During September 2003, the National Association of Insurance Commissioners (NAIC) adopted the Suitability in Annuity Transactions Model Regulation (Suitability Model) to establish uniform standards and procedures for ensuring that annuity purchases and exchanges were suitable to the insurance needs and financial objectives of senior citizens. Prior drafts of the Suitability Model addressed purchases and exchanges of annuities by persons of all ages. The final version of the Suitability Model recommended a narrow model that addressed the area of most concern to regulators—the sale of annuities to seniors . . . [b]ecause of the lack of support for a wide-reaching standard, and because none had existed before in most states.

During June 2006, the NAIC returned to the “wide-reaching standard” draft of the Suitability Model and amended 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 the Suitability Model. Ultimately, they declined to adopt the NAIC’s amendments. Rather, the Florida Legislature determined to enhance significantly the existing standards by which an agent must determine the suitability of annuity transactions with seniors, convert a subjective measure to an objective standard for determining whether the agent properly applied these standards, require that the agent’s suitability analysis be documented, and invoke various other procedures. Meanwhile, Connecticut lawmakers amended that state’s authorizing legislation to enable the CID to match the agency’s suitability regulations with the NAIC’s broadened version of the Suitability Model. Florida would travel by alternate legislative and administrative means to expand suitability analysis into product sales to other segments of Florida’s population.

Despite the differing issues addressed by the legislation in these states, producers, agents, and insurers are bestowed significant additional responsibility for ensuring compliance with a substantial increase in enforcement authority over the suitability of annuity transactions. In this commentary, premier insurance attorney and regulatory expert A. Kenneth Levine describes the purported bases for these changes, the trend which these changes illustrate, and the manner in which producers, agents, and insurers may endeavor to comply with this trend. The commentary also includes a chart that compares various aspects of the 2004 Florida statute, the 2008 Florida amendments, the Connecticut rule and the NAIC Model Regulation.

With respect to developments in Florida, Levine explains how the criteria set forth in that state’s 2004 codification of the NAIC’s suitability model “eluded a precise template for the Florida Department of Financial Services to determine the standard information which an agent was to glean from a senior consumer in conducting suitability analysis and making a recommendation.” Levine also explains the enforcement difficulties inherent in the “reasonable grounds for believing” standard that the 2004 legislation prescribed for determining the propriety of an agent’s suitability recommendation. The author writes that the standard “required a subjective inquiry into whether the agent believed that a particular transaction was suitable regardless of whether the transaction was actually suitable on an objective basis. This subjective standard required that the FDFS prove the negative by “clear and convincing” evidence: that the agent did not believe that a particular transaction was suitable for a particular applicant.”

Levine further recounts how the Florida Legislature responded to these concerns with Senate Bill 2082, known as the “John and Patricia Siebel Act,” which passed both legislative chambers with unanimous approval, and was named for a Venice, Florida couple in their 80s who were sold $600,000 worth of annuities that could not be touched for 15 years without large penalties.

The author writes: “Florida’s new legislation amended the state’s 2004 suitability law, effective on January 1, 2009. The amended statute retained some standard information from the 2004 legislation and clarified or added new information which the agent, or insurer in direct sales, must obtain from the consumer to analyze suitability.”

The author also points out that “The bill clarified the ‘financial status’ inquiry, by replacing that term with an examination of the applicant’s annual income; existing assets, including investment holdings; liquid net worth and liquidity needs; and, financial situation and needs.”

Levine also addresses “several new criteria, not found in the amended Suitability Model: personal information, including the age and sex of the parties to the annuity and the ages and number of any dependents; the source of the funds to purchase the annuity; the applicant’s intended use of the annuity; and, the applicant’s risk tolerance.”

Levine also describes how the Florida Legislature also furnished the FDFS with an objective standard for determining the propriety of an agent’s suitability recommendation. The author writes: “The agent must now have an “objectively reasonable basis” for believing that the recommendation is suitable based on the facts disclosed by the consumer. This objective basis, coupled with the revised consumer information criteria for the agent’s analysis of suitability, arguably will enable the FDFS to apply an objective measure against the agent’s conduct.”

The author also discusses how, “despite Florida’s commitment to the 2004 version of the Suitability Model, focusing on the state’s senior population, Florida has endeavored by other means to address suitability in annuity transactions with other segments of the state.” The author summarizes: “These examples signal Florida’s expanding application of suitability analysis beyond the confines of the state’s senior constituency. While ‘Florida’s senior population is expected to grow by a staggering 176 percent’ by the year 2030, FDFS White Paper at p. 1, Florida lawmakers and regulators clearly do not intend to withhold suitability analysis from the balance of the population in the meantime. “

Levine also traces legislative developments of the suitability laws in Connecticut. Levine writes: “By 2008, in keeping with the NAIC’s revision of the Suitability Model, the CID determined to broaden the scope of these regulations to address the suitability of recommendations to any annuity consumer regardless of age. The statutory authority for the CID’s rules, though, specifically limited the scope of regulation to ‘seniors.’ To address this qualification, the CID proposed legislation to remove the term ‘seniors’ from Section 38a-432a of the Connecticut General Statutes. Such a ‘simple’ statutory revision could not escape the political intervention inherent to the legislative process.”

In outlining the various aspects of regulatory revisions enacted in Connecticut, the author writes: “The Connecticut rules retain the same suitability standards as the 2004 Florida law and the amended Suitability Model. In contrast to Florida, the Connecticut rules require that producers ensure the suitability of, e.g. fixed annuities with deferred payouts, when recommended to younger consumers who may need ready access to funds.”

Levine also explains how developments at NAIC, and in Florida and Connecticut, usher in an era of increased insurer culpability in the arena of suitability in annuity transactions. The author writes: “Under the Florida, Connecticut, and Suitability Model amendments, insurers remain administratively culpable for suitability transgressions in annuity sales and exchanges which involve no producer or agent. The three regulatory schemes also require that the insurer ensure that a system to supervise recommendations is established that is reasonably designed to achieve compliance with each state’s suitability standards.”

Levine further recommends that “Insurers should endeavor to assure that a specific and clear supervisory system is established and followed, that business may only be produced by duly-authorized agents, and that the parameters of an agent’s authority are clearly delineated.”

The author concludes: “A vague legal standard often makes for a flexible allegation against an insurer or agent. On the other hand, violation of a standard which defies measurement is often difficult to prove. Insurers can sidestep their direct involvement in such time-consuming, costly, and public allegations by developing suitability standards which match or exceed the most rigorous and expansive of state requirements. Florida now appears to provide such a heightened level of scrutiny. Connecticut now reflects the breadth of annuity consumers intended for protection by the NAIC. Insurers can reduce litigation and reputation cost by routinely monitoring the application of these standards to ensure that authorized agents only sell annuities which can provide real value and security for each consumer’s financial needs.”

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