ARIZONA 

BILL NUMBER: HB 2162

AMENDS CODE SECTION: An act to amend Title 20, Chapter 6, Arizona Revised Statutes, by adding article 1.3; relating to protection in insurance annuity transactions.

STATUS: APPROVED BY GOVERNOR APRIL 18, 2006 FILED WITH SECRETARY OF STATE APRIL 18, 2006

SUMMARY FROM ARIZONA LEGISLATIVE FACT SHEET:

H.B. 2162 codifies the NAIC model, expanded to require that an insurance producer or insurer that recommends an annuity purchase or exchange to any consumer have reasonable grounds that the recommendation is suitable for the consumer based on the consumer’s financial situation and needs.

ARIZONA is just one of many states incorporating the NAIC model regulation regarding the suitable sale of annuities. It should be clear by now, more than three year after the NAIC adopted its original suitability model (which limited application to consumer age 65 or older), that suitability standards are continuing to occupy legislators’ and regulators’ time and efforts. For the industry, the adoption of the NAIC model allows those conducting business in multiple jurisdictions the ease of complying with rules and regulations which are uniformed among the jurisdictions. Also note Hawaii, Michigan and South Carolina are discussed in this edition as having similar legislation regarding suitability and the sale of an annuity.  

BILL NUMBER: SCR 117

AMENDS CODE SECTION: This measure directs the California Public Employees' Retirement System to study and consider development of a reverse annuity mortgage program for retired members and to report to the Legislature on the findings of the study on or before January 15, 2007.

STATUS: IN ASSEMBLY. Held at desk AUG 27, 2006

SUMMARY FROM CALIFORNIA LEGISLATIVE COUNSEL'S DIGEST

WHEREAS, The California Public Employees' Retirement System has had considerable success with its Home Loan Assistance Program in assisting members with the purchase of their homes and also in generating reasonable investment returns from the program for the Public Employees' Retirement Fund; and WHEREAS, The California Public Employees' Retirement System, by entering into the long-term care market, has aided in setting both reasonable benefit standards and costs for its members; and WHEREAS, Retirees are finding that their living expenses are exceeding inflation; and WHEREAS, The costs of health care are double to triple the rate of inflation year after year; and WHEREAS, Reverse annuity mortgages (RAM) may be a viable alternative for retired members; and WHEREAS, RAM is an opportunity to convert an individual's home equity into an additional source of income; and

WHEREAS, RAM requires that the borrowers be at least 62 years of age or older and that the property be free and clear of debt or that the principal be small relative to the market value; and WHEREAS, The RAM loan is only repaid from the proceeds of the sale after the borrower moves from the home or is deceased; and WHEREAS, The protections for homeowners in RAM programs today are much stronger than they were when these programs first appeared; and WHEREAS, This approach would greatly assist in keeping retired members in their homes and also provide them additional revenue; and WHEREAS, This program, if developed similarly to the California Public Employees' Retirement System Home Loan Assistance Program could also add reasonable investment returns to the Public Employees' Retirement Fund; and WHEREAS, Having the California Public Employees' Retirement System enter into the RAM program would help to reduce retired members' concerns with costs, appraised value, and other consumer issues;…

CALIFORNIA legislators recently requested a study be initiated to learn more about reverse mortgages and annuities to ascertain whether a reverse annuity mortgage program is a

viable tool for the State’s Public Employee Retirement System. The concept of using the home equity to supplement retirement income has gained consistent popularity in the annuity area although it has also been the subject of some scrutiny for unsuitable transactions.

What I find most interesting about this legislative action is the contrast it represents from recent California legislation, namely SB 620 (2003) and SB 192 (2005), which stemmed from severe criticism of the annuity industry as a whole by certain legislators, the Commissioner of Insurance, other DOI representatives, and private alleged senior advocate groups. Testimony at the Senate Insurance Committee meetings for each bill indiscriminately attacked the sales of all annuities specifically to those 65 and older. This study is seeking to incorporate annuities into California employees’ retirement planning. Such a consideration shows insight on behalf of the legislature into the benefits annuities hold, especially for retirement planning.

CALIFORNIA

BILL NUMBER: AB 608

AMENDS CODE SECTION: An act to amend Section 10127.7 of, and to add Section 789.15 to the Insurance Code, relating to life insurance.

STATUS: VETOED BY GOVERNOR SEPT 29, 2006

SUMMARY FROM CALIFORNIA LEGISLATIVE COUNSEL'S DIGEST

Existing law regulates the sale of life insurance, in particular sales to seniors, including annuities, as specified. This bill would provide that if a senior makes a written or telephonic request for a meeting the same day to discuss the purchase of specific life insurance or annuities having an initial face amount of $15,000 or less that are designated by the purchaser for payment of funeral and burial expenses, a notice, as specified, shall be delivered to the senior prior to the start of the meeting. Existing law provides that life insurance policies with a face value of less than $10,000, issued after July 1, 1974, shall contain a notice permitting the return of the policy within a period of time designated in the notice, which may not be less than 10 or more than 30 days. This bill would provide that a life insurance policy or annuity with a face value of $15,000 or less, issued after January 1, 2007, shall contain a notice permitting the return of the policy within 30 days.

VETO MESSAGE FROM GOVERNOR: To the Members of the California State Assembly:

I am returning Assembly Bill 608 without my signature: Under existing law, before a person can meet with a senior in the senior's home for the purpose of selling life insurance or annuities, a written notice must be sent to the senior at least 24 hours in advance of the meeting. The intent of this law is to afford seniors the greatest protection in their homes from unwanted sales intrusions. Current law provides an exception to this rule by allowing a same-day meeting in the senior's home when the senior has a pre-existing relationship with the agent and has requested the meeting. Carving out new exceptions to the rule, even for insurers who offer certain low-value life insurance policies under $15,000, is unnecessary. The 24-hour notice requirement establishes a "bright line" that an insurance agent should know not to cross and a sound consumer business practice.

Sincerely, Arnold Schwarzenegger 

This bill sought to modify SB 620 (2003) which originally created the “24 Hour Notice” to be delivered prior to visiting a consumer age 65 or older for the first time in the consumer’s home.

Currently, the only exception to this rule applies when the consumer requests a same day meeting, which effectively makes presenting the notice 24 hours prior to the meeting impossible.

Under such circumstances the producer remains obligated to the provide notice to the consumer, the exception is that the 24 hour condition is obsolete and the notice must be presented to the senior consumer upon arrival at their home. At the time SB 620 was presented for vote, it was clear that the 24 hour notice provision was a priority to those supporting the legislation.

This veto shows the continued commitment to maintaining the 24 hour notice rule in California, without further exceptions.

CALIFORNIA

BILL NUMBER: SB 1609

AMENDS CODE SECTION: An act to amend Sections 1632, 1923.2, and 1923.5

STATUS: APPROVED BY GOVERNOR SEPT 5 2006

FILED WITH SECRETARY OF STATE SEPT 5, 2006

SUMMARY FROM CALIFORNIA LEGISLATIVE COUNSEL'S DIGEST

Existing state and federal law regulate the activities of financial institutions. Existing state law defines and regulates reverse mortgage loans and provides a disclosure notice that a lender must provide an applicant, which informs the applicant that a reverse mortgage is a complex financial arrangement and advises the applicant of the wisdom of seeking financial counseling before entering the agreement.

This bill would prohibit a lender from requiring the purchase of an annuity as a condition of obtaining a reverse mortgage loan. The bill would prohibit a reverse mortgage lender or a broker arranging a reverse mortgage loan from offering an annuity to the borrower or referring the borrower to anyone for the purchase of an annuity prior to the closing of the loan or before the expiration of the borrower's right to rescind. The bill would, among other things, require a lender to refer a prospective borrower to a housing counseling agency for counseling, as specified, prior to accepting a final and complete application for a reverse mortgage or assessing any fees, and would prohibit a lender from accepting a full and complete application for a reverse mortgage loan or assessing any fees without receiving certification, as specified, that the borrower had received this counseling. The bill would make changes to the disclosure notice provided to an applicant for a reverse mortgage and would require a lender to provide a specified list of independent loan counselors.

CALIFORNIA is scrutinizing the conduct surrounding a reverse mortgage where the proceeds are used to purchase an annuity. Among other requirements, the bill provides for the lender to supply the consumer with a list of independent loan counselors.

As more of the boomer population enters retirement, the trend of consumers borrowing against the equity in their home is likely to increase. As with all retirement income strategies that involve an insurance product, whether the entire transaction is appropriate for a consumer is a case by case analysis. Having access to an impartial, qualified and knowledgeable individual to confirm whether a reverse mortgage will benefit the consumer may help.

My concern is whether the reverse mortgage counselor will have sufficient qualifications and knowledge to render a complete opinion. Meaning, do they know anything about annuities? It seems the reverse mortgage is the first step in this two part process: the purchase of an appropriate income generating annuity being the second part. When a consumer seeks advice about this retirement income strategy, being able to discuss the entire transaction may be the most beneficial.

CALIFORNIA

BILL NUMBER: SB 1847

AMENDS CODE SECTION: An act to amend Sections 789.8, 791.13, 1060, 1749.85, 1872.83, 1874.8, 10089.83, 12922, 12961, 12962, and 12967 of, to amend and renumber Section 10133.66 of, and to repeal Sections 742.435 and 1751.8 of, the Insurance Code, relating to insurance, and declaring the urgency thereof, to take effect immediately.

STATUS: APPROVED BY GOVERNOR SEPT 22, 2006

FILED WITH SECRETARY OF STATE SEPT 22, 2006

SUMMARY FROM CALIFORNIA LEGISLATIVE COUNSEL'S DIGEST

Under existing law, if a life agent offers to sell an elder any life insurance or annuity product, the agent must provide a written disclosure, as specified, to the elder. This bill adds disclosure language, as specified, regarding the Medi-Cal Recovery Program, which may apply to annuities purchased after September 1, 2004. Bill would become operative January 1, 2007.

In the past 5 years or so, consumers have seen a trend in legislation surrounding Medicaid benefits (known as Medi-Cal in CA). Due to a number of factors most states are experiencing extreme pressure to legislate in order to preserve Medicaid programs. This bill is an example of legislation which draws the consumer’s attention to the State’s authority to recover from the consumer’s estate funds which were provided during the consumer’s lifetime through Medi-Cal.

While fewer and fewer carriers publicly brand their annuities as ‘Medicaid friendly’, many carriers will allow the owner to select a payout provision which follows a state’s Medicaid mortality table requirements thus rendering the annuity essentially exempt when determining a consumer’s assets for eligibility to receive Medicaid.

The market conduct problem occurs when the owner purchases an appropriate annuity, thus qualifying for Medicaid and yet is unaware that the State will seek to recover those funds upon death.

Medicaid recovery legislation is not uncommon. This bill discusses the disclosure language required to be presented to a consumer to alert them to the recovery potential.

GEORGIA

BILL NUMBER: HB 1304

AMENDS CODE SECTION: An act to amend Title 33 of the O.C.G.A.

STATUS: APPROVED BY GOVERNOR MAY 5, 2006

SUMMARY FROM GEORGIA LEGISLATURE

Legislation relates to insurance, so as to provide that neither the cash surrender values nor the proceeds of life insurance policies and annuity contracts shall be liable to attachment, garnishment, or legal process in favor of any creditor of the person for whose use or benefit the policy or contract was executed; to provide that the proceeds of life insurance policies that are payable to the insured's estate or executor, administrator, or assign shall become a part of the insured's estate to be administered as all other estate assets; to provide for the discharge from liability for any insurer for payments in accordance with such provisions; to provide for related matters; to provide an effective date; to repeal conflicting laws; and for other purposes.  

GEORGIA recently joined the ranks of several other states which protect monies held in an annuity from attachment or garnishment to pay a creditor. Some states limit the protection to a dollar amount or extend the protection only to monies actually being paid, rather than monies sitting in a deferred annuity.

Producers may use this provision as an added benefit, though not a benefit provided by an insurance carrier, but rather provided by state law, for purchasing an annuity. 

HAWAII

BILL NUMBER: HB 2434

AMENDS CODE SECTION: An act to amend Section 1. Chapter 431:10D, Hawaii Revised Statutes, by adding a new part relating to disclosure of ‘buyer’s guide’ at sale of annuity

STATUS: APPROVED BY GOVERNOR MAY 2, 2006

SUMMARY FROM HAWAII LEGISLATITIVE COMMITTEE ON COMMERCE, CONSUMER PROTECTION & HOUSING

The purpose of this measure is to ensure that purchasers of annuities understand certain basic features of annuities. Your Committee finds that this measure adopts the Annuity Disclosure Model Regulation drafted by the NAIC and adopted by eight other states in its current form, and by ten other states in various forms. The law applies only to fixed and not variable annuities, and requires that information about guaranteed and non-guaranteed elements of the annuity contract be given to consumers in a "disclosure document" along with a "buyers guide" at or before the time of application. 

Upon further consideration, your Committee has amended this measure by:(1) Changing the title of §431:10D-C to refer to the disclosure document and buyer's guide as proposed by the Insurance Commissioner; (2) Amending paragraph (a) of §431:10D-C to more closely conform to the model regulation as proposed by the American Council of Life Insurers and as recommended by the Insurance Commissioner; and (3) Changing the effective date from "upon approval" to "January 1, 2007," as proposed by the American Council of Life Insurers, to afford insurance companies time to conform to the new requirements.

HAWAII adopts legislation governing disclosure of information relating to the sale of an annuity on or before time of application. The “Buyer’s Guide” published by the NAIC has long been a valuable asset to the annuity industry. The booklet which comes in two versions, one with an appendix for index annuities, is required in certain states to be delivered in conjunction with the sale of an annuity. Considering a market conduct issue may arise when a consumer alleges the producer failed to disclose material information regarding the annuity, delivery of the ‘Buyer’s Guide’ at the time of application may assist the consumer in understanding the annuity. 

Although the required disclosures are signed and a free look period is provided for every annuity, often consumers do not exercise their free-look option and instead allegations regarding non-disclosure surface during the contract term. Having written, signed confirmation as evidence that the consumer took receipt of the Buyer’s Guide may assist a producer if faced with these allegations.

HAWAII

BILL NUMBER: SCR 55

AMENDS CODE SECTION: Requesting Legislative Reference Bureau to conduct to conduct a study on the issue of reclassifying variable annuity contracts as insurance rather than securities. See also SR 35

STATUS: Legislative Reference Bureau to report findings at least 20 days prior to start of regular session of 2007.

SUMMARY FROM HAWAII LEGISLATITIVE COMMITTEE ON COMMERCE, CONSUMER PROTECTION & HOUSING:

Your Committee on Consumer Protection & Commerce, to which was referred S.C.R. No. 55 entitled: "SENATE CONCURRENT RESOLUTION REQUESTING THE LEGISLATIVE REFERENCE BUREAU TO CONDUCT A STUDY ON THE ISSUE OF RECLASSIFYING VARIABLE ANNUITY CONTRACTS AS INSURANCE RATHER THAN SECURITIES,"

The purpose of this concurrent resolution is to determine the best method of providing consumers of variable annuity contracts with regulatory protection from unscrupulous sales practices by requesting the Legislative Reference Bureau (LRB) to examine how other states are addressing the issue of reclassifying a variable annuity contract as insurance rather than as a security. The American Council of Life Insurers and National Association of Insurance and Financial Advisors Hawaii supported this measure. State Farm Insurance Companies supported the intent of this measure and requested an amendment. The Insurance Division of the Department of Commerce and Consumer Affairs and LRB commented on this measure. 

Your Committee finds that variable annuity contracts have characteristics of both insurance and securities. They are a tax-deferred investment that typically invests in stock and bond mutual funds. They permit the investor to receive periodic payments from the investment, and provide a death benefit to the beneficiary if the investor dies during the accumulation phase of the contract. These contracts can be unsuitable for certain investors, particularly seniors and those approaching retirement, because of risks such as short-term market movements and steep penalties for early withdrawals. Hawaii currently regulates variable annuity contracts as both insurance and a security. However, several bills were introduced this session to remove these contracts from securities regulation, in part because current regulation is said to be duplicative. This concurrent resolution seeks to examine some of the issues raised by these bills. As affirmed by the record of votes of the members of your Committee on Consumer Protection & Commerce that is attached to this report, your Committee concurs with the intent and purpose of S.C.R. No. 55 and recommends its adoption.

HAWAII has requested a study regarding the reclassification of variable annuities as insurance products and not securities. The legislature notes that the current dual regulation by the state insurance department and the state securities division is inefficient. It will be interesting to read the report as filed by the legislature.

 As background information, The Securities Act of 1933 exempted annuities from federal regulation under the 1933 Act. At the time, traditional declared rate fixed annuities were being sold in the marketplace, the concept of variable annuities had not yet been introduced. Several years later, variable annuities hit the marketplace and the SEC took issue with several life insurance companies issuing the variable annuities alleging the variable annuities should be regulated as federal securities.  

There exists a significant line of US Supreme Court decisions which analyze the federal regulation of variable annuities. Each of these decisions adds an important element to the analysis of why variable annuities are federally regulated as securities. Hawaii’s approach could stir much unrest in the securities market.

While certain individuals and entities have been pushing for securities regulation of index annuities, this legislature is reviewing the State’s declassification of variable annuities as securities. I will be interested to see how this evolves.

BILL NUMBER: SB 2225

AMENDS CODE SECTION: A bill would amend Chapter 431, Hawaii Revised Statutes, by adding a new part to article 10D to be appropriately designated.

STATUS: REFER. TO COMM. ON INSURANCE, FEB 2, 2006

SUMMARY FROM HAWAII LEGISLATURE (SENATE BILL ANALYSIS)

A bill that would require insurers and insurance providers to make reasonable efforts to obtain information from senior (limited 65 and older) consumers prior to annuities transactions; Permits insurance commissioner to consult with securities commissioner; Codifies the failure to make efforts to obtain information as an unfair practice; Follows NAIC model in part.

Suitability legislation for Hawaii reconfirms the importance for producers to recommend products which fit with the client’s needs and wants.  

MICHIGAN

BILL NUMBER: HB 6037  (Also see SB 1361)

AMENDS CODE SECTION: A bill entering into the interstate insurance product regulation compact; and for related purposes.

STATUS: COMM. ON CPH DEFERRED MEASURE, February 27, 2006

SUMMARY FROM MICHIGAN LEGISLATURE (SENATE BILL ANALYSIS)

Many insurance products have evolved to function in a manner similar to the way some investment instruments perform. As such, insurers that offer these products might compete directly with banks and securities firms that sell retirement and estate-planning instruments. While security instruments generally are regulated at the Federal level, insurance products are regulated by individual states. Insurers that sell life insurance and other wealth-protection products, such as annuities and long-term care insurance, may be disadvantaged compared with their competitors in the banking and securities industries because the insurers need to obtain regulatory approval of their products on a state-by-state basis. To address insurers' concerns about getting their products to market in an efficient and speedy manner, some states have joined together to form the Interstate Insurance Product Regulation Compact, which is designed to provide insurers with "one-stop shopping" for multistate product approval. A product approved by the Compact may be sold and marketed in any of the compacting states. Participating states govern the Compact, through the Interstate Insurance Product Regulation Commission and various committees. The Commission creates uniform standards for specific insurance products and serves as a central filing point for approval and review of insurance products. It has been suggested that Michigan become a compacting state by enacting the Compact.

MICHIGAN adopted the Interstate Insurance Product Regulation Compact (the “Compact”). The Compact is an agreement among member states to create a streamlined system of product regulation. The Compact came into existence in March 2004 upon the legislative enactment of two states, Colorado and Utah. The Compact creates a central point of filing, review and approval for insurance products based on national uniform standards with strong consumer protections. It enhances the efficiency and effectiveness of state insurance regulation. Insurance companies are able to get their products in the marketplace faster which is a major obstacle for annuity carriers. The Compact has jurisdiction over four product lines: life insurance, annuities, disability income, and long-term care insurance. The chosen products have a common theme of accumulating and protecting wealth for people.

The Compact became operational for purposes of adopting uniform product standards and for accepting product filings when twenty-six (26) states or, alternatively, states representing greater than forty percent (40%) of the premium volume for life, annuity, disability income and long-term care joined the Compact. In May 2006, the Compact reached both of its threshold goals with Ohio becoming the 26th state to pass legislation joining the Compact and Alaska became the 26th state to sign the Compact into law. When Minnesota joined the Compact as the 27th state, the member states effectively represented 41% of the premium volume. The purpose of the Compact is further discussed in the left hand column.

MICHIGAN

BILL NUMBER: SB 880

AMENDS CODE SECTION: An act to create Chap 41A ("Annuity Recommendation to Senior Consumer") of the Insurance Code regarding the suitability of annuity sales to seniors (65 & older)

STATUS: APPROVED BY GOVERNOR SEPT 29, 2006 FILED WITH SECRETARY OF STATE SEPT 29, 2006

SUMMARY FROM MICHIGAN LEGISLATURE (SENATE BILL ANALYSIS)

The bill follows portions of the NAIC model and would require an insurance producer or insurer to have reasonable grounds to believe that a recommendation to a senior consumer to purchase or exchange an annuity was suitable to the consumer based on his or her financial situation; and require an insurance producer or insurer to make reasonable efforts to obtain a senior consumer's financial information before executing a purchase or exchange of an annuity; and require an insurer to establish and maintain a system to supervise recommendations, designed to achieve compliance with the bill, or assure that such a system was established and maintained; and allow the Commissioner of the Office of Financial and Insurance Services (OFIS) to order an insurer or insurance producer to take corrective action for a senior consumer harmed by a violation of the bill; and specify that compliance with NASD rules would satisfy the bill's requirements regarding the recommendation of variable annuities; and specify situations to which the bill would, and would not, apply.  

MICHIGAN’s adoption of suitability standards reiterates the importance of annuity producers to engage their clients in fact- finding conversations to ensure recommendations of annuities are appropriate for the consumer.

MINNESOTA

BILL NUMBER: SB 3480 (See also NB 3760)

AMENDS CODE SECTION: An act to create Chapter 60A entering into the interstate insurance product regulation compact

STATUS: APPROVED BY GOVERNOR MAY 31, 2006 FILED WITH SECRETARY OF STATE JUNE 1, 2006  

For more information please read MICHIGAN HB 6037 SUMMARY ABOVE OR review www.insurancecompact.org

NEW JERSEY

BILL NUMBER: AB 3040 (see also SB 949)AMENDS CODE SECTION: An act establishing the "Interstate Insurance Product Regulation Compact," and supplementing subtitle 3 of Title 17B of the New Jersey Statutes.

STATUS: REFERRED TO ASSEMBLY FINANCIAL INSTITUTIONS AND INSURANCE COMM. JUNE 19, 2006  

For more information please read MICHIGAN HB 6037 SUMMARY ABOVE OR review www.insurancecompact.org

SOUTH CAROLINA

BILL NUMBER: HB 4994

AMENDS CODE SECTION: An act to add Title 38 establishing the "Interstate Insurance Product Regulation Compact," to South Carolina statutes.

STATUS: REF. TO COMM. OF LABOR, COMMERCE, AND INDUSTRY April 14, 2006  

For more information please read MICHIGAN HB 6037 SUMMARY ABOVE OR review www.insurancecompact.org

SOUTH CAROLINA

BILL NUMBER: SB 967

AMENDS CODE SECTION: An act to add Art. 7 of Chapter 69, Title 38 relating to the suitability of sales of annuities.

STATUS: REF. TO COMM. OF LABOR, COMMERCE, AND INDUSTRY April 19, 2006

SUMMARY BY SOUTH CAROLINA LEGISLATURE:

A bill entitled the “Annuity Investment by Seniors Act” to provide standards and procedures for recommendations to senior consumers to ensure that annuity products for these senior consumers address their insurance and financial needs.

South Carolina proposes to adopt the NAIC Suitability Model for annuity transactions with the age 65 and older restriction. While the NAIC modified it version in March 2006 to exclude the age restriction, it is possible that the legislature will modified its suitability rules to parallel the NAIC’s changes prior to adoption.