Best interest standard and fiduciary rules have been the focus of several regulatory bodies, especially after the Fifth Circuit Court of Appeals struck down the DOL Fiduciary Rule in 2018. Earlier this year, the National Association of Insurance Commissioners (NAIC) adopted a best interest rule as a revision to Suitability in Annuity Transactions Model Regulation (#275), enabling state regulators and legislatures to take up the rule. This article provides an overview of best interest rules (including the NAIC best interest rule), who is adopting them, and what they mean for insurers.
In February 2020, NAIC enacted its own best interest standard as a revision to its regulation 275. In a press release, NAIC describes
it like this: “All recommendations by agents and insurers must be in the best interest of the consumer and ... agents and carriers may not place their financial interest ahead of the consumer’s interest in making the recommendation.” The rule requires that agents and carriers act with “reasonable diligence, care, and skill” in making recommendations.
Now that NAIC has approved the revision and issued guidelines, the insurance regulators in all 50 states and the U.S. territories can take it up in their respective jurisdictions.
Best Interest Standard Definition
Best interest is a term used in a number of situations including the medical and legal fields. In the financial sector it means setting aside any personal beliefs or biases and working for the good of the client at all times. It goes beyond recommending what may be a good fit and finding the best fit.
The NAIC Best Interest Standard Protects Annuity Consumers
The updated NAIC Annuity standard requires insurance producers to recommend annuities that are not only suitable for the client, but are in the clients best interest. For example, if you are looking for a new car to use for your daily commute virtually any automobile is suitable for your needs. However not all automobiles are in your best interest. To determine your best interest the automobile dealer needs to understand more about you, your needs and your wants. They would need to document those needs and wants and disclose any conflicts of interest they may have. This may even require that dealer to recommend an automobile sold by another dealership.
About NAIC Model Regulation
Founded in 1871, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The NAIC is governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories to coordinate regulation of multistate insurers.
The NAIC promulgates model regulations for many insurance products providing guidance to state insurance departments. Each individual state regulates their insurance business and may use the NAIC model regulations to help in that process.
NAIC Model Regulation for Suitability in Annuity Transactions
In 2010, the NAIC introduced their Model Regulation 275 - Suitability in Annuity Transactions. This model regulation outlined an insurance producer’s responsibilities when recommending an annuity to a client. In 2020 the NAIC updated that model to require insurance producer’s to work in their client’s best interests.
According to the NAIC Best Interest standard, to satisfy the best interest obligation, a producer or an insurer must satisfy the four obligations:
- Conflict of interest
To satisfy the four obligations, when making a recommendation, producers must:
- Know the consumer’s financial situation, insurance needs and financial objectives.
- Understand the available recommendation options.
- Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs and financial objectives.
- Communicate the basis of the recommendation to the consumer.
- Disclose their role in the transaction, their compensation, and any material conflicts of interest.
- Document, in writing, any recommendation and the justification for such recommendation.
NAIC Suitability in Annuity Transactions: Model Regulation Training Requirements
The NAIC Annuity model requires insurance producers to successfully complete a four hour annuity product training course that covers the types of annuities, uses of annuities, taxation of annuities and more. Importantly the regulation requires that appropriate sales practices are part of this training.
For those producers who have completed this training already, states who have adopted the Best Interest standard require a new 4 hour or a supplemental 1 hour best interest course. These courses ensure the producer understands the best interest sales practices. For those who have not completed the 4 hour annuity product course, that new 4 hour course is required.
NAIC States’ Plans
Iowa was the first state to put the new NAIC rule in play. They have been followed by Alabama, Arizona, Arkansas, Delaware, Idaho, Michigan, North Dakota,Nebraska, Ohio and Rhode Island. States with rules pending include Connecticut, Kentucky, Maine, Montana, Nevada, Texas and Virginia.
New York, for example, will not revise Regulation 187 to meet the NAIC best interest rule because New York wants to hold brokers and agents to a higher standard. Some states appear to be taking New York’s view. Massachusetts finalized its own fiduciary standard, although it excluded insurance agents, and New Jersey, Nevada, and Maryland are pursuing similar rules.
When you look at a best interest rule like New York’s or the NAIC’s and compare it with the fiduciary standard for CFP® professionals, it’s hard to tell the difference. After enacting its Regulation Best Interest (BI), the SEC indicated that it views fiduciary and best interest as the same. Other organizations, most notably CFP Board, maintain that the fiduciary standard is stricter.
A fiduciary standard, says CFP Board, “should put the interests of the client first and should include both a duty of care and a duty of loyalty.” Certain consumer groups and states agree. They don’t feel the “best interest” standard goes far enough.
Many states prefer the NAIC rule, with 11 adopting the rules already. Another 7 states have Annuity Best Interest rules pending in their legislatures.
States Adopting and Proposing NAIC Requirements and Courses
Kaplan will be following the progression of the NAIC Best Interest Rule, along with any other standards individual states adopt. We encourage you to follow along. As they become part of each state’s insurance continuing education, we will also add them to our insurance CE packages.
States Adopting NAIC Requirements
- New Mexico
- North Dakota
- Rhode Island
States Proposing NAIC Requirements
- South Carolina
- South Dakota
States with NAIC Courses Released
- North Dakota
- Rhode Island
States with NAIC Courses Pending
Best Interest Standard Training Courses for Annuity Agents
If you are ready for a Best Interest Standard Training Course, you can get started with Kaplan’s 1-Hour Training Course, or dive right into our 4-Hour Training Course. Learn more about training course options in your state.