BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 689|
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THIRD READING
Bill No: AB 689
Author: Blumenfield (D), et al.
Amended: 6/27/11 in Senate
Vote: 21
SENATE INSURANCE COMMITTEE : 9-0, 6/22/11
AYES: Calderon, Gaines, Anderson, Corbett, Correa, Lieu,
Lowenthal, Price, Wyland
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 79-0, 5/31/11 - See last page for vote
SUBJECT : Insurance: annuity transactions
SOURCE : Department of Insurance
DIGEST : This bill 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.
ANALYSIS :
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
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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; (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; (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.
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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, 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
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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) are commendation 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.
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.
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
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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
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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; (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 will 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/15/11)
Department of Insurance (source)
American Association of Retired Persons
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American Council of Life Insurers
Association of California Life and Health Insurance
Companies
Congress of California Seniors
Consumer Watchdog
Pacific Life Insurance Company
Professional Fiduciary Association of California
SEIU Local 1000
Senior Citizens Legal Services
ARGUMENTS IN SUPPORT : The author's office 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 discussions
regarding annuity suitability requirements. It is also the
author's office intent to conform to existing California
law and provide additional consumer safeguards. The
author's office 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 the 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's office and the Insurance Commissioner further
state that the federal Dodd-Frank Wall Street Reform and
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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.
ASSEMBLY FLOOR :
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill
Berryhill, Block, Blumenfield, Bonilla, Bradford,
Brownley, Buchanan, Butler, Charles Calderon, Campos,
Carter, Cedillo, Chesbro, Conway, Cook, Davis, Dickinson,
Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani,
Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove,
Hagman, Halderman, Hall, Harkey, Hayashi, Roger
Hern�ndez, Hill, Huber, Hueso, Huffman, Jeffries, Jones,
Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor,
Mendoza, Miller, Mitchell, Monning, Morrell, Nestande,
Nielsen, Norby, Olsen, Pan, Perea, V. Manuel P�rez,
Portantino, Silva, Skinner, Smyth, Solorio, Swanson,
Torres, Valadao, Wagner, Wieckowski, Williams, Yamada,
John A. P�rez
NO VOTE RECORDED: Gorell
JJA:do 8/15/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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