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02/08/2001
Roseanne Mead
Chair, NAIC Suitability Working Group
Iowa Division of Insurance
330 Maple Street
Des Moines, Iowa 50319-0065
Carolyn Johnson, Counsel
National Association of Insurance Commissioners
2301 McGee, Suite 800
Kansas City, MO. 64108
Re: Comments on November 27, 2000 Memorandum to the NAIC Suitability Working
Group
Dear Ms. Mead:
We appreciate your willingness to consider comments provided by the industry
and on behalf of our companies on this important initiative. This letter will
expand upon and supplement our comments on the NAIC Suitability Working Group’s
August 2, 2000 draft of the proposed NAIC Suitability of Sales of Life Insurance
and Annuities Model Regulation made by letter dated October 13, 2000, and during
the Winter 2000 NAIC meeting in Boston. We have organized our comments to
respond to general points raised in your November 27, 2000 outline. Due to the
short turn around time, and the holidays, we did not have an opportunity to
consult with many of the persons in our companies who would have an interest in
and wish to contribute to the content of this letter. We believe this letter
accurately reflects the views of our member companies, but respectfully reserve
the right to refine our position, if need be, given the opportunity.
Definition of the Desired Conduct
Our companies would favor Iowa’s position that the Model Regulation should
apply to recommendations by producers that result in purchases of
insurance products. Thus, in transactions where there are no producer
recommendations, such as an internet sale where the customer shops among various
websites of his own choosing, selects a carrier and product, and makes a
purchase without insurer or producer input, the Regulation would not apply
Similarly, where recommendations do not result in purchases, the Regulation
would not apply. We believe this is an issue to be addressed in the Regulation’s
scope, rather than in the exemptions, which are discussed later in this letter.
Also, since by definition any replacement transaction would involve the
purchase of a new product, we believe it is unnecessary to state in the
regulation that it applies to recommendations to purchase or replace.
Insurer’s v. Producer’s Responsibilities
In detailing the responsibilities of insurers and producers under any
suitability model regulation applicable to recommendations to purchase, our
companies support an approach similar to that outlined in the NAIC Model
Replacement Regulation. In general, [and subject to specific language drafted],
our companies favor a Model Regulation under which:
A producer who makes a recommendation to purchase insurance products, must
make recommendations to purchase products that are reasonably designed to
assist the customer in meeting his or her stated insurable needs or financial
objectives
Prior to making recommendations to purchase, producers must make reasonable
efforts to obtain information pertaining to a customer’s insurable needs or
financial objectives
Where customers refuse to provide the required information, or where the
customer makes a purchase against the recommendations of the producer, these
circumstances are documented in the producer’s file
Insurers are responsible for developing or approving guidelines designed to
assist the producer in determining whether, or under which circumstances, the
insurer’s product may meet the needs or financial objectives of consumers
Insurers are responsible for providing training, or making training
available to independent producers, on these guidelines
Producers are required to certify to insurers whether recommendations to
purchase insurance products covered by the regulation were made in accordance
with the insurer’s approved guidelines
Insurers are required to monitor producer certifications indicating whether
recommendations to purchase were made in accordance with the insurer’s
guidelines
Insurers must review the appropriateness of any recommendation that the
producer does not indicate is in accordance with the insurer approved
guidelines
Where insurers receive a complaint from a customer that a producer’s
recommendation to purchase was not in accord with a customer’s insurable
needs or financial objectives, insurers must review the appropriateness of a
transaction to determine whether there was a reasonable basis to believe the
recommendation to purchase met the customer’s insurable needs or financial
objectives based upon the information provided by the customer at the point of
sale.
If the insurer determines as a result of that review that there was not a
reasonable basis to believe the recommendation to purchase was consistent with
the customer’s insurable needs or financial objectives based upon the
information obtained from the customer at the point of sale, the company
should take corrective action. Corrective action may include, but not be
limited to: reimbursing the customer for financial loss, revising its
guidelines, training, educating or disciplining producers.
We have proposed possible language to accommodate this approach in an
attachment to this letter.
Rationale for this Approach
Recommendations v. Sales
As referenced above, our companies favor a Model Regulation [again, dependent
upon the language used] that applies to recommendations by producers that
result in the purchase of insurance products. As was discussed by the
Working Group and interested parties at the meeting, not all purchases are the
result of recommendations. Purchases of insurance or annuities by the customer
without recommendations by the insurer or producer are a frequent occurrence in
direct mail transactions, on the internet and in some group/employment
enrollments. These transactions should not fall within the scope of the
Regulation, as there is no recommendation.
Recommendations to purchase that do not result in purchases should also not
be covered by the Regulation. If a customer does not want an insurance product,
the producer should not be required to go through the exercise of assessing the
customer’s insurable needs or objectives or maintaining documentary evidence
that such an inquiry occurred. Where the customer makes a purchase that is
contrary to the producer’s recommendation, the producer should retain
documentation supporting his or her recommendation in his copy of the customer’s
file for his own benefit, and should in some fashion, notify the insurer of this
situation. In some instances, however, this will mean that, despite the fact
that the agent followed the insurer’s guidelines in making his recommendation,
the customer purchased another carrier’s product, or a non-insurance product.
This does not appear to be a situation that should trigger a follow up
obligation on behalf of the insurer whose product was not purchased (absent a
replacement, or some other special circumstance).
The focus of the Regulation should be upon the interaction between the client
and the producer leading up to, and at the point of sale, where reasonable
inquiries can be made, customer information collected, and the producer, using
his or her judgment and training, can recommend, from among the products he or
she is licensed and appointed to sell, a product that will be appropriate to
meet the customer’s stated needs and objectives. The goal can not be to have
the producer recommend the MOST appropriate or MOST suitable product, as
reasonable minds could differ on the meaning of these terms. Rather, the
standard should be that, where the producer makes a recommendation from among
the products he is qualified to sell, the product recommended is one that could
reasonably be expected to assist the customer in meeting his needs or objectives
(i.e., is "suitable," "not unsuitable," whatever standard is
ultimately applied).
Insurer’s Responsibilities
We acknowledge and support the premise that the insurer cannot place all
responsibility for compliance with the Model upon the producer. The insurer’s
responsibilities under a Model Regulation should include:
Responsibility for developing or approving guidelines to assist producers
in determining whether the insurer’s products meet customers’ insurable
needs or financial objectives,
Responsibility for communicating these guidelines and having some system
for monitoring whether producer recommendations to purchase insurance products
are consistent with the guidelines.
While the producer is in the best position to collect information regarding,
and to assist the customer in meeting, his or her insurable needs or financial
objectives, the insurer as the issuer and underwriter of the product is in the
best position to know the product and its benefits and limitations. It would
seem appropriate then that the insurer develop or approve guidelines to help
producers determine the types of customers for whom the product would be
appropriate, not unsuitable or suitable, etc.
The insurer should be responsible for providing or making the guidelines
available to the producer. The producer should then have responsibility at the
time of application, for complying with the guidelines and assisting the
customer in determining whether this product may be appropriate to meet the
needs or objectives the customer has identified, or whether another insurer’s
products are appropriate, based upon that insurer’s guidelines. Only the
producer, who actually meets with the client, is in a position to determine
whether an insurer’s product guidelines fit the particular circumstances of
the customer.
Delegation of Duties/Responsibilities
The reality of the current culture and economy is that insurers must have the
discretion to delegate to intermediaries, responsibility for performing the
insurer’s responsibilities under the regulation (e.g. reviewing applications
for producer certifications of compliance with company suitability guidelines,
developing guidelines, and/or training agents) in order to tap into the
efficiencies of the market place. Without this, insurers cannot effectively
compete with other financial product offerers
However, our companies’ agree that the delegation of an insurer’s duties
under the Regulation, does not mean the insurer is absolved of all further
responsibilities under the act. By way of example, under existing state laws and
regulations, the insurer may only sell its products through licensed and
appointed producers. Many insurers market through general agencies, to whom the
insurer has delegated responsibility for recruiting, licensing and appointing
agents. The failure of that general agent to appoint a producer properly, does
not release the insurer from its obligations to sell products only through
licensed and appointed producers.
However, the existence of independent intermediaries, such as general agents
or broker-dealers, may reduce the amount of control the insurer has over
the independent producer who ultimately sells the product to the consumer.
General agencies selling the products of multiple insurers, can not
realistically be expected to track product suitability guidelines developed by
different insurers. By necessity, these general agencies will have to develop
their own guidelines for assisting their producers in determining whether, for
example, universal life products are appropriate for customers. The insurer
should be able to fulfill its responsibilities under the Regulation by reviewing
and approving these general guidelines, if they accurately reflect the issues to
be considered in determining whether the insurer’s universal life product
reasonably meets the customer’s needs. The insurer should also be able to
satisfy its obligations under the suitability Regulation by monitoring agent
certifications that these guidelines were followed in making any recommendations
to the customer, as is permitted under the 1998 NAIC Model Replacement
Regulation.
Many general agencies, bank-affiliated insurance agencies and broker-dealers
who have direct supervisory relationships with producers soliciting and selling
insurers’ products may also have developed their own financial planning or
needs analysis tools that are designed to be used for multiple carriers’
products or services, or even for purposes other than determining the
appropriateness of the purchase of particular insurance products. For example,
the agency may offer non-insurance products (certificates of deposit, Internet
services, financial planning services) to which information gathered may
pertain. This information may be not directly applicable to insurance needs
analysis.
In addition, producers or their agencies may take the position that the
information gathered during customer development is the property of the agency
to be used in cross selling whatever other products the general agency may
offer. Laws and regulations designed to protect consumer privacy may support
this notion. Needs analysis tools developed by these agencies may also be
proprietary or considered agency property. As a result, the agency may not be
willing or able to share the actual tools or information gathered through these
tools with multiple insurers, out of fear of losing its proprietary interest.
For these reasons, in many insurance solicitations, insurers will not have
access to, much less control of, information necessary to review the producer’s
customer needs analysis. In these channels, insurers must rely upon the
producers to perform the needs analysis using their own tools. Under our
proposal, the insurer-approved guidelines could be used in conjunction with the
intermediaries’ needs analysis tools to assist the producer in making a
recommendation to purchase a product to meet the customers’ needs. Under our
proposal, the insurer could monitor the producer’s certification that his
recommendations were made in accordance with the insurer’s guidelines to
fulfill its responsibilities.
It should also be pointed out that insurers may not be able to anticipate or
prevent, nor should any Model Regulation be drafted to make an insurer strictly
liable for, every form of producer or intermediary misconduct that
results in the purchase of a product that does not meet the needs of the
customer. Insurers should not be held liable, for example, for the conduct of a
producer or intermediary who exceeds the scope of his authority, violates the
insurer’s guidelines or engages in conduct the insurer can not be reasonably
expected to detect through its monitoring systems.
Exemptions
Consistent with our comments provided to you by letter dated 10/13/2000, we
continue to believe that certain products or distribution channels should be
exempted from the Regulation’s requirements, or that modifications to the
Regulation’s requirements would be appropriate for these products and
distribution channels. Our companies support exemptions from any Model
Regulation for the following products:
Consistent with Section 3,B, 2 of the ACLI’s December 2000 draft Model
Regulation, our companies support an exemption for variable life insurance and
variable annuity contracts subject to SEC and NASD requirements..
As discussed in the NAIC’s White Paper on Suitability at pages 4-5, all
variable life insurance and variable annuities are sold by representatives who
must be registered with the National Association of Securities Dealers. These
representatives are subject to NASD Rule 2310 which provides that in
recommending the purchase, sale or exchange of any security, a registered
representative must have reasonable grounds to believe that the recommendation
is suitable for such customer upon the basis of the facts, if any, disclosed
by such customer as to his security holdings and as to his financial situation
and needs. The rule further requires registered representatives to make
reasonable efforts to obtain information concerning: financial and tax status,
investment objectives and other information used or considered to be
reasonable in making a recommendation to a customer. The requirements of this
NASD rule and other rules governing sales practices apply to all securities
products sold by registered representatives, whether registered with the SEC
or exempt from the registration provisions of the Securities Act of 1933. See
NASD NTM 97-27.
Additionally, the registered broker-dealers with whom these representatives
are required to be associated must review the suitability determinations of
these representatives for compliance with NASDR rules and SEC regulations
requiring supervision of registered representatives.
Imposing a separate and additional suitability obligation at the state
level upon insurers for products sold through this distribution channel would
create an unnecessary layer of regulation, and a third layer of suitability
review, without any added consumer protections. It is also another impediment
to insurers’ ability to compete effectively against federally regulated
and/or non-insurers offering non-insurance products in the marketplace.
As discussed above, the registered representatives and broker-dealers have
access to Customer Account Information, which is required to be gathered for
NASD and SEC purposes. This information is viewed by the broker-dealer to be
the property of the broker-dealer and is generally not made available to the
insurance company. Further, any state regulation may create conflicts in
standards and confusion among registered representatives who are licensed and
appointed insurance producers about which standards apply to a which products,
and whether the producers might be able to pick and choose between complying
with broker-dealer standards, or those established by insurers for state
insurance law purposes.
The NASD Rules apply to all securities, including individual and group
variable life insurance and annuities. There is a sufficient regulatory scheme
in place applicable to these products.
(2) Consistent with Section 3,B,3 of the ACLI’s December 2000 Draft Life
Insurance and Annuities Suitability Model Regulation, we support an exemption
for long term care products. The existing NAIC Model Long Term Care Regulation
as adopted in most states already imposes upon insurers the obligation to
develop suitability standards for these products, and the obligation upon
agents to use the insurer developed standards in marketing long term care
insurance.
(3) Consistent with Section 3,B,1 of the ACLI’s December 2000 draft Model
Regulation, we support an exemption for direct response solicitations.
Products sold through direct response marketing generally do not involve any
recommendation to purchase. Rather, customers receive mailings sent to the
general public, view television commercials or access websites that contain
general information about the product. The insurer provides a general notice
that the product is available and general information about the product from
which a customer then makes the determination to apply, inquire further, or
throw out the advertisements. There is no face to face transaction, and no
producer who receives a commission, thus there is no incentive to use high
pressured sales tactics to encourage a customer to purchase a product that may
not be suitable.
(4) Consistent with Section 3,B,4 of the ACLI’s December 2000 Draft Life
Insurance and Annuities Suitability Model Regulation, we support an exemption
for products sold to institutions or trusts, individuals represented by
certified public accountants or legal counsel in the purchase, and other
"sophisticated purchasers" which products may include,
business-owned life insurance, business related or employer-sponsored life
insurance, corporate-owned life insurance, structured settlement contracts,
funding agreements, and life insurance owned by a tax exempt organization
under the Internal Revenue Code §501.
This exemption would exclude the need to separately apply the Model to
sales to individuals who are either sufficiently sophisticated (based upon
education or asset level) to make their own decisions about what is
appropriate to help them meet their needs, or they are represented by
professionals paid to oversee the customer’s interests in the transaction.
The SEC has an "accredited investor" exemption that applies to many
of its requirements, in recognition of the fact that these individuals in many
cases know more than the agents selling the products or would have
representatives involved in a transaction responsible for protecting their
interests.
Structured settlements should also be exempt under this criteria.
"Structured settlements" are defined under state law as arrangements
for periodic payment of damages for personal injuries established by
settlement or judgment in resolution of a tort claim. The selection of the
annuity and carrier is performed by a "broker" who acts as an
intermediary for the property/casualty company that owes the injured party a
sum of money and/or attorneys for the parties to the personal injury suit, and
the issuers of the annuity. The method of paying the customer through a series
of payments has already been established at the time the annuity is purchased.
The only remaining decision in these cases is for the property and casualty
company or their attorneys to get the best price offered by a number of
insurers that will generate the income amount. The consumer’s interest has
already been protected by the court in the form of a legal judgment and the
consumer is represented by an attorney. There is no interaction with the
consumer in these sales, only with the property and casualty insurer or the
insurer’s attorneys.
(5) Consistent with Section 3,B, 6 of the ACLI’s December 2000 Draft Life
Insurance and Annuities Suitability Model Regulation, we support an exemption
for policies or contracts used to fund (i) an employee pension or welfare
benefit plan that is covered by the Employee Retirement and Income Security
Act (ERISA); (ii) a plan described by Sections 401(a), 401 (k) or 403(b) of
the Internal Revenue Code ("IRC"), as amended, is established or
maintained by an employer; (iii) a government or church plan defined in
Section 414 of the IRC, a government or church welfare benefit plan, or a
deferred compensation plan of a state or local government or tax exempt
organization under Section 457 of the IRC; or (iv) a nonqualified deferred
compensation arrangement established or maintained by an employer or plan
sponsor
(6) Group/mass marketed life insurance or annuity sales to employers – We
support the approach taken in Section 4 of the August 2, 2000 draft of the
regulation which clarifies that recommendations pertaining to life insurance
or annuity contracts should focus upon the suitability of that product for the
group, not the individual employees or participants. Generally in these
situations, the presentation is made to the employer, the employee is then
advised by the employer of the opportunity to enroll in a single life plan, a
single accident and sickness plan, or other plans made available through the
employer. Whether the policy is a group or individual policy, the product is
sold the same way (to the employer) and it is in turn made available to the
employee. The purchase recommendation is made to the employer, based upon the
demographics of his/her employees and the array of products currently
available to the employee through the employer. The employee’s only decision
is whether to enroll or purchase, and which amount (if any) being offered
bests suits their needs and wants. Our companies support the idea of
furnishing the employees with the information necessary for the individual
employee to make the proper decision about purchasing any of the coverage
offered through his/her employer. However since any purchase recommendation is
made by the producer to the employer, products sold through this channel
should be exempt from the Regulation.
(7) Sales of insurance that do not involve a recommendation to purchase. In
the event that the Working Group does not accept the notion that the scope of
the Model should be limited to "recommendations to purchase," we’d
propose an exemption for any transaction in which there has been no
recommendation to purchase. This exemption would apply to customer initiated
internet transactions in which the customer uses the internet to shop for the
lowest rate term product available, and purchases without any agent
involvement and any other transaction that does not involve a producer
recommendation that results in a purchase.
(8) Term insurance - These products traditionally have been undersold,
rather than oversold. Moreover, term products tend to be sold to applicants
who have a well- defined need for a specific death benefit amount. Therefore,
for these products, there should be at least a truncated review that is
limited to describing the need for the insurance and the amount required to
fulfill that need.
(9) Small face amount policies/Home Service policies - During the Life (A)
Committee meeting at the December NAIC meeting, the Chair invited comment from
the industry on a proposal that would appear to
collide with the work of this Working Group. As we understood that proposal,
the Chair suggested that for small face amount life insurance policies,
producers should have a duty to advise customers of all other life insurance
policies available from the same carrier before accepting an application for a
small face amount life insurance policies. This proposal appears to be
approaching the "most suitable" analysis requirement already
rejected by this Working Group.
Like term life insurance, sales of small face amount policies usually
involve simpler situations, simpler needs, and simpler products. The customer
in such a situation may not want an elaborate needs analysis process. Failure
of the industry to provide an easy, quick, and convenient way to do business
may mean that the customer's needs will go unmet.
Whatever is ultimately adopted needs to be clear and consistent with other
Model Regulations. If a separate standard of conduct is to be developed for
products sold through the home service distribution channel, these products will
need to be carved out of any Model Regulation developed by this Working Group,
or the differences in treatment of these policies somehow incorporated into the
regulation.
Our companies would also support a "safe harbor" from the
requirements of the Model Act imposed upon insurers for IMSA member companies
who must subscribe to that organization’s Principles and Code provisions and
undergo an independent assessment of compliance with those provisions every
three years.
Again, we appreciate the opportunity to offer comments on the Working Group’s
efforts. Please feel free to contact any one of us with any questions on this
submission.
Submitted on behalf of the life insurance companies of AEGON Insurance Group
by:
Katherine Schulze
Assistant General Counsel
1111 North Charles Street
Baltimore, MD 21201
410-385-5901
kschulze@aegonusa.com
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William H. Geiger
Group Compliance Officer
570 Carillon Parkway
St. Petersburg, FL 33716-1202
727-299-1831 |
Mary J. Tresnak
Associate General Counsel
4333 Edgewood Road NE
Cedar Rapids, IA 52499
319-398-8590 |
bgeiger@aegonusa.com mtresnak@aegonusa.com
cc: Commissioner Vaughan
PROPOSED LANGUAGE TO ARTICULATE
THE DUTIES OF INSURERS AND PRODUCERS UNDER
THE NAIC SUITABILITY OF SALES OF
LIFE INSURANCE AND ANNUITIES MODEL REGULATION
Section 5 Duties of Producers
A producer shall not make recommendations to purchase insurance products that
are not reasonably designed to assist in meeting the customer’s insurable
needs or financial objectives.
Prior to making a recommendation to purchase an insurance product, a producer
shall make reasonable inquiries to assist the customer in determining his or her
insurable needs or financial objectives. Where a customer refuses to provide
information in response to the producer’s reasonable inquiries, the producer’s
obligations under this Regulation are discharged.
A producer who makes a recommendation to purchase an insurance product shall
certify at the time of application that any recommendation to purchase was made
in accordance with the insurer’s approved guidelines referred to in Section
6,A of this Regulation.
Where a consumer purchases an insurance product subject to this Regulation in
contravention to the producer’s recommendation which was reasonably designed
to meet the customer’s insurable needs or financial objectives, the producer
shall retain supporting documentation for three (3) years from the date of the
transaction.
Section 6. Duties of Insurers
Insurers shall develop or approve guidelines designed to reasonably ensure
its producers make recommendations to purchase insurance products that are
reasonably designed to meet customers’ insurable needs or financial
objectives.
Insurers shall train producers, or make training available to independent
producers, on guidelines designed to implement Section 6,A of this Regulation.
Insurers shall maintain a system of monitoring to insure its producers comply
with this regulation that shall include at least the following:
A procedure to inform its producers of the requirements of this regulation
and incorporate the requirements of this regulation into relevant producer
training manuals prepared by the insurer;
A procedure to provide to each producer a copy of insurer approved
guidelines designed to ensure that a recommendation made by its producers is
reasonably designed to meet the customer’s insurable needs or financial
objectives.
A system to review the recommendations of producers who indicate that a
recommendation to purchase was not made in accordance with company guidelines
developed under Section 6,A.
A system to review a producer’s recommendation to purchase for compliance
with insurer guidelines developed under Section 6,A where the company receives
a complaint or inquiry alleging that, at the time of application, the producer’s
recommendation was not reasonably designed to assist the customer in meeting
its insurable needs and objectives
Where the insurer determines, as a result of a review performed in
accordance with Section 6,C, that a producer’s recommendation to purchase a
product does not comply with insurer guidelines developed under Section 6,A,
the insurer shall take corrective action. Such corrective action may include,
but not be limited to: reimbursing the customer for any loss, training or
educating the producer on the insurer approved guidelines, revising the
insurer approved guidelines or taking disciplinary action against the
producer.
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