BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB 715 (Calderon) Hearing Date: April 27, 2011
As Amended: April 25, 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 |
SB 715 (Calderon), 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); |
| |
SB 715 (Calderon), 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)) |
| |
| 10. Prohibits Financial Abuse: Provides penalties for |
SB 715 (Calderon), Page 4
| "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. |
| |
| |
| |
SB 715 (Calderon), 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 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 25-2836)
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
SB 715 (Calderon), Page 6
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
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 at least the minimum
requirements of the NAIC's Suitability in Annuity
Transactions Model is a required element 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 at least the minimum
requirements 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 10 to 15)
b. 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. (Section 10509.912 at
Page 3, lines 16 to 20)
c. "Recommendation" is defined as "advice or other
communication 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
SB 715 (Calderon), Page 7
accordance with that advice or communication." (Section
10509.914 (h) at Page 4, lines 29 to 34)
d. The Act excludes from its scope (Section 10509.913
at Page 3, line 25 to Page 4, line 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.
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.
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 16 to Page
6, line 24):
i. In recommending an annuity purchase or
SB 715 (Calderon), Page 8
the exchange of an annuity that results in another
insurance transaction or series of insurance
transactions, the producer and the insurer 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 (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 4, line
38 to 5, line 15) :
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;
12. Tax status; and
13. Whether or not the consumer has
a reverse mortgage.
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, line 25 to Page 6, line 19):
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
SB 715 (Calderon), Page 9
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. 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 60 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 20 to 24)
h. An insurer shall not issue an annuity recommended to
a consumer unless there is a reasonable basis to believe
SB 715 (Calderon), Page 10
the annuity is suitable based on the consumer's
suitability information and applicable California law
(Section 10509.915 (c) at Page 6, lines 25 to 28), 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,
line 29 to Page 7, line 3):
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 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 10509.915 (d)(2) at
Page 7, lines 4 to 8)
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 9 to 19):
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,
SB 715 (Calderon), Page 11
which must include, but is not limited to, all the
following (Section 10509.915 (f) at Page 7, line 20 to
Page 8, line 12) :
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 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 13 to 18)
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 19 to Page 9,
line 4)
SB 715 (Calderon), Page 12
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;
ii. Filing a complaint; or
iii. Cooperating with the investigation of a
complaint.
ee. Subdivision (h) (1) of Section 10509.915 is a
provision which deviates from the NAIC Model but was
agreed to by the California DOI and sets the rules
concerning California supervision for FINRA broker-dealer
sales of variable and fixed annuities. (Section
10509.915(h)at Page 9, line 27 to Page 10, line 3)
The provision specifies sales by FINRA broker-dealers
that comply with the suitability and supervision system
requirements set forth in FINRA Rule 2111, 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
nor shall anything in this Act 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.
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:
1. (It) 'is intended to prevent
duplicative suitability standards being applied
SB 715 (Calderon), Page 13
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,
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 10,
line 4 to Page 11, line 40)
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, in addition to any other available
penalties, remedies, or administrative actions, order any
or all of the following (Section 10509.917 at Page 12,
lines 1 to 25):
i. An insurer to take reasonably appropriate
corrective action for any consumer harmed by the
SB 715 (Calderon), Page 14
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. 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 10509.917(c) at Page 12, line
23 to Page 25)
ii. 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 10509.918 at Page 12 lines 26 to 37)
COMMENTS
1. Purpose of the bill : The purpose of this bill is to adopt,
starting from the platform of the National Association of
Insurance Commissioners 2010 Suitability in Annuity
Transactions Model Act, a law tailored to California.
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. According to the author, California's failure to have in
place an annuity suitability law disadvantages California
annuity buyers and passage of annuity legislation this year
SB 715 (Calderon), Page 15
will correct that. It will ensure 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.
3. As introduced, SB 715 embodied all provisions contained in
the 2010 NAIC Model.
4. Subsequent changes to SB 715 have been of two types,
primarily. They either:
a. Served to more explicitly integrate SB 715'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.
5. As amended April 25th, SB 715's provisions are in all
substantive respects the same as AB 689 (Blumenfield)
sponsored by the Department of Insurance. SB 689's version
of annuity suitability first took substantive form via a
March 31st "gut and amend" which took the language of SB 715
as the starting point for a DOI "NAIC-Plus" version of
Annuity Suitability". AB 689 was passed by the Assembly
Insurance Committee on April 13th by a 10-0 vote.
6. An important innovation in the 2010 NAIC Act is it proposes
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.
7. Key Issue - Scope of "Recommendation" Trigger: Since the
presence or absence of a "recommendation" is the key point
at which responsibility for the new duties under this law
attaches, the scope of that intended term is very important.
As set forth in the NAIC Model, a "recommendation" which
triggers producer and insurer responsibilities under this
Act is " advice provided by an insurance producer, or an
SB 715 (Calderon), Page 16
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. "
It is currently the Department of Insurance preference,
reflected in both this bill and AB 689, that the term
"recommendation" be expanded to include advice or other
communication provided or made that results in a purchase,
exchange, or replacement of an annuity in accordance with
that advice or communication.
As a matter of policy, the scope of the term recommendation
which makes sense to the committee will be an important
choice to consider. As drafted by the NAIC, it can be
generalized that the obligations under the model arise when
a consumer is advised to buy a product, and they buy the
product as advised. When this type of specific sales
activity is underway, duties ensue, reflecting the clear
nexus between the advice process and the purchase.
If a communication which is not "specific buying advice" can
trigger the duties under this bill or AB 689, one can ask
how to conceptually differentiate a banner in a football
stadium that advertises XYZ Annuities if a fan at that
sports contest then decides to buy an XYZ annuity. While
the information exchange occurred in a stadium, it is by its
nature "communication intended for individual consumers" and
if such communication is subject to the bill, so as to fit
within the ambit of the term "recommendation", how does an
insurance producer and/or insurer comply with the extensive
requirements of Section 10509.915?
8. 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.
9. 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
SB 715 (Calderon), Page 17
consumers. As summarized below in the Prior legislation
review, none of the earlier models led to suitability
adoption in California.
10. 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."
11. 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.
12. 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.
SB 715 (Calderon), Page 18
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.
13. 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.
14. 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.
15. 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
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
SB 715 (Calderon), Page 19
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""
16. Summary of Arguments in Opposition:
a. None as amended
17. Amendments: None
18. 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.
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
SB 715 (Calderon), Page 20
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 bill was approved by the Assembly
Insurance Committee on April 13th by a vote of 10
to 0.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Insurance Brokers and Agents of the West
Liberty Mutual Group
MetLife
Pacific Life Insurance Company
Opposition
None
Consultant: Ken Cooley (916) 651-4110
SB 715 (Calderon), Page 21