Ten Minutes With

IIPRC Executive Director Frances Arricale

ARC: With thirty-one states having approved the Compact and ten states currently with legislation pending to join the Compact, what efforts/lobbying are being used to encourage enactment?

Arricale: As the Executive Director, I spend part of my time reaching out to  state legislators and state insurance regulators answering questions about the Compact and the operations of the Commission. It is important we inform legislators and regulators that the Compact is an accountable public agency working on behalf of our member states. It is not a private corporation. The Commission is a public agency carrying out the duties and responsibilities as set forth in the laws establishing the Compact itself. We have worked to create transparency in the agency’s operations so our member states and the general public are able to actually see the Commission’s process and progress.

 ARC: Can you give us some examples of what we mean by the Commission’s work being “transparent”?

Arricale: As the agency acting on behalf of our member states, it is important that our members and the public, can participate in and view the Commission’s processes. When the Commission is reviewing and deciding on uniform standards for insurance products, those proposals are available to the public for comment. Our website www.insurancecompact.org includes a system similar to a legislative tracking system which allows the public to track and review what the Commission is considering, as well as directly comment on the proposals. 

Another example of transparency is the Commission’s public records, which include products approved by the Commission, as well as our budgets and audits.  Transparency is significant to the Commission as a means of including the interested parties in the process and being open about the Commission’s work.

ARC: In the past year, the Commission has focused on uniform standards for individual life insurance products and standards for all benefit features added by life insurance riders, endorsement or amendment. What is the focus for 2008?

Arricale: The Commission is currently focusing on the development of standards for individual annuity products.  If you look at our website, you can actually view and track the proposed standards that the Commission is reviewing and considering. Beginning with annuities, the Commission is using a “core approach,” meaning the standards are more umbrella-like instead of specialized to a particular product. When the Commission first adopted standards for individual life insurance products, these standards were more on a product specific basis. Right now the average review time for individual life insurance products is 38 days from filing the product to approval. That is one filing under one of set of standards for one approval in fewer than 60 days that is valid in all Compact member jurisdictions. We have been receiving life insurance product filings since June of 2007.  

ARC: What has been your experience in working with the Commission since becoming the Executive Director? 

Arricale: We are very pleased with the support we have been receiving from our member regulators, legislators, consumers, and the insurance industry, and with the progress we have made to date.  I encourage insurance carriers to file an insurance product with us to see for themselves the ease and convenience of working with the Commission.

We have developed our Compact electronic centralized filing platform on the System for Electronic Rate and Form Filing (SERFF) which enables carriers to have one-stop filing to get products to market quickly and economically. This is accomplished while still maintaining the high-levels of consumer protection as the hallmark of state-based regulation. The Commission has active advisory committees and a standing Legislative Committee all working to move forward the objectives of the Commission. I am very proud of what the Commission has accomplished since our inaugural meeting in June 2006. My past experience in the insurance sector has given me a global perspective and I consider insurance to be a very dynamic industry. The quicker the insurance carriers are able to get products to market, the more choice and savings may be afforded to consumers. The Commission’s ability to affect speed to market for products while holding the high bar on consumer protection is critical to the Commission’s efforts toward financial regulatory modernization.

ARC: For those states that have declined to pass legislation thus far to join the Compact, what do you perceive to be the major objections and how do you respond to those comments?

Arricale: I have had the opportunity to address questions relating to joining the Compact. There has been some objection raised by the plaintiff’s legal bar concerning rights and remedies for consumers. I would note that the Compact Statute itself in Article 16 specifically states that the Compact does not restrict consumer rights and remedies under state insurance laws. Consumers in each state continue to be protected by state insurance market conduct laws and continue to have access to all rights and remedies. If a consumer alleges a cause of action concerning an insurance product approved by the Compact, there is not an obstacle for lawyers and consumers to obtain records or documents from the Commission under our public access procedures. This is again a credit to the transparency that the Commission has built into its process. 

NASAA Past President Director Joseph Borg

Joseph Borg has served twice as NASAA president during his tenure as Director of the Alabama Securities Commission, and has been a public face of state security departments addressing their concerns about fixed annuities and the way they are sold. Director Borg granted us some time recently to answer questions about fixed annuities and insurance agents. 

ARC: You were quoted as saying “In dozens of equity-indexed annuity sales the state has investigated in the past few years insurers have paid the money back, plus 6% interest”. I track index annuity complaints at both state security departments and state insurance departments and can find no record of any of this. Could you provide a public source where these details are available?

Borg: My state, like many states, has an exclusion for annuities underwritten by insurance companies which goes back to the 1956 act, which is why we still don’t regulate true fixed annuities. In Alabama our insurance department refers complaints to us because they have no anti-fraud authority and they have no investigators. They are not in a position to look at point of sale or market conduct type cases.

We take the investment advisor approach and look at complaints as they come in. Typically what happens when we have a complaint is that we contact the customer, look at the customer’s account and then contact the insurance company. As a practical matter every single insurance company involved with one of these complaints in the last few years has said “look we’re not going to argue, we’ll pay back the customer but we don’t want an [administrative] order.” Well, the question is it worth going after the investment advisory concern or do I solve the problem for the customer. And so what happens is there are no records. We get the complaint, we inquire, the insurance company takes care of it – there is no order because there is no case. And the insurance companies have been very good about coming in day one and saying we want to get it fixed.

We have over 20 pending civil suits in my state over index annuities – mostly Allianz products – and I wouldn’t be surprised to see 40 within the next six months because we are seeing volumes of customers that opted out of the class action against Allianz pursuing their own cases.

The way to solve a lot of the problem is put the fiduciary standard on all people selling investment products. 

The insurance companies know we track this. I had an insurance company in yesterday that did a two-hour presentation on how they are redoing their disclosures – and I haven’t brought any cases against them. There have been some complaints and the company has resolved every single one to our satisfaction without us having to open up an investigation file, issue an order, or take other action. The insurance company said they’d take care of it, and they did. So, technically there is no case so there are no records.

The customer prefers that the complaint gets resolved without public records for one simple reason – if they made a mistake they don’t want their kids to find out. Eight out of ten seniors I talk with do not want me to bring a case if I have to let their kids know or if I have to make it public. Why? They tell me it’s because the kids will think they don’t know how to handle their affairs and put them in a nursing home. I get that constantly.

We’re trying to get them their money back, but I’ve had some say if you need to go public with this then I don’t want you to do a thing, I’d rather take the loss. And I think there are a lot of folks that feel this way. We try to get the consumers their money back and usually the insurance companies will give them their money back and 6% interest. That’s why there aren’t a whole lot of public records on these.

The SEC left the definition of “investment advisor” very vague, the states have left it vague, is there a way for the NAIC and the NASAA and all the folks to work together to create a safe harbor on what an insurance agent can say?

Borg: It’s not that they need a safe harbor. Let’s back up a little bit. The problem with the index annuity is not with the policy or the disclosures – in the Allianz MasterDex 10 it clearly says if you ever, under any circumstances, take the money out at anytime without annuitizing you’re not going to get your bonus and you’re not going to get your full money. The problem is at the kitchen table sitting across from that agent when he says “At the end of ten years you’ll have $241,000 of annuitized value” and it stops there. What was said may be technically correct but what the customer heard was “at the end of ten years I’ve got $241,000”. The agents know that’s the impression they left. There is no doubt in my mind because that is where the complaints come from.

If the insurance regulators have passed on a product I don’t have jurisdiction. I may not like the  product, but I’m not going to argue with it because it isn’t my area of jurisdiction. Likewise, I don’t have a problem with what is in the disclosure. The problem is all the advertisements and all the seminars and all the discussion is “trust me and don’t worry about the documents, I’ll take care of you”. And the agent isn’t telling them to get that $241,000 not only must you leave it there for ten years but you must take the money out over the next 10 years, and you can only take out 10% a year for the next ten years. If consumers knew they were really locked up for twenty years they would start to drift away from the product, and so that end of the conversation is left unsaid.

The way to fix it is to give the agents sufficient training so that when the agent is sitting at the kitchen table the agent is giving complete and full disclosure. Not in writing, but in the sense that the consumer understands they’re starting out with a cash surrender value of 87% because the agent has to get paid and the consumer understands they have to leave it in for ten years.

What really galls me about the MasterDex 10 product is for the folks that are buying it to leave the money to their kids they find out at death that the estate has to annuitize the annuity to get full value – they’re going to take the cash. It would be interesting to take Allianz’s financials and look at the profit they made from products that made it to maturity and at the profit from folks that cashed in early. How much do you want to bet that Allianz makes more profit on the policies that are surrendered early?

When most regulators talk to me about why index annuities are bad they seem to describe two-tier annuities, but 98% of the annuity products on the market don’t require annuitization.

Borg: There are a lot of good index annuities out there. The trouble is regulators always get the worst case scenario. I recently saw an annuity presentation that spelled out the worst case of what the consumer would get in years one, five and ten and we felt most customers would clearly understand this, so if they still wanted the product it was fine because the consumer wanted what they were getting.

Would NASAA or the individual states consider approving index annuity sales materials, scripts or consumer presentations?

Borg: The first place it needs to go is to the insurance commissioners, and I would hope NAIC would engage us and FINRA, and I think together it could be done. Certainly the agent committee looking at this whole area of designations would have an interest in this. I think NASAA would be open to discussion on this. 

If you get rid of products that did not require annuitization and paid full account value at death would that eliminate a lot of the problem?

Borg: I think that’s correct. I’m not against index annuities. I think they could be improved, and MasterDex 10 is one of the worse ones. 

All the written disclosures in the world don’t work. It’s a matter of sales practices at the kitchen table and if consumers don’t understand it, or we see the same complaints with the same products, the agent isn’t getting it right. The way to solve a lot of the problem is put the fiduciary standard on all people selling investment products. So an agent won’t be able to tell a consumer “No, you’re not paying me for this annuity, the insurance company pays me,” because the agent would know they had breeched a fiduciary standard.

Because annuities are more of a financial instrument than other insurance products would it make sense for state securities departments to regulate all annuities instead of insurance departments?

Borg: Probably not. There is a fundamental difference between a fixed annuity and a public company stock or a mutual fund, because a lot has to do with the safety and soundness of the insurance company. Securities regulators do not have a clue how to examine an insurance company for safety and soundness. 

It really has to be a joint regulatory issue. Someone has to watch the insurance company to ensure they will be there 50 or 100 years from now to deliver on their promises, but somebody also has to watch the point of sale and I’m not too sure if under the current system any one regulator can do both functions safely. 

I don’t see insurance and securities departments being combined because one philosophy or the other tends to dominate, and where insurance regulators are more concerned about safety and soundness of the insurance company – when they hear “insurance fraud” they are thinking about someone defrauding the insurance company, the securities regulator is more driven by issues of consumer protection from investment companies.

With annuity products getting even more complicated as they adjust to the needs of the babyboomers I think you need to focus on both insurance company soundness and what happens across the kitchen table. And that is better served by having two regulators.

How would you tell an agent to stay out of trouble with your department?

Borg: I would say to be completely honest with the consumer about fees, costs and make sure the customer is really hearing what you are saying about the product. If the agent gets the mindset that their job is to protect the customer’s future and not simply make a sale, they will do the right thing.

North Dakota Commissioner Jim Poolman(Summer 2007)
Jim Poolman is currently serving in his second term as North Dakota Insurance Commissioner. He has an active role in the NAIC where he sits on and chairs several committees and working groups, including the National Insurance Producer Registry (NIPR) and System of Electronic Rate and Form Filing (SERFF) Boards of Directors. Commissioner Jim Poolman is part of an Annuity Working Group formed last year that brings together state insurance and security regulators, as well as NASD, to evaluate regulatory standards for annuities in a number of areas. ARC asked Commissioner Poolman for an update.

Do you foresee greater cooperation or consolidation in the regulatory arena?

Poolman: I think more cooperation is going to be needed to effectively regulate all of the products across the spectrum, whether they are insurance products or investment products.  A few of us insurance regulators have been working closely with the NASD on annuity issues specifically related to suitability, adequate disclosure and other consumer protection issues and I’m sure that will continue.

Do you feel insurance carriers are getting better on consumer suitability issues?

Poolman: I think some insurance carriers are getting better because some carriers have been forced to get better due to regulatory action, but we are still a long ways away from producers that sell these products having the adequate knowledge of the products they are selling, and companies creating products that are understandable.

What could carriers be doing better?

Poolman: Insurance Carriers need to better train their producers on the specifics of their products.  Ethics training and suitability training are incredibly important for agents.  These are areas that I would like to see addressed, sooner rather than later.

Are additional inter-industry roundtables or similar activities being planned?

Poolman: I believe so. We have a working group that has been created in conjunction with the NASD and leading regulators that have an interest in annuities issues that will continue to meet and develop consumer protection standards.

Should the NASD name change to the Financial Industry Regulatory Authority give state insurance departments concern?

Poolman: No, we’ll continue to work together as we have. FINRA and the state insurance departments regulate different products, and we will continue to cooperate to do what’s best for consumers.

IMSA General Counsel Donald Walters (Spring 2007)
For nearly a decade the Insurance Marketplace Standards Association (IMSA) has had a  mission of being the premier market conduct and compliance standards-setting organization serving the life insurance marketplace, and encouraging life insurance companies to be fair, honest, and open in the way they advertise, sell and service their products. With greater regulatory attention being given to annuity suitability we thought it would be a good time to speak with Donald Walters, Secretary and General Counsel for IMSA and ask for an update.

In the fixed annuity arena, what does IMSA see as market conduct challenges?

Walters: We began an entire review of our standards in September 2005 and we published a new set of standards for IMSA in September 2006, and within those standards were ones specifically related to index annuities. The overall standards are scheduled to become effective January 2008; however, the index annuity standards became effective last October, so we are already starting to see a change in insurer practices with regard to suitability, product disclosure, and producer training relating to index annuities offered by member companies.

Another issue we’re continuing to look at is the types of disclosures provided by insurers to consumers and whether the disclosure is written in a way that is easily understood. We’re also looking at the question of replacement activity and whether there are better ways for companies to monitor replacement activity.

I’m aware of carriers that have systems in place to “red flag” transfers in or out and annuities that have been in force less than 5 years, is this the type of monitoring you’re talking about?

Walters: Yes, we’re also seeing concerted efforts by carriers to conserve that business.

Do you see a broadening acceptance of IMSA standards by state insurance departments?

Walters: Yes, we continue to work with state insurance departments to educate commissioners and senior staff regarding our standards. Our objective is to educate regulators on the nuances and rigors of the IMSA process, because we believe education will build acceptance.

IMSA Companies had lower complaints and were more cost efficient than nonmembers

Could you talk about your study on voluntary certification programs?

Walters: Georgia State University conducted a study in 2006 titled The Economic Consequences Of Voluntary Quality Certification Programs: The Case Of The Insurance Marketplace Standards Association. Working closely with NAIC to obtain information from Annual Statements, the research attempted to quantify the extent to which the IMSA qualification process produces tangible value to insurers. What the Georgia State University researchers found was that IMSA companies had (A.M) Best Ratings almost two levels higher than non-IMSA members, IMSA companies’ return on equity averaged 4% higher, they were 8% more cost efficient, had 4% lower lapse ratios, and had fewer complaints than nonmembers and lower legal fees and settlement expenses than nonmembers.

We’re not suggesting causality between IMSA membership and these results, but the data indicates that leading companies that operate their companies in a best practices manner often choose to become IMSA members.

Do you see a need for a universal standardized annuity disclosure form?

We have a project underway to explore whether we could develop a standardized suitability form for fixed annuities that would capture the essential elements we believe a producer needs to determine whether a product is suitable. I think part of the challenge lies in creating the appropriate nexus between establishing a standardized format while maintaining flexibility to accommodate the variety of product features that exist in the marketplace.

What reaction did you get to the IMSA Indexed Annuity Standards proposed last year?

The reaction from the industry has been extremely favorable. It is interesting to note that no one company was doing all of the standards we outlined, so everybody had to “step up the game” and they have been willing to do so. I think it speaks well of IMSA-qualified companies because they are trying to do the right thing.

We’re also working with the regulatory community to help them get a better understanding of why these standards were developed and their potential impact in the marketplace. We also are trying to work with regulators from a public policy perspective to take actions to recognize these standards as a means to encourage insurers to abide by them. We’ve also seen strong interest from insurers that were not IMSA members in adopting these standards and becoming IMSA members.

What is next for IMSA?

There are many interesting areas. One current question is are there ways for insurers to conduct electronic or ‘app-less’ processing of annuity business while continuing to comply with the laws and regulations? We are aware there are some companies that are leading edge in this area and we’re consulting with those companies to see what their practices may be so we can improve the standards of the overall marketplace.

We’re always attempting to enhance our value proposition for our companies. One of our projects is something we call Compliance Solutions, which is a periodic publication of guidance to suggest various ways companies could address different compliance issues. We evaluate these Compliance Solutions and consider whether the most effective solutions should be incorporated into IMSA standards.

We’re trying to ensure that IMSA standards reflect what is taking place in the marketplace and if there is an issue that is of concern to companies or regulators that we can examine ways to address those issues. If there are innovative techniques that companies are using to try to address compliance issues, disclosure, and other areas, we want to make sure we cull those best practices and consider introducing them formally to our members.

Iowa was a leader in getting regulators to look at index annuity issues in 2006. We were able to sit down with Iowa Insurance Commissioner Susan Voss and ask a few questions on new consumer awareness programs, what the Interstate Compact means and what are some key issues facing annuities.

Voss: Yes, we are in the middle of doing the rulemaking on expanding CE that will mean 4 hours of new required agent education specifically on index annuities and requiring the terminology in company marketing materials to say fixed index annuity rather than equity index annuity, which we feel does a better job of describing the annuity for consumers.

Speaking of consumers, what has been the response to Iowa’s new $AIF (Seniors Against Investment Fraud) Program?

When you look at the annuity world is there any one issue that concerns you more than the others?

Voss: A concern is some of the attitudes towards index annuities. We’ve done so much work with the Best Practices, and I think IMSA’s done a really good job of stepping up to the plate on creating Indexed Annuity Standards, and I think the attention of the NAIC “A” Committee on the suitability change to the models were good, and I give the industry credit, the major players are embracing these changes and that’s a really good sign.

Index annuities are not part of the axis of evil

I also have to give a lot of credit to Commissioner Poolman in North Dakota and Jim Mumford (Iowa Deputy Insurance Commissioner) that are trying to meet with the other regulators with the overall understanding that although we all have our own areas to regulate we can really work together.

On the negative side, once again there was an article in the Wall Street Journal today talking badly about indexed annuities, and yes, we know they are not for everybody, but mutual funds aren’t for everybody, stocks aren’t for everybody...I am really amazed where the media’s focus is on what index annuities don’t do when clearly the objective should be to say that there are some things that are good for some people and other things that are good for other people, and we need to take a more global look at the concepts of investments and retirement. Index annuities are not part of the axis of evil. On index annuities the people that seem to think this is a really bad product seem to be the ones selling in another part of the market and competing.

We’ve been trying to work on a joint statement between the NASD, NASAA and NAIC, but it’s not going as smoothly as we want. The bottom line should be “what’s good for the consumer”. As long as somebody is regulating and regulating it well, why do I care whether it is NAIC or NASD or NASAA?

I think there are some turf issues involved...but get over it. The important thing is consumers need to feel they can go to their regulator for help.

On the regulatory side, after the Interstate Insurance Compact is up and running, do you see it making your department’s task easier?

Voss: The plan is to get the Compact up and running in January 2007, and even though in Iowa we’ve always had a very fast turnaround, I think it will help. As an aside, Iowa is now telling companies they must file everything electronically, no more paper, and I think that is really going to make a difference.

Our staff will be able to focus on more analysis issues.  Clearly, the trend is away from hiring more staff. So, we need to utilize our staff in ways that truly benefit consumers and the industry.  Handling less paper and focusing on real issues is the way to go.

From your perspective as chairperson of NAIC D committee what issue looms largest in annuity world?

Voss: The biggest item that has come to my attention is states understanding index annuities. As you know, one of the things we’ve tried to do in the last few NAIC meetings is to educate regulators on what this product is, and also to get states to collaborate with the states that really understand the product. If a state is going to do a Market Conduct Exam in a carrier and their main reason for the exam is because they really don’t understand index annuities, I’m not sure if that really benefits anyone? But if a state wants to learn more about index annuities, we could send our staff in, or Minnesota could send their staff in; we’re happy to help.

It’s funny, when I became Commissioner and moved into the office the previous Commissioner had left a lot of stuff, and one of the stacks contained a whole collection of NAIC Bulletins, and one of the bulletins from the bottom of the stack was on how we should treat index annuities, and here it is a decade later and we’re again asking the same questions. But hopefully five years from now we’ll look back and all the concern over index annuities will seem like nothing.