No. 27083 (New Rule): R590-230. Senior Protection in Annuity Transactions .

DAR File No.: 27083
Filed: 04/13/2004, 12:36
Received by: NL

 

RULE ANALYSIS

Purpose of the rule or reason for the change:

The purpose of this rule is to set standards and procedures for recommendations to senior consumers that result in a transaction involving annuity products so that the insurance needs and financial objectives of senior consumers at the time of the transaction are appropriately addressed.

 

Summary of the rule or change:

This rule sets the duties of the insurer and the producer in their recommendation to purchase or exchange of an annuity to a senior citizen. The rule allows the commissioner to order the insurer to take corrective action, or have their producer or agencies take corrective action when a consumer is harmed and allows the commissioner to withdraw or reduce penalties based on promptness of the corrective action. The rule sets requirements of records to be kept by the insurer, agents, and agencies of information collected from senior consumers and information used in making recommendations to seniors during transactions.

 

State statutory or constitutional authorization for this rule:

Sections 31A-2-201 and 31A-22-425

 

Anticipated cost or savings to:

the state budget:

This rule will not have an affect on costs or savings to the state budget. No additional people will need to be hired and no additional revenue will be created or lost as a result of this rule.

 

local governments:

This rule will not affect local government since it deals solely with the relationship between insurers and their producers with consumers and the Insurance Department.

 

other persons:

Insurers and producers are required to develop and maintain a system to supervise recommendations to senior consumers. The system is to collect information so as to determine that the sale is suitable for the senior consumer. This is a brand new requirement of life insurance companies. Two other states are also currently in the implementation stage with other states considering the implementation of this National Association of Insurance Commissioners' Model Rule. This is going to require life insurers to develop or subcontract out the work for the development and maintenance of a program to assess the data. The amount of business and size of the company will determine the cost to the insurer. The intent of this rule is to ensure that senior consumers purchase annuities that are suitable and not purchase annuities that could be financially detrimental to them.

 

Compliance costs for affected persons:

Insurers and producers are required to develop and maintain a system to supervise recommendations to senior consumers. The system is to collect information so as to determine that the sale is suitable for the senior consumer. This is a brand new requirement of life insurance companies. Two other states are also currently in the implementation stage with other states considering the implementation of this National Association of Insurance Commissioners' Model Rule. This is going to require life insurers to develop or subcontract out the work for the development and maintenance of a program to assess the data. The amount of business and size of the company will determine the cost to the insurer. The intent of this rule is to ensure that senior consumers purchase annuities that are suitable and not purchase annuities that could be financially detrimental to them.

 

Comments by the department head on the fiscal impact the rule may have on businesses:

There will be a fiscal impact to life insurance companies doing business in Utah but believe that they will be offset by protections provided to senior consumers.

 

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Insurance
Administration
Room 3110 STATE OFFICE BLDG
450 N MAIN ST
SALT LAKE CITY UT 84114-1201

 

Direct questions regarding this rule to:

Jilene Whitby at the above address, by phone at 801-538-3803, by FAX at 801-538-3829, or by Internet E-mail at [e-mail]

 

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

06/01/2004

 

Interested persons may attend a public hearing regarding this rule:

5/17/2004 at 10:00 AM, State Office Building, 450 N Main Street, Room 3112, Salt Lake City, UT

 

This rule may become effective on:

06/02/2004

 

Authorized by:

Jilene Whitby, Information Specialist

 

 

RULE TEXT

R590. Insurance, Administration.

R590-230. Senior Protection in Annuity Transactions.

R590-230-1. Authority.

This rule is promulgated pursuant to Section 31A-22-425 wherein the commissioner is to make rules to establish standards for recommendations and Subsection 31A-2-201(3)(a) wherein the commissioner may make rules to implement the provisions of Title 31A.

 

R590-230-2. Purpose.

(1) The purpose of this rule is to set forth standards and procedures for recommendations to senior consumers that result in a transaction involving annuity products so that the insurance needs and financial objectives of senior consumers at the time of the transaction are appropriately addressed.

(2) Nothing herein shall be construed to create or imply a private cause of action for a violation of this rule.

 

R590-230-3. Scope.

(1) This rule shall apply to any recommendation to purchase or exchange an annuity made to a senior consumer by an insurance producer, or an insurer where no producer is involved, that results in the recommended purchase or exchange.

(2) Unless otherwise specifically included, this rule shall not apply to recommendations involving:

(a) direct response solicitations where there is no recommendation based on information collected from the senior consumer pursuant to this rule; and

(b) contracts used to fund:

(i) an employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA);

(ii) a plan described by Internal Revenue Code (IRC) Sections 401(a), 401(k), 403(b), 408(k) or 408(p), as amended, if established or maintained by an employer;

(iii) a government or church plan defined in IRC Section 414, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax exempt organization under IRC Section 457;

(iv) a nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor;

(v) settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process; or

(vi) formal prepaid funeral contracts.

 

R590-230-4. Definitions.

In addition to the definitions in Section 31A-1-301, the following definitions shall apply for the purpose of this rule:

(1) "Annuity" means:

(a) an annuity as defined in Section 31A-1-301; and

(b) a fixed annuity or variable annuity that is individually solicited, whether the product is classified as an individual or group annuity.

(2) "Recommendation" means advice provided by an insurance producer, or an insurer where no producer is involved, to an individual senior consumer that results in a purchase or exchange of an annuity in accordance with that advice.

(3) "Senior consumer" means a person 65 years of age or older. In the event of a joint purchase by more than one party, the purchaser will be considered to be a senior consumer if any of the parties is age 65 or older.

 

R590-230-5. Duties of Insurers and of Insurance Producers.

(1) In recommending to a senior consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the senior consumer on the basis of the facts disclosed by the senior consumer as to his or her investments and other insurance products and as to his or her financial situation and needs.

(2) Prior to the execution of a purchase or exchange of an annuity resulting from a recommendation, an insurance producer, or an insurer where no producer is involved, shall make reasonable efforts to obtain information concerning:

(a) the senior consumer's financial status;

(b) the senior consumer's tax status;

(c) the senior consumer's investment objectives; and

(d) such other information used or considered to be reasonable by the insurance producer, or the insurer where no producer is involved, in making recommendations to the senior consumer.

(3)(a) Except as provided under Subsection (3)(b), neither an insurance producer, nor an insurer where no producer is involved, shall have any obligation to a senior consumer under Subsection (1) related to any recommendation if a consumer:

(i) refuses to provide relevant information requested by the insurer or insurance producer;

(ii) decides to enter into an insurance transaction that is not based on a recommendation of the insurer or insurance producer; or

(iii) fails to provide complete or accurate information.

(b) An insurer or insurance producer's recommendation subject to Subsection (3)(a) shall be reasonable under all the circumstances actually known to the insurer or insurance producer at the time of the recommendation.

(4)(a) An insurer either shall assure that a system to supervise recommendations that is reasonably designed to achieve compliance with this rule is established and maintained by complying with Subsections (4)(c) to (4)(e) or shall establish and maintain such a system, including:

(i) maintaining written procedures; and

(ii) conducting periodic reviews of its records that are reasonably designed to assist in detecting and preventing violations of this rule.

(b) A general agent and independent agency either shall adopt a system established by an insurer to supervise recommendations of its insurance producers that is reasonably designed to achieve compliance with this rule, or shall establish and maintain such a system, including:

(i) maintaining written procedures; and

(ii) conducting periodic reviews of records that are reasonably designed to assist in detecting and preventing violations of this rule.

(c) An insurer may contract with a third party, including a general agent or independent agency, to establish and maintain a system of supervision as required by Subsection (4)(a) with respect to insurance producers under contract with or employed by the third party.

(d) An insurer shall make reasonable inquiry to assure that the third party contracting under Subsection (4)(c) is performing the functions required under Subsection (4)(a) and shall take such action as is reasonable under the circumstances to enforce the contractual obligation to perform the functions. An insurer may comply with its obligation to make reasonable inquiry by doing all of the following:

(i) the insurer annually obtains from a third party's senior manager, who has responsibility for the delegated functions, a certification that the manager has a reasonable basis to represent, and does represent, that the third party is performing the required functions; and

(ii) the insurer, based on reasonable selection criteria, periodically selects third parties contracting under Subsection (4)(c) for a review to determine whether the third parties are performing the required functions. The insurer shall perform those procedures to conduct the review that are reasonable under the circumstances.

(e) An insurer that contracts with a third party pursuant to Subsection (4)(c) and that complies with the requirements to supervise in Subsection (4)(d) of this subsection shall have fulfilled its responsibilities under Subsection (1).

(f) An insurer, general agent or independent agency is not required by Subsection (4)(a) or (4)(b) to:

(i) review, or provide for review of all insurance producer solicited transactions; or

(ii) include in its system of supervision an insurance producer's recommendations to senior consumers of products other than the annuities offered by the insurer, general agent or independent agency.

(g) A general agent or independent agency contracting with an insurer pursuant to Subsection (4)(c), shall promptly, when requested by the insurer pursuant to Subsection (4)(d), give a certification as described in Subsection (4)(d) or give a clear statement that the third party is unable to meet the certification criteria.

(h) No person may provide a certification under Subsection (4)(d)(i) unless:

(i) the person is a senior manager with responsibility for the delegated functions; and

(ii) the person has a reasonable basis for making the certification.

(5) Compliance with the National Association of Securities Dealers (NASD) Conduct Rules pertaining to suitability shall satisfy the requirements under this section for the recommendation of variable annuities. However, nothing in this subsection shall limit the commissioner's ability to enforce the provisions of this rule.

 

R590-230-6. Mitigation of Responsibility.

(1) The commissioner may order:

(a) an insurer to take reasonably appropriate corrective action for any senior consumer harmed by the insurer's, or by its insurance producer's, violation of this rule;

(b) an insurance producer to take reasonably appropriate corrective action for any senior consumer harmed by the insurance producer's violation of this rule; and

(c) a general agency or independent agency that employs or contracts with an insurance producer to sell, or solicit the sale, of annuities to senior consumers, to take reasonably appropriate corrective action for any senior consumer harmed by the insurance producer's violation of this rule.

(2) Any applicable penalty under 31A-2-308 for a violation of Subsection R590-230-5.(1), (2), or (3)(b) may be reduced or eliminated if corrective action for the senior consumer was taken promptly after a violation was discovered.

 

R590-230-7. Records.

Insurers, general agents, independent agencies and insurance producers shall maintain or be able to make available to the commissioner records of the information collected from the senior consumer and other information used in making the recommendations that were the basis for insurance transactions for the current calendar year plus three years after the insurance transaction is completed by the insurer. An insurer is permitted, but shall not be required, to maintain documentation on behalf of an insurance producer.

 

R590-230-8. Enforcement Date.

The commissioner will begin enforcing the provisions of this rule October 1, 2004.

 

R590-230-9. Severability.

If any provision of this rule or the application of it to any person or circumstance is for any reason held to be invalid, the remainder of the rule and the application of the provision to other persons or circumstances shall not be affected by it.

 

KEY: insurance, senior protection, annuities

2004

31A-2-201

31A-22-425