BILL ANALYSIS �
AB 689
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Date of Hearing: April 13, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 689 (Blumenfield) - As Amended: March 31, 2011
SUBJECT : Insurance: annuity transactions
SUMMARY : Requires that insurance producers and insurers
selling annuities have reasonable grounds to believe that their
recommendations are suitable for consumers, and adopts a
regulatory process to enforce this requirement. Specifically,
this bill :
1)States its purpose to require 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.
2)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 that the
recommendation is suitable for the consumer. This belief
shall be based 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 all of the following:
a) The consumer has been reasonably informed of various
features of the annuity, such as the potential surrender
period and 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 riders, limitations on
interest returns, insurance and investment components,
and market risk.
b) The consumer would receive a tangible net benefit
from the transaction.
c) The particular annuity including subaccounts and
riders are suitable for this particular consumer.
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d) In the case of an exchange or replacement of an
annuity, the exchange or replacement is suitable by
considering all of the following: (i) surrender charges,
a new surrender period, the loss of existing benefits,
any increased fees; (ii) whether the consumer would
benefit from product enhancements and improvements; and
(iii) whether the consumer has had another annuity
exchange or replacement within the preceding 60 months.
3)Defines "annuity" as an insurance product under California law
that is individually solicited, whether the product is
classified as an individual or group annuity.
4)Defines "insurance producer" as a person required to be
licensed under California law to sell, solicit, or negotiate
insurance, including annuities.
5)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,
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.
6)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.
7)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 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.
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8)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,
(d) a consumer decides to enter into an annuity transaction
that is not based on a recommendation of the insurer or the
insurance producer.
9)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 ERISA law, 401(k) plans, government or
church plans, tax exempt organizations under Section 457 of
the Internal Revenue Code, 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.
10)Requires an insurance producer at the time of sale to do all
of the following (or where no insurance producer is involved,
the responsible insurer representative):
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.
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.
11)Requires an insurer to establish a supervision system that is
reasonably designed to achieve the insurer's and its insurance
producer's compliance with this bill, including all of the
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following:
a) The insurer shall use reasonable procedures to
inform its insurance producers of the requirements of
this bill and incorporate these requirements into
insurance producer training manuals.
b) The insurer shall establish standards for insurance
producer product training and require specified training.
c) The insurer shall maintain and use procedures for
review of each recommendation prior to issuance of an
annuity that are designed to ensure that there is a
reasonable basis to determine that a recommendation is
suitable.
d) The insurer shall maintain reasonable procedures to
detect recommendations that are not suitable.
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
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
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action for any consumer harmed by the insurer's, 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.
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)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, microprocess, magnetic, mechanical, or
electronic media, or by any other process that accurately
reproduces the actual document.
18)Requires the IC, after notice and hearing, to adopt
reasonable rules and regulations as 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
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
within the Insurance Fund for the purpose of protecting
consumers of life insurance and annuity products. This fund
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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
investigations and prosecutions 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 : Undetermined.
COMMENTS :
1)Background. The author states that this bill 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 regarding annuity
suitability requirements. It is also the author's intent to
conform to existing California law and provide additional
consumer safeguards.
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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.
2)Support. According to the author and Insurance Commissioner
Jones, 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 purchaser before issuing it. The author and
the Commissioner also state that there is no law requiring
that insurers and producers collect information regarding
specified criteria that must be considered in determining
whether an annuity is suitable for a consumer's financial
situation, such as the consumer's financial objectives,
financial time horizon, liquidity needs, 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 Insurance Commissioner further state that the
federal Dodd-Frank Wall Street Reform and Consumer Protection
Act indicates that 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.
Therefore, California must set annuity suitability
requirements in order to preserve the state's current
exemption from federal regulation. The author states that
Dodd-Frank makes clear that the NAIC Annuity Suitability Model
Regulation establishes a "floor" of minimum requirements,
allowing states such as California to impose additional
requirements consistent with their state laws and offer
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additional protections to consumers.
The California Advocates for Nursing Home Reform (CANHR), which
supports the bill if amended, states that this bill excludes
certain types of contracts such as employee pensions, 401(k)
plans, government or church plans, and deferred compensation
plans. CANHR proposes that insurers should be required to
provide consumers purchasing these excluded annuities with a
comprehensive annuity suitability checklist and
self-evaluation worksheet.
3)Opposition. Life insurers and producers oppose the bill
unless amended, and state that this bill differs from the
NAIC's Suitability in Annuity Transactions Model in several
sections. The foremost concern is that the bill does not
follow the NAIC model in recognizing the regulation of the
federal Financial Industry Regulatory Authority (FINRA) over
products sold by brokers and dealers. The opposition states
that the FINRA rules mirror the provisions in the NAIC model,
and avoids duplicative and possibly conflicting
interpretations of two sets of rules. Unless this bill is
amended to avoid this conflict, these insurers will retain
their opposition.
The opposition has proposed adoption of the NAIC Model's FINRA
provision, which the author has not agreed to. If the FINRA
amendment were made as proposed by the opposition, the author
and some proponents have expressed concern that existing
consumer protections of state law would be lost. To address
that concern, if a FINRA amendment is adopted an additional
provision needs to be added to clarify that existing state
laws providing consumer protections would be retained.
REGISTERED SUPPORT / OPPOSITION :
Support
Congress of California Seniors
Insurance Commissioner Jones, Department of Insurance
Law Offices of Senior Citizens Legal Services
Professional Fiduciary Association of California
SEIU Local 1000
Support if Amended
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California Advocates for Nursing Home Reform
Oppose Unless Amended
American Council of Life Insurers
Association of California Life and Health Insurance Companies
MetLife
National Association of Insurance and Financial Advisors
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086