BILL ANALYSIS �
AB 689
Page 1
ASSEMBLY THIRD READING
AB 689 (Blumenfield)
As Amended May 4, 2011
Majority vote
INSURANCE 12-0 APPROPRIATIONS 16-0
-----------------------------------------------------------------
|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 |
|-----+--------------------------+-----+--------------------------|
| | | | |
-----------------------------------------------------------------
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
AB 689
Page 2
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.
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
AB 689
Page 3
sponsor, settlements associated with personal injury litigation
or a claim resolution process, or formal prepaid funeral
contracts.
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.
AB 689
Page 4
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
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)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.
18)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 annuity
policies to be replaced; b) a copy of a specified replacement
AB 689
Page 5
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 (ACP) Fund
within the Insurance Fund for the purpose of protecting
consumers of life insurance and annuity products. The ACP 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 ACP 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 Model
Regulation, which was created as a result of national-level
AB 689
Page 6
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.
2)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: 0000681