BILL ANALYSIS �
SB 715
Page 1
Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 715 (Calderon) - As Amended: June 14, 2011
SENATE VOTE : 39-0
SUBJECT : Annuity transactions
SUMMARY : Requires insurance producers and insurers to have
reasonable grounds for believing that a recommendation made to a
consumer to purchase or exchange an annuity is suitable for the
consumer. Specifically, this bill :
1)Expresses that the purpose of this bill is to require insurers
to set forth standards and procedures for recommendations to
consumers that result in transactions involving annuity
products so that the insurance needs and financial objectives
of consumers at the time of the transaction are appropriately
addressed.
2)Specifies that it applies to any recommendation to purchase,
exchange or replace an annuity made to a consumer.
3)Provides that it does not apply to transactions involving
direct response solicitations where there is no recommendation
based on information collected from the consumer, contracts
that fund an employee pension or welfare benefit plan covered
by the federal Employee Retirement and Income Security Act
(ERISA), a 401 Plan, a government or church plan as defined by
federal law, a deferred compensation plan of a state or local
government or tax exempt organization, a nonqualified deferred
compensation arrangement maintained by an employer or plan
sponsor, settlements of disputes, or formal prepaid funeral
contracts.
4)Defines "annuity" as an annuity that is an insurance product
that is individually solicited, whether the product is
classified as an individual or group annuity.
5)Defines "insurance producer" as a person required to be
licensed to sell, solicit, or negotiate insurance, including
annuities.
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6)Defines "suitability information" as information that is
reasonably appropriate to determine the suitability of a
recommendation, including: 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.
7)Requires the insurance producer and insurer to have reasonable
grounds for believing that a recommendation made to a consumer
to purchase or exchange an annuity is suitable for the
consumer.
8)Requires the insurer and insurance producer to reasonably
believe the following:
a) The consumer has been reasonably informed of various
features of the annuity such as the potential surrender
period, surrender charge, potential tax penalty if the
consumer sells or surrenders the annuity, the fees,
limitations on interest returns, and market risk;
b) The consumer would receive a tangible net benefit
from the transaction;
c) The annuity and subaccounts are suitable for the
particular consumer, based on his or her suitability
information;
d) In the case of an exchange or replacement of an
annuity, the exchange or replacement is suitable when
considering the following: whether the consumer would
incur a surrender charge, a new surrender period, lose
existing benefits such as death or other benefits, or
become subject to increased fees; whether the consumer
would benefit from product enhancements; and whether the
consumer has exchanged or replaced another annuity within
the preceding 60 months, and the exchange or replacement
of the annuity would not be an unnecessary replacement.
9)Prohibits an insurer 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
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information and applicable state law.
10)Provides that an insurance producer and an insurer shall not
have an obligation to a consumer if the following occur: no
recommendation is made, a recommendation was made and later
found to have been prepared based on materially inaccurate
information provided by the consumer, a consumer refuses to
provide relevant suitability information and the annuity
transaction is not recommended, or a consumer decides to
purchase or exchange an annuity that is not based on a
recommendation of the insurer or the insurance producer.
11)Requires insurers to establish a supervision system that is
reasonably designed to achieve compliance with this bill,
including:
a) Information to insurance producers, incorporating
information into insurance producer training manuals,
providing training materials to insurance producers;
b) Requires the insurer to maintain procedures for
review of each recommendation prior to issuance of an
annuity that are designed to ensure that there is a
reasonable basis to determine that a recommendation is
suitable; and
c) Requires the insurer to maintain reasonable
procedures to detect recommendations that are not
suitable.
12)Prohibits an insurance producer or insurer from dissuading,
or attempting to dissuade, a consumer from truthfully
responding to an insurer's request for confirmation of
suitability information, filing a complaint, or cooperating
with the investigation of a complaint.
13)Provides that sales by broker-dealers authorized by the
Financial Industry Regulatory Authority (FINRA) that comply
with the suitability and supervision system requirements in a
FINRA rule shall satisfy the suitability and supervision
system requirements of this bill, as long as the suitability
criteria also includes the consumer's income, and the intended
use of the annuity.
14)Prohibits an insurance producer from soliciting the sale of
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an annuity product unless the producer has adequate knowledge
of the product to recommend the annuity.
15)Requires insurer producers to complete a one-time 8-hour
annuity training course approved by the Insurance Commissioner
(IC), and to satisfactorily complete four continuing education
credits prior to license renewal every two years.
16)Specifies that insurers are responsible for compliance with
this bill.
17)Authorizes the IC to take the following actions to gain an
insurer's compliance:
a) Ordering an insurer to take reasonable corrective
action for the consumer harmed by the insurer or its
insurance producer;
b) Ordering a managing general agent or an insurance
producer to take reasonable corrective action for the
consumer harmed.
c) Placing an administrative penalty on individuals of
$1,000 for the first violation and a penalty of $5,000 to
$50,000 for each subsequent violation;
d) Placing an administrative penalty on an insurer of
$10,000 for the first violation and a penalty of $30,000
to $300,000 for a knowing violation or if committed with
a frequency as to indicate a general business practice.
18)Requires the IC to adopt reasonable rules and regulations as
are necessary to administer this bill.
EXISTING LAW :
1)Identifies a series of unfair methods of competition and
unfair and deceptive acts or practices in the business of
insurance, and prohibits these as unfair trade practices.
2)Specifies that one of these unfair trade practices is making
any statement misrepresenting the terms of any policy issued.
3)Specifies that insurers, brokers, agents, and others engaged
in the business of insurance, owe senior citizens (65 years of
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age or older) a duty of honesty, good faith, and fair dealing.
4)Prohibits the sale of an annuity to a senior citizen if the
senior's purpose in purchasing the annuity is to affect
Medi-Cal eligibility and the purchaser's assets are equal to
or less than the community spouse resource allowance
established by the state Department of Health Services or the
senior would otherwise qualify for Medi-Cal.
FISCAL EFFECT : Expected minor and absorbable costs, likely
less than $50,000 per year, for on-going training of DOI staff.
COMMENTS :
1)Purpose . The purpose of this bill is to adopt in California
the NAIC 2010 Suitability in Annuity Transactions Model Act.
Adoption of this type of legislation is encouraged by the
federal Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010.
Under Title IX of the federal Dodd-Frank Wall Street Act
Reform and Consumer Protection Act of 2010, a state adoption
of suitability requirements that meet or exceed NAIC's
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. Additionally, under that federal act,
California's adoption of the NAIC Suitability in Annuity
Transactions Model Act is necessary for this state's continued
jurisdiction over indexed securities.
2)Background . Annuities can be complex financial tools and, in
recent years, regulators have made various suggestions in
connection with these transactions. In 2003, the NAIC
developed a model regulation designed to protect senior
citizens. In 2006, the NAIC developed a model regulation
intending to help buyers of all ages. In 2010, the NAIC
significantly revised its Annuity Suitability Model law to
include a dozen required factors: age, annual income,
financial situation and needs, financial experience, financial
objectives, intended use of the annuity, financial time
horizon, existing assets, liquidity needs, liquid net worth,
risk tolerance, and tax status. These factors are
incorporated into this bill. The model law also expands
training and procedural safeguards upon producers and places
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requirements on insurers to establish procedures and
monitoring systems to help assure the suitability of annuity
transactions.
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, in the future, the
individual receives a stream of payments. Annuities can be
structured to provide either fixed or variable payments.
Because of the large number of factors affecting the
suitability of an annuity (see 2010 NAIC model law list above,
for example), buyers depend to a major extent on the skill and
training of their financial advisor.
In recent years, California has considered several legislative
proposals on the topic of annuity suitability sales including
SB 267 (Calderon) and 573 (Scott) in 2007, and AB 2066 (Jones)
in 2010 but these have not been approved by the Legislature.
Earlier this Spring, the Assembly approved AB 689
(Blumenfield) and the Senate approved this bill (SB 715) to
adopt the NAIC model law on annuity suitability sales and
exchanges. These two bills are nearly identical and are
pending before the other house's Insurance Committee.
3)Support . The author states that this legislation is important
because it recognizes that not every annuity is a good fit for
every buyer, and this bill adopts the 2010 NAIC model law that
provides an expanded number of factors to consider when
testing the suitability of an annuity transaction for a
consumer. Additionally, the bill strengthens the training
requirements of producers, and requires insurers to establish
procedural safeguards to assure that the insurer provides
appropriate guidance to consumers to buy or exchange suitable
annuities.
The Insurance Brokers & Agents of the West (IBA West), Liberty
Mutual Group, and Pacific Life Insurance Company state that
this bill would establish protections through the use of
standards and procedures to meet the insurance needs and
financial objectives of consumers.
MetLife states that this bill places increased responsibility on
insurance companies for the suitability of annuity
transactions and places extensive education requirements on
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those who sell annuities. MetLife also states that 11 states
have already adopted the 2010 NAIC model law regarding annuity
transactions.
4)Suggested amendments . This bill and a nearly identical
Assembly Bill, AB 689 (Blumenfield), contain code sections
that are not numerically aligned. In order to align this bill
to AB 689, previously approved by this Committee, it is
recommended that the findings and declarations section of this
bill be changed to an uncodified section, and that the
remaining code section numbers be aligned to those in AB 689.
With this set of changes, there would be a reduced chance of
the code sections becoming confusing if the Governor signs
both bills.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Life & Health Insurance Companies
Insurance Brokers & Agents of the West (IBA West)
Liberty Mutual Group
National Association of Insurance and Financial Advisors -
California
Pacific Life Insurance Company
Opposition
None received.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086