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A Brief History of the NAIC Model Laws Affecting Fixed Annuities

In the 143 years since the National Association of Insurance Commissioners (NAIC) passed its very first model law in 1871 (related to the standardization of fire insurance policies), the NAIC has adopted some 193 different model laws or regulations, along with an additional 16 NAIC Guidelines.1 The purpose of these model regulations is to promote uniformity of insurance regulation among the individual states, which is viewed as a benefit both to state insurance regulators and to insurance consumers. Furthermore, for insurance companies doing business in multiple states, regulatory uniformity enhances compliance.

Upon the recommendation of one of the NAIC Standing Committees, the NAIC Executive Committee determines whether a proposed new model law — or an amendment to an existing one — should be drafted and considered for implementation. According to the NAIC website, in order to be considered for adoption or revision, a model law not only must involve a national standard or require national uniformity, but it must also be adopted by a minimum two-thirds of the majority of the respective standing committee making the recommendation as well as the general NAIC membership.2

Fortunately, stakeholders in the fixed annuity industry don’t need to be knowledgeable about or stay abreast of all 193 model laws, but there are a fair number of model laws that do affect the industry, and more specifically, the transaction of fixed annuity sales. In particular, and for the purpose of this article, NAFA tracks a number of the NAIC model regulations — following the changes and amendments made to the regulations as well as their adoption, either in whole or in part — by the various states. In addition to discussing just a few of the model regulations, this article will also provide a bit of historical background on each, as well as an overview of their current adoption status at the state level.

1. Annuity Disclosure Model Regulation — MDL 245

The NAIC first adopted the Annuity Disclosure Model Regulation in 1999 and subsequently amended it in October 2011, revising the requirements concerning the standards for and content of annuity disclosures and illustrations.

The “Annuity Buyer’s Guide” was first adopted in 1998, and after the Disclosure Model was amended in 2011, the NAIC Disclosure Model Working Group spent months revising the “Annuity Buyer’s Guide.” Eventually, three guides were created: one for deferred annuities in general, reflecting both variable and fixed annuities (“the Combination Guide”), one for fixed deferred annuities, and one for variable deferred annuities. The NAIC adopted these revised guides in August 2013 at its summer meeting.

Currently, four states (Colorado, Iowa, Ohio, and Rhode Island) have adopted the 2011 version of the Annuity Disclosure Model Regulation and the 2013 updated “Annuity Buyer’s Guide,” and an additional six states (Georgia, Idaho, Maine, New Jersey, Oklahoma, and Utah) have adopted the updated version of the “Annuity Buyer’s Guide” only. At present, the Alabama Department of Insurance is considering adoption of the 2011 Disclosure Model and the updated buyer’s guide.

2. Suitability in Annuity Transactions Model Regulation — MDL 275

Originally adopted in 2003, the NAIC Suitability in Annuity Transactions Model Regulation (MDL 275) has been revised twice: first in June 2006 and most recently in April 2010.

Originally called the Senior Protection in Annuity Transactions Model Regulation, the model was first renamed and amended in 2006 to expand the suitability protections to consumers of all ages — not just those aged 65 and older. Then, in 2009, the Life Insurance and Annuities Committee considered further amendments to the model, focusing on compliance and oversight requirements for insurance companies, suitability review, and producer training requirements.  The NAIC adopted the third (and current) version of the model at its 2010 spring meeting. Presently, 33 states plus the District of Columbia have adopted (at least in part) the 2010 version of the NAIC Suitability Model Regulation. (At the time this went to press, New Hampshire was on the cusp of finalizing the model’s adoption.)

In addition to the adoption of Model 275 by the individual states, insurance companies that operate on a multistate or national basis have also adopted the model pursuant to the mandate included in the Dodd-Frank Act, which requires insurance companies to adopt and implement nationwide practices that substantially meet or exceed the requirements of the model in order to ensure insurance-issued annuity products continue to remain exempt from regulation under federal securities law.

3. Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities — MDL 278

The Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities generally prohibits insurance producers from using such certifications and designations in the solicitation, sale, or purchase of a life insurance or annuity product in such a way as to mislead a prospective purchaser that the producer has “special” certification or training in advising or serving seniors. By example, the model suggests that combining words such as “senior,” “retirement,” or “elder” (or similar words) with words such as “certified,” “registered,” “advisor,” “specialist,” “consultant,” or “planner” (or similar words) would likely trigger a violation of the regulation, which typically is incorporated under a state’s unfair trade practices laws.

In early 2008, the NAIC Life Insurance and Annuities (A) Committee first considered adopting this model law, which was generally based on the model rule adopted by the North American Securities Administrators Associations (NASAA). Despite some interest in expanding the scope of the proposed model law to include all designations (i.e., not just those that were “senior specific”), the Committee ultimately determined that the model would remain focused on senior-specific certifications and professional designations. After the A Committee adopted MDL 278, the model was then adopted by the Executive/Plenary Committee at the 2008 Fall National Meeting, after which there have been no further modifications to the model regulation.

To date, 31 states and the District of Columbia have adopted the NAIC 2008 Model Regulation on the Use of Senior-Specific Certifications and Professional Designations in the Sale of Life Insurance and Annuities, with an additional 12 states adopting regulations or issuing bulletins that reflect principles similar to those of the model.

4. Advertisements of Life Insurance and Annuities Model Regulation — MDL 570

The Advertisements of Life Insurance and Annuities Model Regulation dates back to 1974, when the NAIC created a task force to draft regulations specifically governing advertisements, which led to the model’s first formal adoption in 1975. It was extensively amended in December 1987 and then again (and most recently) in June 2000, largely to reflect the expansion of new products and new marketing methods as well as the adoption of other NAIC model rules (such as the regulations associated with disclosures and illustrations) that in some aspects relate to advertising practices.

Thirteen states have now adopted the most recent (2000) version of the model regulation, including Alabama, Arkansas, Colorado, Illinois, Louisiana, Missouri, Nebraska, New Hampshire, New Jersey, Rhode Island, Virginia, West Virginia, and Wisconsin.

5. Interstate Insurance Product Regulation Compact Model Regulation — MDL 692

In 2000, the NAIC began discussing the need both to modernize state insurance regulation and to create regulatory efficiencies and uniformity, particularly in the area of standardizing insurance product development and product filing review. This ultimately led to the adoption of the Interstate Insurance Product Regulation Compact Model Regulation in December 2002 (revised in July 2003).

Colorado and Utah became the first two states to enact the compact model regulation, and in May 2006, the Interstate Insurance Product Regulation Commission (IIPRC) was officially formed after meeting its required threshold requirement to have 26 states adopt the compact.

The IIPRC’s goals are to promote efficiencies in insurance product review, approval, and filing; to allow consumers greater and faster access to insurance products in the dynamic insurance marketplace; and to promote uniformity of product standards and consumer protections.3

As of this writing, 43 states are members of the IIPRC.4 Arizona is the newest member, and there is legislation pending in New York to join the Compact. The jurisdictions that are not members include California, Connecticut, Delaware, the District of Columbia, Florida, North Dakota, and South Dakota.

In addition to the model regulations discussed above, other model regulations or model laws affecting the fixed annuity industry include the Life Insurance and Annuities Replacement Model Regulation (MDL 615 — originally adopted in 1969 for life insurance only, an amended version added annuities in 1984, and it was most recently amended in June 2000); the Standard Nonforfeiture Law for Individual Deferred Annuities (MDL 805 — most recently revised in April 2003); the Unfair Trade Practices Act (MDL 880 — most recently amended in 2008); and the Producer Licensing Model Act (MDL 218 —  originally adopted in 1987, it was amended extensively in 2000 to include greater uniformity and reciprocity between the states and was most recently revised in December 2004).

 

1 Much of the historical information in this article can be found in the Legislative History (Proceedings of the NAIC) which is included as part of the free (but not for reprint) publications on the NAIC website available at  http://www.naic.org/store/free/
2   NAIC FAQ, available at http://www.naic.org/documents/about_faq.pdf
3 “About the IIPRC,” available at www.insurancecompact.org/about.htm.
4 Puerto Rico is also a member of the IIPRC.

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