Annuities – Looking Out for the Consumer’s Best Interest

By: Robert Procter & Judd Genda | Axley Attorneys

Governor Evers just signed into law a bill that will change the standards for selling annuities in Wisconsin from a “suitability” to a “best interest” framework. The best interest standard comes from model regulation advanced by the National Association of Insurance Commissioners (NAIC). To date, twenty states have adopted the model regulation. Wisconsin has historically been a leader in setting standards as to annuities, and Richard B. Wicka, Chief Legal Counsel at the Office of the Commissioner of Insurance (OCI), is a member of the NAIC Annuity Suitability Working Group.

“Best interest” is a higher standard than suitability. The new law requires that an insurance intermediary act in the best interest of the consumer when selling an annuity. An annuity may be “suitable” for a consumer, but it may not be in that person’s best interest. To meet this standard, the intermediary must satisfy four obligations: (1) care, (2) disclosure, (3) conflict of interest, and (4) documentation.

Care Obligation

To satisfy the care obligation, the new law sets forth a laundry list of requirements, which include that the intermediary:

• Know the consumer’s financial situation, insurance needs, and financial objectives.
• Understand the available recommendation options after making a reasonable inquiry into the options available to the intermediary.
• Have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information.
• Communicate the basis or bases of the recommendation to the consumer.

Disclosure Obligation

To satisfy the disclosure obligation, the new law requires that the intermediary provide a disclosure form which includes: a description of the intermediary’s relationship with the consumer and role in the transaction; the intermediary’s license and carrier appointments; the sources and types of compensation to be received by the intermediary; and a notice of the consumer’s right to obtain additional information.  OCI will be issuing a form for intermediaries to use based on the NAIC model form.

Conflict of Interest Obligation

The intermediary must identify, avoid or reasonably manage, and disclose material conflicts of interest. The intermediary’s financial interest may not influence the intermediary’s recommendation to purchase or not purchase an annuity.

Documentation Obligation

The new law requires the intermediary to document in writing the recommendation and the basis for the recommendation. If a consumer refuses to provide, or provides insufficient, consumer profile information, or the consumer decides to enter into an annuity transaction that is not recommended by the intermediary, the intermediary must obtain a signed statement from the consumer.  Here again, OCI will be issuing a form for intermediaries to use based on the NAIC model form.

An intermediary acts in the consumer’s best interest if he or she complies with the four obligations.

The new law requires an intermediary to complete a training course approved by OCI within six months of the effective date of the law. It is important to note that these new regulations are licensing obligations, and do not create new civil liability or fiduciary duties for intermediaries, and do not require any additional licenses.

This new law will be a significant change to the sale of annuities in Wisconsin.

This information is provided for the convenience of PIAW members, but cannot be construed as legal advice. Members of PIAW may call (608) 200-4221, or email their questions to insurancehotline@axley.com, to work with an attorney and receive legal information specific to your situation.