Producers Beware: More States Adopt NAIC Annuity Suitability Framework

The Alabama Department of Insurance has finalized key revisions to the state’s Insurance Regulation No. 137, which sets forth conflict of interest mitigation requirements concerning the suitability of the sale of annuities.

The revisions make the Alabama suitability regulation substantially similar to the most recent revisions of the Suitability in Annuity Transactions Model Regulation developed by the National Association of Insurance Commissioners (NAIC). The effective date of the revisions in Alabama is January 1, 2022.

This development means Alabama is now the 13th state to embrace the model suitability framework finalized in early 2020 by the NAIC. By way of background, the NAIC is the United States’ standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate their regulatory oversight.

Similar to the Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI), the NAIC model regulation says that insurance producers must act in the best interest of the consumer under the circumstances known at the time an annuity transaction recommendation is made. The suitability framework explicitly requires an insurance producer not to place their own financial interest, or the interest of their firm, ahead of the consumer’s interest.

Supporters of the NAIC best interest framework include the Insured Retirement Institute (IRI), which says the revised annuity transaction model is constructively consistent with Reg BI, which has been in effect since June 2020. Beyond the IRI, other supporters of the NAIC’s suitability approach include the American Council of Life Insurers (ACLI) and the National Association of Insurance and Financial Advisors (NAIFA).

ACLI President Susan Neely offered the following statement regarding the development in Alabama: “The new rule adopted by Alabama Insurance Commissioner Jim Ridling and the Alabama Insurance Department enhances protections for retirement savers seeking lifetime income through annuities. It makes certain that financial professionals they work with are acting in the best interest of consumers. This action adds important momentum to the nationwide push for stronger protections for annuity consumers. … Unlike a fiduciary-only approach that limits choices for consumers, these measures offer strong state and federal protections and make sure savers, particularly financially vulnerable middle-income Americans, have information about options for long-term security through retirement.”

Notably, other states have taken steps to create their own local frameworks that are more restrictive than the NAIC model, most notably New York, although that state’s approach is the subject of ongoing litigation.