BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 689 (Blumenfield)Hearing Date: June 22, 2011
As Amended: May 27, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would require adoption of more stringent procedures to
assess suitability of proposed annuity sales for customers,
including requiring insurers to establish a system to supervise
the suitability of annuity sale recommendations. In addition,
would establish mandatory standards, procedures and processes,
for insurers and producers, for assessing suitability and
monitoring annuity sales recommendations made to consumers so
that the insurance needs and financial objectives of consumers
at the time of the transaction are appropriately addressed.
DIGEST
Existing California law
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| |
| 1. California law imposes various rules (described below) |
| related to the sale of annuities to California buyers but |
| does not contain standards related to the "Suitability" of |
| Annuity Sales to the personal situation of prospective |
| buyers. |
| |
| 2. Regulates Unfair Practices: Establishes a comprehensive |
| system for the regulation of unfair practices in the |
| business of insurance sale which encompasses, among other |
| matters, misrepresentation and the making false or |
| misleading statements. (See California Insurance Code |
| (CIC) Section 790 et seq.); |
| |
| 3. Imposes Special Duties toward Seniors: All insurers, |
| brokers, agents, and others in the transacting of |
| insurance owe a prospective insured 65 years of age or |
| older a duty of honesty, good faith, and fair dealing |
| which is in addition to any other duty, whether express or |
AB 689 (Blumenfield), Page 2
| implied, that may exist; the conduct of an insurer, |
| broker, or agent, or other person during the offer and |
| sale of a policy or certificate prior to the purchase is |
| relevant to any action alleging a breach of the duty of |
| good faith and fair dealing. (See CIC Section 785); |
| |
| 4. Imposes Rules on Annuity Sales for Medi-Cal Purposes: |
| Provides an annuity shall not be sold to a senior if the |
| senior's purpose is to affect Medi-Cal eligibility and the |
| seniors assets are equal to or less that the community |
| spouse resource allowance or the senior would have |
| otherwise qualified for Medi-Cal (See CIC Section 789.9); |
| |
| |
| 5. Requires 8 Hour Mandatory Annuity Sales Training: |
| Requires all life agents selling annuities shall complete |
| 8 hours of training prior to soliciting consumers to sell |
| annuities. Specific training is required in: |
| a. Topics related to annuities; |
| b. California law, regulations, and requirements |
| related to annuities; |
| c. Prohibited sales practices; |
| d. The recognition of indicators that a |
| prospective insured may lack the short-term memory or |
| judgment to knowingly purchase an insurance product; |
| e. Information on fraudulent and unfair trade |
| practices |
| f. Subject matter determined by the commissioner |
| to be primarily intended to promote the sale or |
| marketing of annuities shall not qualify for credit |
| towards the training requirement. (See CIC Section |
| 1749.8); |
| |
| 6. Prohibits "Unnecessary Replacement" of a Life or |
| Annuity Policy: Imposes duties upon insurers and agents |
| with respect to the replacement of life and annuity |
| policies and specifies that an "unnecessary replacement", |
| which constitutes a violation of this existing law, means |
| a sale of an annuity to replace an existing annuity that |
| requires the insured to pay a surrender charge for the |
| annuity being replaced without the new transaction |
| conferring a substantial financial benefit over the life |
| of the policy so that a reasonable person would believe |
| that the purchase is unnecessary and provides related |
| presumptions to guide this law's application. (See CIC |
| Section 10509.8); |
AB 689 (Blumenfield), Page 3
| |
| 7. Establishes a Life and Annuity Consumer Protection Fund |
| in the Insurance Department: Establishes until January 1, |
| 2015 a Life and Annuity Consumer Protection Fund in the |
| Department of Insurance funded by a $1 fee on all life and |
| annuity policies sold in California; The funds are used to |
| enhance the DOI's enforcement efforts in investigating and |
| prosecuting financial abuse by licensees, responding to |
| consumer complaints and inquiries, educating consumers, |
| regulating and overseeing life insurance and annuity |
| marketing and sales activity and to support district |
| attorneys with prosecution. (See CIC Section 10127.17); |
| |
| 8. Prohibits Misrepresentations: Provides that insurers, |
| their officers and agents, and brokers and solicitors |
| shall not issue, circulate or use any statement which is |
| known, or which should have been known to be a |
| misrepresentation of: |
| a. The terms of a policy issued by the insurer |
| or which is being negotiated by the person making or |
| permitting the misrepresentation; |
| b. The benefits or privileges promised |
| thereunder; or |
| c. The future dividends payable thereunder. (See |
| CIC Section 780) |
| |
| 9. Regulates any Reverse Mortgage Issuance with an Annuity |
| Tie-In: Specifies that a lender or another participant in |
| issuance of a reverse mortgage shall not require the |
| applicant to purchase an annuity as a condition of |
| obtaining a reverse mortgage loan, nor shall the lender or |
| other party: |
| a. Participate in any form with a party engaged |
| in any other financial or insurance activity unless |
| the lender maintains procedural safeguards to ensure |
| that individuals participating in the origination of |
| the mortgage shall have no involvement with, or |
| incentive to provide the prospective borrower with, |
| any other financial or insurance product; or |
| b. Refer the borrower to anyone for the purchase |
| of an annuity or other financial or insurance product |
| prior to the closing of the reverse mortgage or |
| before the expiration of the right of the borrower to |
| rescind the reverse mortgage agreement. (See |
| California Civil Code Section 1923.2(i)) |
| |
AB 689 (Blumenfield), Page 4
| 10. Prohibits Financial Abuse: Provides penalties for |
| "Financial Abuse" of an elder or dependent adult, which is |
| defined as occurring when a person or entity does any of |
| the following: |
| a. Taking, obtaining, or retaining real or |
| personal property of an elder or dependent adult for |
| a wrongful use or with intent to defraud, or both; |
| b. Assisting in taking, obtaining or retaining |
| real or personal property of an elder or dependent |
| adult for a wrongful use or with intent to defraud, |
| or both; |
| c. Taking, obtaining , or retaining, or |
| assisting in taking, obtaining, or retaining real or |
| personal property of an elder or dependent adult by |
| undue influence; |
| d. Undue influence is defined as the use, by one |
| in whom a confidence is reposed by another, of such |
| confidence for the purpose of taking an unfair |
| advantage of another's weakness of mind and it is |
| deemed to have been taken, obtained, or retained for |
| a wrongful use if, among other things, the person or |
| entity knew or should have known that their conduct |
| is likely to be harmful to the elder or dependent |
| adult. (See California Welfare and Institutions Code |
| Section 15610.30) |
| |
|Existing Federal Law |
| |
| 1. Under the 2010 Dodd-Frank Wall Street Reform and |
| Consumer Protection Act, specifically Title IX, Subtitle |
| I, Section 989a of the (relating to senior investment |
| protections) a state's adoption of suitability |
| requirements that meet or exceed National Association of |
| Insurance Commissioners' Suitability in Annuity |
| Transactions Model requirements is required for a state to |
| participate in a program of grants to support enhanced |
| protections of seniors against misleading marketing |
| practices. |
| |
| 2. Additionally, under Dodd-Frank Title IX, Subtitle I, |
| Section 989J of the Dodd-Frank Act California's adoption |
| of at least the minimum requirements NAIC Suitability in |
| Annuity Transactions Model is necessary for California's |
| continued jurisdiction over indexed securities. |
| |
| |
AB 689 (Blumenfield), Page 5
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This bill
1. Would enact, with limited revisions, the National
Association of Insurance Commissioner's Suitability in
Annuity Sales Transactions Model to govern the duties of
insurers and producers when recommending the purchase or
exchange of an annuity and to impose a duty that the agent
and insurer have reasonable grounds for believing that the
recommendation is suitable for the consumer on the basis of
the facts disclosed by the consumer.
2. The Act additionally imposes a secondary suitability
review process upon life insurers who are prohibited under
SB 689 from issuing "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
and applicable California law" (Section 10509.914 (c) at
page 6, Lines 37-40)
3. The Act also imposes producer training and annuity
continuing education, carrier training programs, and
training verification requirements.
4. More specifically, SB 689:
a. States legislative findings and declarations
as follows:
i. The Legislature recognizes that
annuities are complex, long-term financial
investment products designed to provide payments
to the consumer at specified intervals, usually
after retirement.
ii. The Legislature also recognizes
that seniors and other California consumers who
seek to safeguard funds for retirement and other
purposes may be targeted for the sale of
unsuitable annuities, resulting in their
purchasing annuities that are unsuitable for
their financial goals and circumstances, without
understanding the complex provisions of the
annuities that they purchased.
iii. The Legislature further finds that
AB 689 (Blumenfield), Page 6
as a result of purchasing unsuitable annuities
without understanding their complex provisions, a
consumer who has circumstances arise that require
him or her to withdraw funds from the annuity may
find himself or herself unable to withdraw
significant funds from the annuity without paying
expensive charges, large surrender penalties, and
the forfeiture of income and other benefits of
the investment, thus making the consumer more
dependent on the advice, skill, and training of
his or her insurance producer and insurer, hence
the concern to strengthen annuity suitability
requirements in California.
iv. The Legislature recognizes that
President Obama signed the federal Dodd-Frank
Wall Street Reform and Consumer Protection Act
(Public Law 111-203), a historic and
comprehensive financial regulatory reform bill,
which in Section 989J promotes the adoption of
laws and regulations based on the National
Association of Insurance Commissioners' (NAIC)
"Suitability in Annuity Transactions" Model that
governs suitability requirements in the sale of
annuities in order to preserve the authority for
state insurance regulators to oversee the sales
practices of these products.
v. The Legislature further recognizes
that the NAIC "Suitability in Annuity
Transactions" Model establishes a regulatory
framework that requires insurers to establish a
system to supervise recommendations so that the
insurance needs and financial objectives of
consumers are appropriately addressed and that
holds insurers responsible for ensuring that
annuity transactions are suitable, whether or not
the insurer contracts with a third party to
supervise or monitor the recommendations made in
the marketing and sale of annuities.
vi. The Legislature further recognizes
that preservation of the current exemption from
federal regulation of fixed annuities is
beneficial to both consumers and the insurance
businesses of this state.
AB 689 (Blumenfield), Page 7
b. Declares its purpose to be requiring insurers
to establish a system to supervise recommendations and
to set forth standards and procedures for
recommendations to consumers that result in
transactions involving annuity products so that the
insurance needs and financial objectives of consumers
at the time of the transaction are appropriately
addressed. (Section 10509.910 at Page 3, lines 22 to
27)
c. Is made applicable to any recommendation to
purchase, exchange, or replace an annuity made to a
consumer that results in the purchase, exchange, or
replacement that was recommended and provides nothing
in this Act shall be interpreted to preclude, preempt,
or otherwise interfere with the application of any
other laws of this state that may apply in any matter
involving the sale of an annuity that is subject to
this article. (Section 10509.911 (a) and (b) at Page
3, lines 28 to 35)
d. "Recommendation" is defined as "advice or
guidance provided or made, by an insurance producer,
or by an insurer, to an individual consumer that
results in a purchase, exchange, or replacement of an
annuity in accordance with that advice or guidance."
(Section 10509.912 (g) at Page 4, lines 35 to 39)
e. The Act excludes from its scope (Section
10509.912 at Page 3, line 36 to Page 4, line 16):
i. Transactions arising from direct response
solicitations where there is no recommendation based
on information collected from the consumer pursuant
to this article, or:
ii. Contracts used to fund any of the
following:
1. An employee pension or welfare
benefit plan s covered by the Employee
Retirement and Income Security Act (ERISA) (29
U.S.C. Sec. 1001 et seq.);
2. A plan described by Section
401(a), 401(k), 403(b), 408(k), or 408(p) of
AB 689 (Blumenfield), Page 8
the Internal Revenue Code, if established or
maintained by an employer;
3. A government or church plan
defined in Section 414 of the Internal Revenue
Code, 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 Internal
Revenue Code.
4. A nonqualified deferred
compensation arrangement established or
maintained by an employer or plan sponsor;
5. Settlements of or assumptions of
liabilities associated with personal injury
litigation or any dispute or claim resolution
process; or
6. Formal prepaid funeral
contracts.
f. Establishes, at subdivisions (a) and (b) of
Section 10509.914 the duty of insurers and insurance
producers with respect to the making of annuity
recommendations (Section 10509.914 (a) and (b) at Page
5, line 34 to Page 6, line 36):
i. In recommending an annuity purchase or
the exchange of an annuity that results in another
insurance transaction or series of insurance
transactions, the producer, or an insurer if no
producer is involved, shall have reasonable grounds
for believing that the recommendation is suitable
for the consumer on the basis of 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.
ii. "Suitability information" is defined in
subdivision (i) of Section 10509.913 as information
that is reasonably appropriate to determine the
suitability of a recommendation, including all of
the following (Section 10509.913 (i) at Page 5, line
16 to 5, line 33) :
1. Age;
2. Annual income;
AB 689 (Blumenfield), Page 9
3. Financial situation and needs,
including the financial resources used for the
funding of the annuity;
4. Financial experience;
5. Financial objectives;
6. Intended use of the annuity;
7. Financial time horizon;
8. Existing assets, including
investment and life insurance holdings;
9. Liquidity needs;
10. Liquid net worth;
11. Risk tolerance;
12. Tax status; and
13. Whether or not the consumer has
a reverse mortgage.
a. In recommending the purchase or exchange of an
annuity, the producer, or the insurer where no
insurance producer is involved, is required to have a
reasonable basis to believe all the following (Section
10509.914 (a) at Page 5, line 34 to Page 6, line 31):
i. The consumer has been reasonably informed
of annuity features, such as the surrender period,
surrender charge, potential tax penalty if the
consumer sells, exchanges, surrenders, or annuitizes
the annuity, mortality and expense fees, investment
advisory fees, potential charges for and features of
riders, limitations on interest returns, insurance
and investment components, and market risk.
ii. The consumer would receive a tangible net
benefit from the transaction.
iii. The particular annuity as a whole, the
underlying subaccounts to which funds are allocated
at the time of purchase or exchange of the annuity,
and riders and similar product enhancements, if any,
are suitable, and in the case of an exchange or
replacement, the transaction as a whole is suitable,
for the particular consumer, based on his or her
suitability information.
iv. In the case of an exchange or replacement
of an annuity, the exchange or replacement is
suitable, including taking into consideration all of
the following:
1. Whether the consumer will incur
AB 689 (Blumenfield), Page 10
a surrender charge, be subject to the
commencement of a new surrender period, lose
existing benefits, such as death, living, or
other contractual benefits, or be subject to
increased fees, investment advisory fees, or
charges for riders and similar product
enhancements.
2. Whether the consumer would
benefit from product enhancements and
improvements.
3. Whether the consumer has had
another annuity exchange or replacement and, in
particular, an exchange or replacement within
the preceding 60 months.
a. Prior to a purchase, exchange or annuity
replacement based on a recommendation, an insurance
producer or an insurer where no insurance producer is
involved are to make reasonable efforts to obtain the
consumer's suitability information. (Section 10509.914
(b) at Page 6, lines 32 to 36)
b. 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. (Section 10509.914
(c) at Page 6, lines 37 to 40), except that neither a
producer nor an insurer has any obligation to a
consumer pursuant to Subdivisions (a) and (c) of
Section 10509.914 if (Sec. 10509.915 (d)(1) at Page 7,
lines 9 to 21):
i. No recommendation is made;
ii. A recommendation was made and was later
found to have been prepared based on materially
inaccurate information provided by the consumer;
iii. A consumer refuses to provide relevant
suitability information and the annuity transaction
is not recommended; or
iv. A consumer decides to enter into an
annuity transaction that is not based on a
recommendation of the insurer or the insurance
producer.
a. However, in the instances set forth in
paragraph i through iv above, an insurer's issuance of
AB 689 (Blumenfield), Page 11
an annuity must "be reasonable under all the
circumstances which are actually known, or which after
reasonable inquiry should be known, to the insurer or
insurance producer at the time the annuity is issued".
(Section 10509.914 (d)(2) at Page 7, lines 22 to 25)
b. Agents (or the responsible insurer
representative where there is no agent) are required
at the time of any sale to (Section 10509.914 (e) at
Page 7, lines 26 to 36):
i. Keep a record of any recommendations
made;
ii. If a customer declines to provide
suitability information, obtain a signed statement
to that effect;
iii. If a customer decides upon an annuity
transaction not based on the insurance producer's or
insurer's recommendation, obtain a signed customer
statement acknowledging that the transaction is not
recommended.
a. Insurers are required to establish a
supervision system that is reasonably designed to
achieve the insurer's and its producers' compliance
with AB 689, which must include, but is not limited
to, all the following (Section 10509.914 (f) at Page
7, line 37 to Page 8, line 29) :
i. Reasonable procedures to inform its
insurance producers of this law's requirements,
which are to be incorporated into relevant insurance
producer training manuals;
ii. Standards for insurance producer product
training and reasonable procedures to require
producers to comply with the SB 689 and current
law's education and training rules.
iii. Product-specific training and training
materials that explain all material features of the
insurer's annuity products to its insurance
producers.
iv. Procedures for review of each annuity
sales recommendation, prior to issuance, to ensure
that there is a reasonable basis to determine that a
recommendation is suitable.
v. Procedures to detect recommendations that
AB 689 (Blumenfield), Page 12
are not suitable, which may include, but is not
limited to, confirmation of consumer suitability
information, systematic customer surveys,
interviews, confirmation letters, and programs of
internal monitoring. SB 689 authorizes the use of
sampling procedures and post annuity delivery
processes.
NOTE: With respect to subparagraphs i., ii., and iv.
above, AB 689's most recent amendments include
changes suggested by committee staff to delete 3
occurrences of the words "and use" after the word
"maintain" where it appears on page 8 at lines 1, 6
and 12. Staff was concerned the California Insurance
Code includes many requirements that various
procedures and practices be "maintained". The clear
implication in all these under current law is that
they are to be maintained in order to be used .
Assemblyman Blumenfield has stricken the term "and
use" so as to not cast doubt on the current
statutory framework of the Insurance Code that
maintain already implies "use"; the term should be
thus construed in the context of AB 689 as well.
a. AB 689 requires that every insurer shall
annually provide a report to senior management,
including to the senior manager responsible for audit
functions, which details a review, with appropriate
testing, reasonably designed to determine the
effectiveness of the supervision system, the
exceptions found, and corrective action taken or
recommended, if any. (Section 10509.914 (f)(1)(F) at
Page 8, lines 30 to 35)
b. AB 689's supervision rules permit an insurer
to contract with a third party for these compliance
reviews, but the insurer remains obligated to
supervise the performance of any such third party
suitability reviewer under paragraph (1) of
Subdivision (f) of Section 10509.914. An insurer is
not required to include in its system of supervision
producer's recommendations of products other than
annuities offered by the insurer. (Section 10509.914
(f)(2) at Page 8, line 36 to Page 9, line 21)
c. The Act prohibits insurance producers from
AB 689 (Blumenfield), Page 13
dissuading or attempting to dissuade, a consumer from
(Section 10509.915 (g) at Page 9, lines 5 to 10):
i. Truthfully responding to an insurer's
request for confirmation of suitability information;
ii. Filing a complaint; or
iii. Cooperating with the investigation of a
complaint.
a. Subdivision (h) (1) of Section 10509.914 is a
provision which deviates from the NAIC Model by
agreement with the California DOI and sets the rules
concerning California supervision for FINRA
broker-dealer sales of variable and fixed annuities.
(Section 10509.914(h) at Page 9, line 28 to Page 10,
line 5)
The provision specifies sales by FINRA broker-dealers
that comply with the suitability and supervision
system requirements set forth in FINRA Rule 2330, or
any successor Rule, shall satisfy the suitability and
supervision system requirements of this article,
provided that the suitability criteria used also
include the consumer's income the intended use of the
annuity and except to this limited extent, all other
provisions of this Article remain applicable to these
broker-dealer sales and nothing in this provision
shall limit the commissioner's ability to enforce,
including conducting investigations related to, the
provisions of this article.
i. NOTE: An online commentary from the NAIC
website on the rationale for a FINRA recognition in
the model was prepared by the state regulators who
chaired the 2010 NAIC Annuity Suitability Model
revisions. It states as follows:
"(It) 'is intended to prevent duplicative
suitability standards being applied to sales of
annuities through FINRA broker-dealers. Sales
of insurance products which are securities
under federal law, such as variable annuities,
are required to meet FINRA suitability rules;
and sales in compliance with FINRA rules would
comply with the NAIC suitability regulation.
AB 689 (Blumenfield), Page 14
Broker-Dealers may subject fixed annuity sales
to FINRA suitability and supervision rules; and
sales made in compliance with such rules would
also qualify as complying with the NAIC
suitability regulation. However, since FINRA
does not have authority to enforce its rules on
the sale of fixed annuities, broker-dealers
supervising fixed annuity sales may be subject
to more intensive insurance examination than
for sale of security insurance products.
Representatives of a broker-dealer, who are not
required by the broker-dealer to comply with
the FINRA requirements on the sale of fixed
annuities, will have to comply with the
insurance suitability regulation adopted by the
state. In any case, insurers are responsible
for any unsuitable annuity transactions no
matter what suitability regulation or rule is
applied by a broker-dealer."
a. AB 689 imposes continuing education and
training requirements that are dovetailed with
existing California law and DOI regulation and
includes requirements for producers and insurers,
including as to the latter a requirement to verify
that training requirements of their producers have
been met. (Section 10509.915 at Page 10, line 6 to
Page 11, line 31)
b. The Act states the insurer is responsible for
compliance with this article and provides that if a
violation occurs, either because of the action or
inaction of the insurer or its insurance producer, the
commissioner may, in addition to any other available
penalties, remedies, or administrative actions, order
any or all of the following (Section 10509.916 at Page
11, lines 32 to page 12, line 13):
i. An insurer to take reasonably appropriate
corrective action for any consumer harmed by the
insurer's, or by its insurance producer's, violation
of this article;
ii. A general insurance agency, independent
agency, or the insurance producer to take reasonably
appropriate corrective action for any consumer
harmed by the insurance producer's violation of this
AB 689 (Blumenfield), Page 15
Article; and
iii. Penalties and sanctions pursuant to
Section 10509.9, which specifies:
1. Agent penalties of from $1,000
dollars for a first violation to from $5,000 to
$50,000 dollars for multiple or willful
violations; and
2. Insurer penalties of from
$10,000 for a first offense or $30,000 to
$300,000 for subsequent violations which
indicate a general business practice or a
willful violation.
a. Provides nothing in this Article shall affect
any other obligation of an insurer for acts of its
agents, or any other consumer remedy or cause of
action otherwise provided by law. (Section
10509.916(b) at Page 12, lines 11 to 13)
b. Insurers and producers are required to
maintain recommendation-related records and
information for five (5) years after the insurance
transaction is completed by the insurer. The insurer
is permitted, but not required, to maintain this
documentation on their producer's behalf. (Section
10509.917 at Page 12 lines 14 to 25)
c. Requires the Commissioner, from time to time
as conditions warrant to adopt reasonable rules and
regulations, and amendments and additions thereto, as
are necessary to administer this article. The
commissioner may adopt regulations not inconsistent
with this article pursuant to Section 989J of the
federal Dodd-Frank Wall Street Reform and Consumer
Protection Act (Public Law 111-203). (Section
10509.918 at Page 12 lines 26 to 32)
COMMENTS
Purpose of the bill : AB 689 is the Insurance Commissioner's 2010
"Suitability in Annuity Transactions bill. According to the
Author, AB 689 requires insurers to establish a system to
supervise recommendations and to set forth standards and
procedures for recommendations to consumers for the sale of
AB 689 (Blumenfield), Page 16
annuities to ensure that the financial and insurance needs and
objectives of the consumer purchasing the annuity are
appropriately addressed. These protections include:
a. Specifying the duties of insurers and of insurance
producers in recommending the purchase of an annuity to a
consumer, outlining a process for assessing whether an
annuity is suitable for a consumer based on the consumer's
suitability information, and establishing a supervision
system to ensure compliance;
b. Requiring that the insurer and producer have a
reasonable basis to believe that the consumer will obtain a
net, tangible benefit from the purchase;
c. Requiring that all producers who intend to sell
annuities be adequately trained prior to selling an annuity
and that these producers satisfactorily complete continuing
education requirements pursuant to current state law;
d. Providing the Insurance Commissioner with the authority,
among other things, to order an insurer to take corrective
action when the Insurance Commissioner determines that a
violation of AB 689 has occurred; and,
e. Specifying record-keeping requirements regarding annuity
transactions for insurers and producers.
AB 689 builds on, and in some sections exceeds the requirements
set forth in the 2010 National Association of Insurance
Commissioners' (NAIC) Annuity Suitability Model Regulation,
which was created as a result of national-level discussions with
respect to annuity suitability requirements. AB 689 also
conforms to current California law and provides additional
consumer safeguards.
1. As introduced on, AB 689 closely paralleled the substance
of the 2010 NAIC Model. Subsequent changes to AB 689 have
been of two types, primarily. They either:
a. Served to more explicitly integrate the NAIC
Model's provisions with existing California law, or
b. Modify some facet of the NAIC Model based upon
preferences of the Department of Insurance and
negotiations with interested parties.
2. As amended May 27th, AB 689's provisions are in all
substantive respects the same as SB 715 (Calderon et al).
3. An important innovation in the 2010 NAIC Act is it proposes
AB 689 (Blumenfield), Page 17
requiring insurers to establish a system to supervise
annuity sale recommendations and sets forth standards and
procedures, for insurers and producers, for recommendations
made to consumers that result in transactions involving
annuity products so that the insurance needs and financial
objectives of consumers at the time of the transaction are
appropriately addressed.
4. History and Evolution of NAIC Annuity Model Legislation:
Annuities, which are described below, are complex financial
tools whose traits, as they affect buyers, vary based upon
the kind of annuity involved. Due to this complexity,
regulators nationally have focused intently over the past
decade on developing tools to help ensure that as annuity
sales occur, producers and insurers are selling suitable
products.
5. This effort led in 2003 to a National Association of
Insurance Commissioners (NAIC) Senior Protection in Annuity
Transactions Model Regulation. By 2006, recognition of the
underlying complexity as a pitfall for buyers of all ages
led to NAIC adoption of a revised model applicable to all
consumers. As summarized below in the Prior legislation
review, none of the earlier models led to suitability
adoption in California.
6. In recent years, the NAIC initiated a further review of its
Annuity Suitability Model, issuing a charge to its committee
of subject matter experts that it:
"Review and consider changes to the Suitability in
Annuity Transactions Model Regulation to improve the
regulation of annuity sales and to provide insurers
uniform guidance in developing agent training,
supervision and monitoring standards in order to
better protect annuity consumers from unsuitable sales
and abusive sales and marketing practices."
7. That most recent review led to the significantly revised
2010 version of the NAIC Annuity Suitability model. Under
the former model, for example, required consumer information
was limited to financial status, tax status and investment
objectives. In the 2010 model contained in AB 689, the
required "suitability information" appears at page 5, lines
8 through 24 and includes a dozen required factors. It also
expands training and procedure requirements for producers
AB 689 (Blumenfield), Page 18
and a requirement on insurers to establish their own
processes and monitoring to protect against the sale of
unsuitable annuities.
8. What are Annuities?: Annuities are specialized contracts
sold by an insurance company which are designed to provide
payments to the holder at specified intervals, usually after
retirement. The insurance company accepts payment from the
buyer and then, at a future time, a stream of payments to
the individual begins. They are often used to secure a
steady cash flow during retirement. Annuities can be
structured according to a wide array of details and factors,
such as the how long annuity payments can be guaranteed to
continue. Annuities can also be structured to provide either
fixed or variable payments. Variable annuities let an
annuitant receive greater payments if investments of the
annuity fund do well and smaller payments if its investments
do poorly. While this provides for a less stable cash flow
than a fixed annuity, it allows annuitants to reap a benefit
when returns are strong.
While the variety of annuities give buyers great flexibility to
pick one that fits their situation, it also makes buyers
more dependent on the skill and training of their financial
advisor, hence the concern to strengthen suitability
requirements.
9. Background and Discussion Regarding the NAIC and its Model
Law Process: The National Association of Insurance
Commissioners (NAIC) is the organization of insurance
regulators from the 50 states, the District of Columbia and
the five U.S. territories. State insurance regulators
created the NAIC in 1871 to address the need to coordinate
regulation of multistate insurers.
10. The NAIC provides a forum for the development of uniform
policy when uniformity is appropriate. A state regulator's
primary responsibility is to protect the interests of
insurance consumers, and the NAIC helps regulators fulfill
that obligation. That assistance is related to the
regulators' shared objectives of financial solvency and
market conduct regulation. The first major step in that
process was the development of uniform financial reporting
by insurance companies. Since then, new legislative
concepts, new levels of expertise in data collection and
delivery have broadened the role of the NAIC as an
AB 689 (Blumenfield), Page 19
internationally-recognized, insurance regulatory support
organization.
11. Summary of Arguments in Support:
a. The California Department of Insurance, which is
this bill's Sponsor, states "Currently there is no
clearly stated requirement in California law that an
insurance producer must make a reasonable determination
that an annuity is suitable for a consumer prior to the
consumer purchasing it, nor is there a law that requires
an insurer to determine that an annuity is suitable for
the purchasers before issuing it?. California needs a
comprehensive system that requires that insurers
supervise producer annuity recommendations and sales, in
order to ensure that all consumers are adequately
protected, including vulnerable seniors."
b. The American Association of Retired Persons states
"AARP policy supports the adoption of strong suitability
requirements for annuity products that build on the NAIC
Model regulation and that apply regardless of age."
c. Senior Citizens Legal Services states "AB 689 sets
standards and procedures for insurers and producers to
follow when they are making their annuity recommendations
to consumers. If passed, it will ameliorate the problem
of unsuitable sales of annuities."
12. Summary of Arguments in Opposition:
a. None as amended
13. Amendments: None
14. Prior and Related Legislation:
a. Prior Failed Suitability Legislation:
i. SB 620 (Scott) 2003/2004, While SB
620 was passed, a ground-breaking portion of it
which would have required insurers to establish a
plan for ensuring suitable sales of insurance
product to seniors was deleted.
ii. SB 192 (Scott), 2005/2006, would
have created suitability standards for the sale
of annuities and imposed new duties on insurers
AB 689 (Blumenfield), Page 20
and agent-brokers relative to the sale of these
products to seniors. It died in the Assembly
Insurance Committee.
iii. AB 267 (Calderon), 2007, would have
required that agents or insurers, when making a
recommendation to a senior for the purchase or
exchange of an annuity, have reasonable grounds
for believing that the recommendation is suitable
for the senior. It died in the Assembly Insurance
Committee.
iv. SB 573 (Scott), 2007, would have
created suitability standards for the sale of
annuities and imposed new duties on insurers and
agent-brokers relative to the sale of these
products to seniors. It died in the Assembly
Insurance Committee.
v. AB 989 (Block), 2009/2010, would
have created a private right of action for anyone
harmed under the senior insurance statutes in the
CIC. It died in the Assembly Insurance
Committee.
vi. AB 2066 (Jones), 2010, proposed 1)
various new suitability-type requirements to be
submitted with an annuity application, 2) limits
on agent compensation agreements in an effort to
limit surrender charges, and 3) would have deemed
certain annuity sales presumptively improper. It
died in the Assembly Insurance Committee.
b. Related Legislation
i. SB 715 (Senators Calderon, Gaines,
Anderson, Correa, Lieu, Lowenthal, Price &
Wyland) is the Senate Insurance Committee's 2011
Annuity Suitability bill. It is pending in the
Assembly having received no votes during its
Senate consideration. SB 715 and AB 689 are
substantially similar bills, the NAIC model first
appearing in the February 18 version of SB 715
and being added to AB 689 on March 31st.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AB 689 (Blumenfield), Page 21
California Department of Insurance (Sponsor)
American Association of Retired Persons (AARP)
American Council of Life Insurers (ACLI)
Association of California Life and Health Insurance Companies
(ACLHIC)
Carey Associates
Congress of California Seniors
Consumer Watchdog
Pacific Life Insurance Company
Professional Fiduciary Association of California
SEIU Local 1000
Senior Citizens Legal Services
Opposition
None
Consultant: Ken Cooley (916) 651-4110