Annuity Suitability & Best Interest Standard

Last Updated: 11/2/2023

Issue: Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. The Suitability in Annuity Transactions Model Regulation (#275) serves as a basis for this regulatory framework. Model #275 sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. Since the model's original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA). Most states have enacted the updated version of Model #275.

Background: The Annuity Suitability (A) Working Group was appointed in 2017 to review and revise, as necessary, Model #275, to promote greater uniformity across NAIC-member jurisdictions. Renewed interest in the model was prompted, in part, by work being done at the federal level. In April 2016, the U.S. Department of Labor (DOL) completed regulations broadening its definition of "fiduciary investment advice" under the federal Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). However, the rule was vacated by the 5^th U.S. Circuit Court of Appeals in March of 2018 before it took effect.

The U.S. Securities and Exchange Commission (SEC) released a proposed rule package on April 18, 2018, updating the standard of care broker-dealers and investment advisers would be required to provide to retail investors. The NAIC submitted comments to the SEC during the exposure period to further coordinate efforts so that the respective regulatory developments can provide consistency for consumers, industry, and regulators. The final rule took effect on June 30, 2020.

In 2018, the New York State Department of Financial Services proposed a new "best interest" standard for agents and brokers licensed to sell life insurance and annuity products in the state aligning with the now vacated DOL "fiduciary rule" for retirement savings. Under the rule, product sales must prioritize customer's interest over sales commissions and agents and brokers' compensation should not be influenced by the products recommended. The rule went into full effect on February 1, 2020.

Status: In 2019 the NAIC Annuity Suitability (A) Working Group completed updates to Model #275 which began in November 2017. The goal of the Working Group was to seek clear, enhanced standards for annuity sales so consumers understand the products they purchase, are made aware of any material conflicts of interest, and are assured those selling the products do not place their financial interests above consumers' interests.

The NAIC membership approved revisions to Model #275 in February of 2020 clarifying that all recommendations by agents and insurers must be in the best interest of the consumer and that agents and carriers may not place their financial interest ahead of the consumers’ interest in making a recommendation. The model now requires agents and carriers to act with “reasonable diligence, care and skill” in making recommendations. The revisions also include enhancements to the current model’s supervision system to assist in compliance. Currently, the Working Group is drafting a Frequently Asked Questions document to provide guidance as states adopt the revisions to the model. To date, 43 states have adopted the model revisions.

The NAIC believes a high degree of harmonization across regulatory platforms would be beneficial to consumers and the industry. The NAIC hopes to continue a productive dialogue with the SEC, the DOL and other financial regulators as updates to the respective standards of conduct governing the sale of annuity products are considered.