurers should endeavor to assure that aspecific and clear supervisory system standard is clearly in operation established and followed so thatbusiness may be produced by duly- authorized agents, for example at American National InsuranceCompany standards emphasize the parameters of an agent’s authority are clearly delineated.In analysis, Florida now appears to provide such a high level of scrutiny of course limited to its seniors atthis time.

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