BILL ANALYSIS Ó
AB 689
Page 1
ASSEMBLY THIRD READING
AB 689 (Blumenfield)
As Amended May 27, 2011
Majority vote
INSURANCE 12-0 APPROPRIATIONS 16-0
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|Ayes:|Solorio, Hagman, Charles |Ayes:|Fuentes, Harkey, |
| |Calderon, Carter, Feuer, | |Blumenfield, Bradford, |
| |Grove, Hayashi, Miller, | |Charles Calderon, Campos, |
| |Olsen, Skinner, Torres, | |Davis, Gatto, Hall, Hill, |
| |Wieckowski | |Lara, Mitchell, Nielsen, |
| | | |Norby, Solorio, Wagner |
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SUMMARY : Requires insurance producers and insurers selling
annuities to have reasonable grounds to believe their
recommendations are suitable for consumers, and to adopt a
regulatory process to enforce this requirement. Specifically,
this bill :
1)Requires the insurance producer and the insurer when
recommending to a consumer the purchase or exchange of an
annuity to have reasonable grounds for believing the
recommendation is suitable for the consumer.
2)Requires insurance producers and insurers to base their belief
on the facts disclosed by the consumer as to his or her
investments and other insurance products and as to his or her
financial situation and needs, including the consumer's
suitability information, and that there is a reasonable basis
to believe the consumer has been reasonably informed of
various features of the annuity, the consumer would receive a
tangible net benefit from the transaction, and that the
particular annuity including subaccounts and riders are
suitable for this particular consumer.
3)Defines "insurance producer" as a person required to be
licensed under California law to sell, solicit, or negotiate
insurance, including annuities.
4)Defines "suitability information" as information that is
reasonably appropriate to determine the suitability of a
recommendation, including all of the following: age, annual
income, financial situation and needs, financial experience,
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financial objectives, intended use of the annuity, financial
time horizon, existing assets including investment and life
insurance holdings, liquidity needs, liquid net worth, risk
tolerance, tax status, and whether or not the consumer has a
reverse mortgage.
5)Requires an insurance producer or insurer to make reasonable
efforts to obtain the consumer's suitability information prior
to the execution of the purchase, exchange or replacement of
an annuity resulting from a recommendation.
6)Provides, with specified exceptions, that an insurer shall not
issue an annuity recommended to a consumer unless there is a
reasonable basis to believe the annuity is suitable based on
the consumer's suitability information. In no event shall an
insurance producer or insurer recommend to a person 65 years
or older the sale of an annuity to replace an existing annuity
that requires the insured to pay a surrender charge for the
annuity that is being replaced, where purchase of the annuity
does not confer a substantial financial benefit over the life
of the policy, so that a reasonable person would believe the
purchase is unnecessary.
7)Provides that neither an insurance producer nor an insurer
shall have any obligation to a consumer, pursuant to this bill
and related to an annuity transaction, if any of the following
occur: a) no recommendation is made; b) a recommendation was
made and later found to have been prepared based on materially
inaccurate information provided by the consumer; c) a consumer
refuses to provide relevant suitability information and the
annuity transaction is not recommended; and, d) a consumer
decides to enter into an annuity transaction that is not based
on a recommendation of the insurer or the insurance producer.
8)Specifies that, unless otherwise specifically included, this
bill shall not apply to the following transactions: a) direct
response solicitations when no recommendation is based on
information collected from the consumer; or, b) contracts used
to fund employee pension or welfare benefit plans covered
under the federal Early Retirement and Income Security Act,
401(k) plans, government or church plans, tax exempt
organizations under Internal Revenue Code Section 457, a
nonqualified deferred compensation arrangement maintained by
an employer or plan sponsor, settlements associated with
personal injury litigation or a claim resolution process, or
formal prepaid funeral contracts.
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9)Requires an insurance producer, or the responsible insurer
representative, at the time of sale to: a) make a record of
any recommendation to a consumer to purchase or exchange an
annuity; b) obtain a customer-signed statement documenting the
customer's refusal to provide suitability information, if any;
and, c) obtain a customer-signed statement acknowledging that
an annuity transaction is not recommended if the customer
decides to enter into an annuity transaction that is not based
on the insurance producer's or insurer's recommendation.
10)Requires an insurer to establish a supervision system, with
specified elements, that is reasonably designed to achieve the
insurer's and its insurance producer's compliance with this
bill.
11)Provides that sales of annuities by broker-dealers licensed
pursuant to the federal Financial Industry Regulatory
Authority (FINRA) that comply with the suitability
requirements set forth in a FINRA rule shall satisfy the
suitability requirements of this bill, provided the
suitability criteria includes the consumer's income and the
intended use of the annuity.
12)Specifies that an insurer shall be responsible for taking
appropriate corrective action in connection with the
performance of functions required by this bill, and is
responsible for the compliance of its insurance producers.
13)Prohibits an insurance producer from soliciting the sale of
an annuity product unless the insurance producer has adequate
knowledge of the product to recommend the annuity and the
insurance producer is in compliance with the insurer's
standards for product training.
14)Specifies both the required hours of training and the topics
to be covered in the training of insurance producers.
15)Requires an insurer to verify that an insurance producer has
completed the annuity training required by this bill before
allowing the producer to sell an annuity product for the
insurer.
16)Makes an insurer responsible for compliance with this
article. If a violation occurs, either because of the action
or inaction of the insurer or its insurance producer, the
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Insurance Commissioner (IC) may, in addition to other
available penalties or remedies, order any of the following:
a) An insurer to take reasonable appropriate corrective
action for any consumer harmed by the insurers, or its
insurance producer's, violation of this bill;
b) A managing general agent or an insurance producer to
take reasonably appropriate corrective action for any
consumer harmed by the insurance producer's violation of
this bill; or,
c) Administrative penalties and sanctions ranging from
$1,000 to $300,000 for each violation, depending on whether
a person or an insurer commits the violation and if it is
the first or a frequent violation.
17)Specifies that nothing in this bill shall affect any
obligation of an insurer for the acts of its agents, or any
consumer remedy or cause of action that is otherwise provided
for.
18)Requires insurers and insurance producers to maintain, or be
able to make available to the IC, records of the information
collected from the consumer and other information used in
making the recommendations that were the basis for insurance
transactions for five years. The records may be maintained in
paper, photographic, micro process, magnetic, mechanical, or
electronic media, or by any other process that accurately
reproduces the actual document.
19)Requires the IC, after notice and hearing, to adopt
reasonable rules and regulations that are necessary to
administer this bill. The IC would be authorized to adopt
regulations not inconsistent with this bill pursuant to a
section of the federal law known as the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Public Law 111-203).
EXISTING LAW :
1)Requires life insurers selling life insurance and annuity
policies through the use of agents to require, with completed
applications, a statement signed by the agent as to whether he
or she knows replacement is involved in the transaction, and
if replacement is involved, the insurer must require: a) a
list of all of the applicant's existing life insurance or
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annuity policies to be replaced; b) a copy of a specified
replacement notice; and, c) a written notice that the
applicant has a right for 30 days to an unconditional refund
of all premiums paid.
2)Establishes the Life and Annuity Consumer Protection Fund
(Fund) within the Insurance Fund for the purpose of protecting
consumers of life insurance and annuity products. The Fund is
authorized up to $5 million annually and is financed from fees
levied on admitted insurers. The Department of Insurance
(DOI) distributes the proceeds from the Fund for: a) DOI's
investigation and prosecution of financial abuse, to respond
to consumer inquiries and complaints, to educate consumers,
and to regulate life insurance and annuity products including
advertising; and, b) for district attorneys to investigate and
prosecute individual life insurance and annuity product
financial abuse.
3)Prohibits the sale of annuities to seniors where the purpose
of the sale is to affect Medi-Cal eligibility and the
purchaser would already qualify for Medi-Cal, or the
purchaser's assets are less than the community resource
allowance established by the Department of Health Services,
or, after the purchase, the purchaser or the purchaser's
spouse would not qualify for Medi-Cal.
4)Requires that life agents complete eight hours of training
prior to selling individual annuities to consumers and four
hours of training every two years prior to license renewal, in
courses approved by the IC.
5)Prohibits the replacement of an existing insurance policy by
the use of a materially inaccurate presentation that
recommends that a senior citizen purchase an unnecessary
replacement annuity and prescribes the administrative
penalties for violating this law.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, minor and absorbable costs, likely less than $50,000
per year, for on-going training of DOI staff.
COMMENTS :
1)The author states that this bill builds on, and in some
sections exceeds, the requirements set forth in the 2010
National Association of Insurance (NAIC) Annuity Suitability
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Model Regulation, which was created as a result of
national-level discussions regarding annuity suitability
requirements. It is also the author's intent to conform to
existing California law and provide additional consumer
safeguards. The author states this bill is needed because
annuities are often complex long-term insurance products in
which the premium monies invested are unavailable for many
years and the withdrawal of funds from annuities frequently
involves the payment of large penalties. It is therefore
necessary that the consumer understands the implications of
purchasing an annuity and that the insurer and producer make a
reasonable determination that the sale of the annuity is
suitable for the consumer's financial circumstances and
investment objectives at the time the annuity is sold to the
consumer and prior to the insurer's issuance of the contract.
The author and Insurance Commissioner Dave Jones state there is
no law requiring insurers and producers to collect information
regarding specified criteria that must be considered in
determining whether an annuity is suitable for a consumer's
financial situation (e.g., the consumer's financial objectives,
financial time horizon, liquidity needs, and existing needs) and
whether or not the consumer has a reverse mortgage.
Accordingly, the state should establish appropriate safeguards
to protect consumers from costly unsuitable annuity purchases.
The author and the IC further state that the federal Dodd-Frank
Wall Street Reform and Consumer Protection Act indicates the
states should preserve their sole authority over regulating
fixed annuities by adopting comprehensive suitability standards
for annuity sales that meet or exceed the 2010 NAIC Model
Regulation by June 6, 2013, in order to avoid federal dual
authority/oversight of fixed annuities with the U.S. Securities
and Exchange Commission. This bill accomplishes that objective.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086
FN: 0000852
AB 689
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