BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 715 (Calderon) Hearing Date: April 13, 2011
As Amended: April 4, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would require insurers to establish a system to
supervise the suitability of annuity sale recommendations,
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 |
| 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 |
SB 715 (Calderon), Page 2
| 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": 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); |
| |
| 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 |
SB 715 (Calderon), Page 3
| 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)) |
| |
| 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 |
SB 715 (Calderon), Page 4
| 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 Title IX, Subtitle I, Section 989a of the 2010 |
| Dodd-Frank Wall Street Reform and Consumer Protection Act |
| (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 Title IX, Subtitle I, Section 989J |
| of the Dodd-Frank Act California's adoption of the NAIC |
| Suitability in Annuity Transactions Model is necessary for |
| California's continued jurisdiction over indexed |
| securities. |
| |
| |
| |
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This bill
1. Would enact the National Association of Insurance
Commissioner's Suitability in Annuity Sales Transactions
SB 715 (Calderon), Page 5
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 715 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 10509.915 (c) at
page 6, Lines 33-36)
3. The Act also imposes producer training and annuity
continuing education, carrier training programs, and
training verification requirements.
4. More specifically, SB 715:
a. States legislative findings and declarations
as follows:
i. The Legislature finds and declares that
in 2010 the National Association of Insurance
Commissioners (NAIC) adopted a significantly revised
Suitability in Annuity Transactions Model
Regulation;
ii. The Legislature also finds that the
revised Suitability in Annuity Transactions Model
was adopted by the NAIC to set standards and
procedures for suitable annuity recommendations and
to require insurers to establish a system to
supervise recommendations so that the insurance
needs and financial objectives of consumers are
appropriately addressed;
iii. The Legislature finds that the revised
NAIC Suitability in Annuity Transactions Model
establishes a regulatory framework 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;
iv. The Legislature also finds that the 2010
SB 715 (Calderon), Page 6
revisions to the NAIC Suitability in Annuity
Transactions Model require that producers be trained
on the provisions of annuities in general, and the
specific products they are selling;
v. The Legislature finds that the adoption
last year of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Public Law 111-203)
provides, under Title IX, Subtitle I, Section 989A,
relating to senior investment protections, that a
state's adherence to the NAIC's Suitability in
Annuity Transactions Model is required for a state
or other eligible entities to participate in a
program of grants to support enhanced protections of
seniors against misleading marketing practices;
vi. Finally, the Legislature finds that
adoption in this state of the NAIC Suitability in
Annuity Transactions Model affects California's
continued jurisdiction over indexed securities under
Title IX, Subtitle I, Section 989J of the Dodd-Frank
Act.
a. 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 10509.911 at Page
3, lines 8 to 13)
b. Is made applicable to any recommendation to
purchase, exchange, or replace an annuity made to a
consumer by an insurance producer, or an insurer where no
insurance producer is involved, that results in the
purchase, exchange, or replacement recommended. (Section
10509.912 at Page 3, lines 17 to 21)
c. "Recommendation" is defined as "advice provided by
an insurance producer, or an insurer where no insurance
producer is involved, to an individual consumer that
results in a purchase, exchange, or replacement of an
annuity in accordance with that advice." (Section
10509.914 (h) at Page 5, lines 1 to 4)
d. The Act excludes from its scope (Section 10509.913
at Page 3, line 23 to Page 4, line 5):
SB 715 (Calderon), Page 7
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
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. A nonqualified deferred
compensation arrangement established or
maintained by an employer or plan sponsor;
4. Settlements of or assumptions of
liabilities associated with personal injury
litigation or any dispute or claim resolution
process; or
5. Formal prepaid funeral
contracts.
e. Establishes, at subdivisions (a) and (b) of Section
10509.915 the duty of insurers and insurance producers
with respect to the making of annuity recommendations
(Section 10509.915 (a) and (b) at Page 5, line 26 to Page
6, line 32):
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 the insurer where 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
SB 715 (Calderon), Page 8
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 (j) of Section 10509.914 as information
that is reasonably appropriate to determine the
suitability of a recommendation, including all of
the following (Section 10509.914 (j) at Page 5,
lines 8 to 24) :
1. Age;
2. Annual income;
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; and
12. Tax status.
f. 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 10509.915 (a)
at Page 5, lines 34 to Page 6, line 27):
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 benefit from certain
features of the annuity, such as tax-deferred
growth, annuitization, or death or living benefit.
iii. The particular annuity as a whole, the
SB 715 (Calderon), Page 9
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
whether any of the following are applicable:
1. The consumer will incur 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. The consumer would benefit from
product enhancements and improvements.
3. The consumer has had another
annuity exchange or replacement and, in
particular, an exchange or replacement within
the preceding 36 months.
4. The exchange or replacement of
that annuity would not be an "unnecessary
replacement" as that term is used in
subdivision (b) of Section 10509.8.
g. 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 10509.915 (b) at Page
6, lines 28 to 32)
h. 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 and applicable California law
(Section 10509.915 (c) at Page 6, lines 28 to 32), except
that neither a producer nor an insurer has any obligation
to a consumer pursuant to Subdivisions (a) and (c) of
Section 10509.915 if (Sec. 10509.915 (d)(1) at Page 6,
SB 715 (Calderon), Page 10
line 33 to Page 7, line 9):
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.
i. However, in the instances set forth in paragraph i
through iv above, an insurer's issuance of an annuity
must "be reasonable under all the circumstances actually
known to the insurer at the time the annuity is issued".
(Section 10509.915 (d)(2) at Page 7, lines 10 to 12)
j. Agents (or insurers if there is no agent) are
required at the time of any sale to (Section 10509.915
(e) at Page 7, lines 13 to 23):
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.
aa. Insurers are required to establish a supervision
system that is reasonably designed to achieve the
insurer's and its producers' compliance with SB 715,
which must include, but is not limited to, all the
following (Section 10509.915 (f) at Page 7, line 24 to
Page 8, line 16) :
i. Reasonable procedures to inform its
insurance producers of this law's requirements,
which are to be incorporated into relevant insurance
producer training manuals;
SB 715 (Calderon), Page 11
ii. Standards for insurance producer product
training and reasonable procedures to require
producers to comply with the SB 715 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
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.
bb. SB 715 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 10509.915
(f)(1)(F) at Page 8, lines 17 to 22)
cc. SB 715'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
10509.915. 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 10509.915 (f)(2) at Page 8, lines 23 to Page 9,
line 4)
dd. The Act prohibits insurance producers from
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;
SB 715 (Calderon), Page 12
ii. Filing a complaint; or
iii. Cooperating with the investigation of a
complaint.
ee. Subdivision (h) of Section 10509.915 includes the
NAIC Model provision that sales made in compliance with
requirements of the Financial Industry Regulatory
Authority (FINRA) pertaining to suitability and
supervision of annuity transactions satisfy the
requirements of SB 715 provided the insurer actively
monitors the broker dealer and provides to the broker
dealer information and reports appropriate to assist
their supervision system. (SB 715 provides, however, at
page 9, lines 16 to 19, that this provision shall not
limit the Insurance Commissioner's ability to enforce,
including conducting investigations related to, the
provisions of SB 715. (Section 10509.915 (h) at Page 9,
lines 11 to 26)
i. NOTE: An online commentary from the NAIC
website on this FINRA provision was prepared by the
state regulators who chaired the 2010 NAIC Annuity
Suitability Model revisions and states as follows:
1. (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. 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,
SB 715 (Calderon), Page 13
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."
ff. SB 715 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 10509.916 at Page 9,
line 28 to Page 12, line 3)
gg. 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 order any of the following (Section
10509.917 at Page 12, lines 5 to 20):
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
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.
hh. Insurers and producers are required to maintain
recommendation-related records and information for five
(5) years after the insurance transaction is completed by
SB 715 (Calderon), Page 14
the insurer. The insurer is permitted, but not required,
to maintain this documentation on their producer's
behalf. (Section 10509.918 at Page 12 lines 22 to 33)
COMMENTS
1. Purpose of the bill : The purpose of this bill is to adopt in
California the National Association of Insurance
Commissioners 2010 Suitability in Annuity Transactions Model
Act. Adoption of this NAIC by the states is encouraged under
the terms of the Congress' Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010.
2. This NAIC Act will require 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.
3. 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. 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.
4. 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
SB 715 (Calderon), Page 15
better protect annuity consumers from unsuitable sales
and abusive sales and marketing practices."
5. 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 SB 715, 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
and a requirement on insurers to establish their own
processes and monitoring to protect against the sale of
unsuitable annuities.
6. According to the author, California's failure to have in
place an annuity suitability law disadvantages California
annuity buyers and SB 715 will correct that. The result is
that every Californian will be better protected with sales
process safeguards that can help them despite the increased
variety and complexity of annuity offerings and their
necessary reliance upon the advice of others.
7. 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.
SB 715 (Calderon), Page 16
8. 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.
9. 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
internationally-recognized, insurance regulatory support
organization.
10. To understand the unique status of the NAIC as a source of
Model laws such as the Suitability in Annuity Transactions
Model, it is helpful to understand the system of insurance
department accreditation which the NAIC administers.
11. In the mid to late 1980's there were a high number of
insurance company insolvencies. These prompted a 1988
Congressional inquiry led by Congressman John Dingell which
led, in 1990, to issuance of a report "Failed Promises". As
a response to the Congressional inquiry, in 1989 the NAIC
adopted accreditation standards. While the NAIC's Financial
Regulation Standards and Accreditation Program is a
voluntary program, under its auspices 49 states plus the
District of Columbia are now accredited, including
California. Accreditation requires states to meet minimum
baseline accreditation standards in the areas of Laws &
Regulations, Regulatory Practices & Procedures, and
Organizational & Personnel Practices.
12. With respect to the scope of the NAIC's accreditation
program, insurance departments are currently required to
have in place 18 NAIC laws and regulations which are deemed
indispensable to adequately monitoring domestic insurer
solvency. The accreditation standard requires that a state
SB 715 (Calderon), Page 17
have all 18 laws in effect to be accredited (i.e., pass or
fail). NAIC laws required for accreditation include those
relating to:
a. Examination Authority
b. Capital & Surplus Requirement
c. NAIC Accounting Practices & Procedures
d. Corrective Action
e. Valuation of Investments
f. Holding Company Systems
g. Risk Limitation
h. Investment Regulations
i. Liabilities & Reserves
j. Reinsurance Ceded
aa. CPA Audits
bb. Actuarial Opinion
cc. Receivership
dd. Guaranty Funds
ee. Filings with NAIC
ff. Producer Controlled Insurers
gg. Managing General Agents Act
hh. Reinsurance Intermediaries Act
13. The NAIC's Suitability in Annuity Transaction Model which
forms the basis for SB 715 is not a required statute for
NAIC accreditation purposes. The background on the NAIC is
provided because its system of collaboration among state
insurance regulators and practice of Model law development
has been extremely influential in the development of
California's Insurance Code.
14. Summary of Arguments in Support:
a. The Insurance Brokers & Agents of the West (IBA
West), along with Liberty Mutual Group and Pacific Life
Insurance Company state "SB 715 would 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 need s and financial
objectives of consumers ?" are met.
?
"Our clients believe the language of the NAIC model act,
as reflected in SB 715, provide consumers with additional
SB 715 (Calderon), Page 18
protections against unsuitable annuity products and from
some bad actors in the insurance sales marketplace"
b. MetLife states "SB 715 follows the National
Association of Insurance Commissioners' (NAIC) Model on
Suitability in Annuity Transactions, which was adopted by
that group in 20 10 after more than two years of
deliberation. SB 715 places increased responsibility on
insurance companies for the suitability of annuity
transactions and places extensive and continuing
education requirements on those who sell annuities.
Over forty states maintain laws and regulations governing
annuity suitability based on NAIC models and 11 states
have already adopted this 2010 version of the NAIC
Model""
15. Summary of Arguments in Opposition:
a. The Consumer Attorneys of California (CAOC), advised
the committee of their opposition to SB 715 as
introduced based upon inclusion in the NAIC model of a
clause stating "Nothing in this article shall be
construed to create or imply a private cause of action
for a violation of this article." (The April 4th
amendments to SB 715 removed the clause in question.)
b. California Advocates for Nursing Home Reform, states
"SB 715 does not speak to consumer protection".
CANHR asserts that subparagraph (C) of paragraph (1) of
subdivision (d) of Section 10509.915 (Found at Page 7,
lines 5 & 6), promotes unethical standards by allowing
"the agent to avoid any responsibility if the senior
refuses to provide relevant suitability information and
the transaction is not recommended". CANHR suggests
this provision should be struck as a matter of policy.
CANHR also states that the provision which "allows the
agent to avoid responsibility if the senior decides to
enter into the transaction that is not based on a
recommendation of the insurer or insurance producer"
(subparagraph (D) of paragraph (1) of subdivision (d) of
Section 10509.915 at Page 7, lines 7 to 9), again
"speaks to the ethical consideration".
SB 715 (Calderon), Page 19
CANHR additionally objects to the scope of coverage the
NAIC model in terms of the kinds of financial products
which are excluded by Section 10509.913.
1. Amendments:
a. As indicated in paragraph (9) of the Existing
California law overview, California Civil Code Section
1923.2(i) codifies a sensitivity to the issuance of
annuities in conjunction with the origination by a
senior of a reverse mortgage. The Department of
Insurance suggests adding as a 13th suitability
criterion "Whether or not the consumer has a reverse
mortgage." This seems a reasonable companion to the
indicated Civil Code provision applicable to lenders.
b. The April 4th amendments were primarily
intended to better "fit" the NAIC model language with
existing provisions of California law. If the bill
moves forward, staff expects there will be continued
refinements of this type to ensure that the bill
achieves its intended purposes without unintentionally
interfering with other provisions of California law.
2. 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
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.
SB 715 (Calderon), Page 20
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. AB 689 (Blumenfield) was amended on
March 31st, 2011 to incorporate the NAIC
Suitability in Annuity Transactions Model
contained in SB 715 coupled with various changes
sought by the Insurance Commissioner, most
notably different handling of the FINRA
provision. The March 31st version of AB 389 does
not include the FINRA provision; DOI staff advise
this committee that consideration is being given
to adoption of an unspecified variant of SB 715's
FINRA provision.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Insurance Brokers and Agents of the West
Liberty Mutual Group
MetLife
Pacific Life Insurance Company
Opposition
SB 715 (Calderon), Page 21
Consumer Attorneys of California (As Introduced)
California Advocates for Nursing Home Reform
Consultant: Ken Cooley (916) 651-4110