Suitability

In order for a producer to recommend the purchase of an annuity contract to a client, it is essential that the product be suitable for each specific client’s needs.  To this end, a producer must make reasonable efforts to obtain the client’s suitability information prior to execution of the purchase. In addition to other factors that may be unique to the client’s particular situation, producers should take into account various factors relating to the client, such as age, annual income, financial situation and needs, and risk tolerance. 

In 2020, the NAIC (National Association of Insurance Commissioners) adopted the most recent version of the “Suitability in Annuity Transactions Model Regulation.” While the new Model Regulation contains many of the same requirements as the previous suitability regulations, there are several significant additional requirements. While the NAIC develops Model Regulations, each state must enact the regulation and while most states use the Model Regulation as the basis for their regulation, states may make material changes to the model by adding additional requirements and you must comply with the appropriate regulation for the state where you are making the recommendation for any variations from the model.  Below is a summary of the Model Regulation as they apply to Producer Responsibilities.

First, the Model Regulation requires producers to act in the best interest of the consumer under the circumstances know at the time the recommendation is made without placing the producer’s or the insurer’s financial interest ahead of the consumer.  There are four obligations that a Producer must satisfy when making a recommendation:

1. Care Obligation: The producer, in making a recommendation, must exercise reasonable diligence, care and skill to know the customer’s financial situation, insurance needs and financial objections; understand the available options; and have a reasonable basis to believe the producer addresses the consumer’s situation known at the time of the recommendation and are able to communicate he basis of the recommendation.
2. Disclosure Obligation: Prior to making a recommendation, the producer must prominently disclose to the consumer on a prescribed form (the Model Regulation provides an Appendix A that can be utilized) a description of the sources and types of cash and non-cash compensation received by the producer and notice of the consumer’s right to request additional information regarding cash compensation. While some states have adopted the Model Regulation and apply Appendix A, other states may require a state-specific form so it is pertinent that a consult each state’s specific suitability laws. Please review the RSL Suitability page found at www.reliancestandardlife.com/-/media/files/reliance-standard-life/professionals/bulletins/rsl-suitability.pdf for more information.
3. Conflict of Interest Obligation: A producer must identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.
4. Documentation Obligation: A producer must make a written record of their recommendation and the basis for their recommendation. In addition to the Best Interest Rule, carriers or a third-party are now required to pre-screen all annuity applications for suitability before issuing a contract and producers are required to provide a disclosure statement to all applicants in a form prescribed by the state in which they are soliciting the annuity contract. Producers must submit a completed Suitability Analysis Form for each annuity contract that a customer intends to purchase.