New Research Explores Annuity Suitability Monitoring Beyond Current Regulatory Requirements

Aggressive moves by state attorneys general to hold insurance companies responsible for annuity suitability are poised to drive major changes in how the insurance industry approaches this class of products. “Suitability” refers to the determination of whether the terms of a specific annuity product offering are appropriate to a given individual, based on factors such as his or her age, financial and tax status, and desired investment outcome. A recent spate of lawsuits against insurance companies and their brokers for selling what the lawsuits deem “unsuitable” annuities to senior citizens is fueling increased regulatory demands.

New research from TowerGroup finds that insurance companies who proactively evaluate and implement systems for monitoring annuity suitability beyond current regulatory requirements will not only reduce their risk of being on the receiving end of litigation – they will help consumers feel more comfortable with annuity products and enhance the industry’s reputation.

The author of the research is Rachel Alt-Simmons, a senior analyst and the newest member of the TowerGroup Insurance research practice. “Insurers and their distribution partners must find ways to improve the sharing of compliance and suitability information in order to address current challenges,” said Alt-Simmons. “Leveraging business intelligence technologies is one critical way that these organizations can better proactively identify macro trends and risks, allowing them to more effectively service their customers.”

Highlights of the research include:

• To reduce litigation risk, many insurers and broker-dealer firms are rapidly adopting rules proposed by the Financial Industry Regulatory Authority, referred to as the “model law.” They are doing so before these rules are mandated, just as they are “pre-adopting” rules proposed by individual state regulators demanding higher levels of suitability screening. However, the pending rules still leave implementation open to interpretation, which is causing the industry to scramble to figure out to standardize the definition of “suitability.”

• TowerGroup expects that the increase in new offerings like life settlements, and hybrid insurance/securities products such as those indexed to the financial markets, will drive increased regulatory scrutiny and confusion over which agencies hold jurisdiction over which products.

• Although standards in annuity processing will go a long way toward increasing suitability enforcement by cutting down the current chaos of paperwork and manual effort, TowerGroup anticipates that new standards will quickly be pulled apart as insurers demand customization.

• The implementation of traditional business intelligence software solutions is essential to better understand and interpret the behavior of the broker, selling organization, and end consumer. The increased transparency of business processes provides opportunities to mitigate compliance risk.

Prior to joining TowerGroup, Alt-Simmons served as the Director of Business Intelligence for the US Wealth Management Division of Hartford Life. Her expertise includes implementing analytic capabilities throughout organizations, identifying and developing information management and stewardship programs, data warehousing, project/program management, and best practices in IT/business alignment. At TowerGroup, Alt-Simmons covers a broad range of issues related to annuities, retirement plans, mutual funds, college savings plans, and life insurance product lines.