States Implement Best-Interest Standard for Annuity Sales

The National Association of Insurance Commissioners has updated past regulations to ensure that insurance companies provide transparent, consumer-focused recommendations to consumers. Now, more states are moving toward adopting the NAIC’s updated best-interest standard or similar rules to prioritize consumer interests over insurers’ financial interests.

Although the best-interest standard does not go so far as to establish a fiduciary duty, experts are optimistic that the new regulation will raise the bar when it comes to protecting the public interest and the strengthening the accountability of insurance carriers and agents who sell annuities.

“There are more steps a salesperson needs to go through to be able to offer annuities to individuals,” Steve Parrish, co-director of the New York Life Center for Retirement Income and adjunct professor at The American College of Financial Service told Annuity.org. 

Agents may be required to ask additional questions to ensure that clients fully understand their product recommendations.

Current Regulation Among States

Annuities and life insurance product sales are regulated by the states, not the federal government. Generally, the state in which the annuity is sold and the consumer resides will have jurisdiction.

Parrish is hopeful that the standard will bring positive change by adding uniformity and tightening the rules.

“The more states that adopt it, the more uniform the regulation,” Parrish said, comparing the best-interest standard to speed limit regulations. “Forty-nine states had normal speed limits, like 55 [mph], but Montana had a rule to drive safely. The ‘drive safely’ rule is principle-based, and 55 is rules-based. The NAIC’s best-interest is a little of both.”

As of Jan. 14, 2021, several states have adopted the NAIC guidelines or similar versions.

States that have adopted the best-interest standard:

• Arizona
• Arkansas
• Iowa
• Michigan 
• Rhode Island

States that are considering action:

• Alabama
• Delaware
• Idaho
• Kentucky
• Maine
• Nebraska
• Nevada

Additionally, Massachusetts and New York have enacted other regulatory provisions for annuity sales.

How the Best-Interest Standard Protects Consumers

Ideally, with insurance companies following the best-interest standard, consumers should feel informed and better prepared to make important financial decisions. 

“It puts a lot of the onus on the insurance company as well as the actual salesperson, so it’s kind of an extra layer of protection,” Parrish said.

Rather than the client being expected to fully understand each product, insurers would have the responsibility of recommending only products that serve the consumer’s best interest.

Some states may impose tighter rules and standardization than others, so it may be a challenge for the governing agencies to regulate. Governing agencies may also further define the term “best-interest” in the future, and the states’ standardization — or lack thereof — will impact consumers and agencies alike.

Best-Interest Background

The recent NAIC standardization began as the Suitability in Annuity Transactions Model Regulation. The organization revised the model to include a best-interest standard in 2020 to tighten regulation on recommendations from insurance companies. The standard was intended to prevent insurance agents from recommending products that were profitable for them but perhaps not the best solution for the client.

To promote ethical sales practices, the NAIC standard includes regulations that insurance companies must implement and supervise. When recommending an annuity or life insurance product, the insurer is obligated to explain the basis for the recommendation, disclose their compensation and any conflicts of interest, and provide written documentation of the recommendation.