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Draft: January 6, 2001
The NAIC solicits comments on this draft. Comments should be
sent electronically by Feb. 5, 2001 to Carolyn Johnson, NAIC, 2301 McGee, Suite
800, Kansas City, Missouri, 64108; e-mail address is cjohnson@naic.org.
LIFE INSURANCE AND ANNUITIES
SUITABILITY MODEL REGULATION
Table of Contents
Section 1. Purpose and Scope
Section 2. Authority
Section 3. Definitions
Section 4. Exemptions
Section 5. Duties of Insurers
Section 6. Duties of Producers
Section 7. Recordkeeping
Section 8. Severability
Section 9. Effective Date
Section 1. Purpose and Scope
The purpose of this regulation is to regulate the activities
of insurers and producers that make recommendations to consumers to purchase
certain life insurance and annuity products. The goal of this regulation is to
ensure that insurers and producers will make suitable recommendations based on
relevant information obtained from persons who purchase life insurance and
annuity products.
This regulation shall apply to all recommendations for the
purchase of individually sold fixed life insurance and annuity products that are
not specifically exempted.
Section 2. Authority
This regulation is issued under the authority of [insert
reference to unfair trade practice act].
Section 3. Definitions
A. "Customer" means an individual who seeks to
obtain, obtains or has obtained an insurance product covered by this
regulation from a producer or directly from an insurer.
B. "Direct response solicitation" means a
solicitation through a sponsoring or endorsing entity or individually sold
through mail, telephone, the Internet or other mass communications media.
C. "Insurance transaction" means the purchase of
an individually sold fixed life insurance or annuity product that is offered
by an insurer pursuant to the insurance laws of this state.
D. "Person" means an individual, aggregation of
individuals, trust, association, partnership, corporation or similar entity.
E. "Producer" means an agent, broker or producer
licensed in this state.
F. "Registered contract" means a variable annuity
contract or a variable life insurance policy subject to the prospectus
delivery requirements of the Securities Act of 1933.
G. "Relevant information" includes, but is not
limited to, occupation, marital status, age, number of dependents, sources of
income, yearly income, the customer’s need or primary objective for
purchasing insurance, affordability of premiums to keep the policy in force,
the customer’s existing insurance, investments or savings, liquid net worth,
tax status, need or desire for tax advantages or benefits provided by a
product, investment experience of the customer, customer concern for
preservation of principal, product time horizon, and the customer’s
awareness of liquidity limitations or surrender charges.
H. "Sophisticated purchaser" means an
institution, trust or individual represented by a certified public accountant
or legal counsel in the purchase of a life insurance or annuity product. A
sophisticated purchaser also includes a person purchasing business-owned life
insurance, business related or employer-sponsored life insurance,
corporate-owned life insurance, structured settlement contracts, funding
agreements, life insurance owned by a tax exempt organization under the
Internal Revenue Code Section 501 and other similar products.
I. "Suitable recommendation" means a
recommendation for the purchase of a life insurance or annuity product not
exempted from this regulation, which is based upon relevant information
obtained from a potential purchaser and that meets the purchaser’s insurable
needs or financial objectives.
Section 4. Exemptions
Unless otherwise specifically included, this regulation shall
not apply to recommendations for purchases involving:
A. Direct response solicitations where there is no
recommendation by a producer or agent of an insurer;
B. Registered contracts;
C. Long term care insurance products;
D. Products sold to sophisticated purchasers;
E. Group life insurance or annuity products where there is
no direct solicitation of individuals by an insurance producer. Direct
solicitation shall not include any group meeting held by an insurance producer
solely for the purpose of educating or enrolling individuals or, when
initiated by an individual member of the group, assisting with the selection
of investment options offered by a single insurer in connection with enrolling
that individual; or
F. Policies or contracts used to fund:
(1) An employee pension or welfare benefit plan that is
covered by the Employee Retirement and Income Security Act (ERISA);
(2) 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;
(3) 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
(4) A nonqualified deferred compensation arrangement
established or maintained by an employer or plan sponsor.
Section 5. Duties of Insurers
A. An insurer shall establish, maintain and enforce
policies and procedures reasonably designed to ensure that its producers make
suitable recommendations. An insurer’s policies and procedures shall be
appropriate to the methods of distribution and products sold.
B. An insurer’s policies and procedures shall include at
least the following:
(1) Informing its producers of the requirements of this
regulation and incorporating those requirements into any relevant producer
training manuals prepared by the insurer;
(2) Providing each producer with the insurer’s
guidelines as to information that should be obtained from a customer prior
to making recommendations to a customer; and
(3) Establishing and maintaining a system reasonably
designed to detect, on either an individual or aggregate basis, producer
practices that are not in compliance with guidelines established in
accordance with this section. Compliance with this regulation may include,
but shall not be limited to, systematic customer surveys, interviews,
confirmation letters or programs of internal monitoring.
C. An insurer may contract with a third party, such as an
insurance agency or brokerage firm, to deliver information and perform the
functions described in Subsection B(1) and (2). An insurer utilizing such a
contract shall perform a reasonable inquiry to assure that the third party is
performing all duties required by this regulation.
D. An insurer shall be deemed to comply with the
requirements of this regulation if the insurer can demonstrate to the
satisfaction of the commissioner any one or more of the following:
(1) The insurer complies on a continuing basis with the
membership requirements of the Insurance Marketplace Standards Association;
(2) The insurer requires that suitability requirements
established by the National Association of Securities Dealers are used for
products sold pursuant to this regulation; or
(3) The insurer’s policies and procedures require
collection of appropriate relevant information for the type of product being
recommended.
Section 6. Duties of Producers
A. In recommending the purchase of life insurance or
annuity products covered by this regulation, producers shall make suitable
recommendations.
B. Producers shall have reasonable discretion to determine
what information is relevant or necessary for any specific recommendation or
insurance transaction.
C. Producers shall maintain for [insert number] years, from
the date of providing a recommendation covered by this regulation,
documentation of the relevant information that was considered in making the
recommendation. Documentation need not be retained if no policy or contract is
issued. An insurer is permitted, but shall not be required, to maintain
documentation on behalf of a producer.
D. The determination of whether a producer has met his or
her obligations under this section shall be based on the circumstances known
by the producer that existed at the time the recommendation is made to a
customer and shall not be judged upon facts that arose or were made known at
any time after the recommendation was made. A rebuttable presumption that a
recommendation was a suitable recommendation is created if the producer can
demonstrate:
(1) Collection and consideration of relevant information;
and
(2) Conformance with an insurer’s policies and
procedures, prior to making a recommendation.
E. Neither a producer nor an insurer shall have any
obligation of any nature to a customer under this regulation related to any
recommendation or insurance transaction if a customer:
(1) Refuses to provide the kinds of information described
in Subsection B of this section; or
(2) Decides to enter into an insurance transaction that
is contrary to a recommendation of the producer.
Section 7. Recordkeeping
Records required 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 actual
document.
Section 8. Severability
If any section, term or provision of this regulation shall be
judged invalid for any reason, that judgment shall not affect, impair or
invalidate any other section, term or provision of this regulation, and the
remaining sections, terms and provisions shall be and remain in full force and
effect.
Section 9. Effective Date
This regulation shall become effective [insert date] and
shall apply to contracts and policies recommended or sold on or after the
effective date.
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