Responding to the Demands of Evolving Annuity Suitability Standards

Michelle HolmesDirector, Minot ComplianceING

2009 ACLI Legal and Compliance Sections Meeting, Boston, MA

Carla StrauchDirector, Insurance Compliance Thrivent Financial for Lutherans

Agenda

2

Survey Responses

Forms and Tools

Hot Topics (as time permits)

Survey Responses

3

Survey Responses

Forms and Tools

Hot Topics (as time permits)

Annuity Suitability Model Adoption

4

Comments Noted on Survey:

“Other”: All states-- it complies with the model and any other state laws/regulations regarding suitability. “Other”: Implemented across the board, even in states with no regulations.

0

1

2

3

4

5

6

7

Captive 1 7 0

Independent 3 7 2

Model States OnlyAll States Except

Those with Conflicting Regulations

Other

Controls: Seniors vs. Non-Seniors

5

0

1

2

3

4

5

6

7

8

9

10

Yes 2 2

No 6 10

Captive Independent

Comments Noted on Survey:

Senior sales receive a heightened suitability review; non-senior sales receive a heightened review if there are flags. Suitability profile forms are collected at all ages for Fixed and Fixed Index annuity sales through IMOs. Annuitants age

65+ are run through an exceptions database to identify any red flags indicating a need for escalated review.

Additional forms used with seniors. Calls to some seniors. Same process but some of the controls differ for senior applicants.

Routine Client Contact With Review

6

0

1

2

3

4

5

6

7

8

9

10

Yes 1 2

No 7 10

Captive Independent

Comments Noted on Survey: “No”: Producers are contacted. “Yes”: Routine contact for seniors but not routine for other ages. “Yes”: We use post-issue LIMRA survey for all non-group deferred fixed annuity contracts.

Non-Senior Fixed Deferred Reviewed

7

0

2

4

6

8

10

12

14

16

18

20

Captive 0 1 20 6

Independent 1 1 1 5

5 % 10 % 20 % 100 %

Comments Noted on Survey: No difference in process for seniors vs. non-seniors. Up to 50% of sales subject to review by the suitability team. 100% of captive except those who opt out. We don’t track the percentage reviewed by BDs when a registered producer makes the sale. For independent producers, suitability is delegated to the banks and BDs, and have monitoring procedures in place.

Senior Fixed Deferred Reviewed

8

0

1

2

3

4

5

6

Captive 1 1 6

Independent 1 1 6

10 % 20 % 100 %

Comments Noted on Survey:

100% captive except for those who opt out. We don't track the percentage reviewed by BDs when a registered producer makes the sale. 100% go through the automated Red Flag review, approximately 50% are escalated for additional review by

Compliance Team.

Use of Fixed Product Disclosure (ACLI)

9

0

1

2

3

4

5

6

7

Captive 4 3

Independent 7 6

Yes No

Comments Noted on Survey:

No: Strongly suggested; perhaps not required. Yes: We have our own product disclosure with required state variations (e.g., NJ).

Use of Variable Product Disclosure (ACLI)

10

0

2

4

6

8

10

12

Captive 2 4

Independent 1 11

Yes No

Comments Noted on Survey:

No, we have our own disclosures for associated registered reps who only sell nonproprietary variable products. Each issuer also has its own product-specific disclosure, none of which are the ACLI templates.

Currently not offering new variable annuity contracts. The variable annuity product disclosure follows FINRA guidance.

Area Responsible for Suitability Reviews

11

0

1

2

3

4

5

6

7

8

Captive 6 4 2 3 0

Independent 5 8 1 2 2

Operations/ Home Office

Law or Compliance

Field Supervisors

Automated Suitability System

Other

Comments Noted on Survey:

Other: Suitability review is delegated to the outside firm. At this time, we are only conducting suitability reviews for one firm because the firm informed us that they had no plans on reviewing fixed annuity suitability.

Other: Third party for select bank sales.

Trend Reporting: Board/ Senior Management

12

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2

3

4

5

6

7

Captive 5 3

Independent 5 7

Yes No

Comments Noted on Survey:

Volume reviewed, decline rates - quarterly reporting. Updates based on significant state activities and trends. No Board review. Provided in quarterly report to Business Unit heads. Certain information is provided to Senior Management; however not to the Board. We provide an annual summary regarding certification response trends of the various BD respondents to the annual

suitability certifications. Population, sample, number of potential red flags: Age over 75, initial consideration > 50% of liquid net worth,

replacement involved, missing information on suitability forms, customer did not provide information, contract held for shorter period than surrender schedule, low income, policy owner needs funds for emergencies, etc.

Trend Reporting: Field Supervisors

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0

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2

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5

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7

8

Captive 2 6

Independent 1 8

Yes No

Comments Noted on Survey:

No: Currently monitor at home office level. Volume is not high enough in any channel to discern reliable trending. No: Managers receive, field supervisors do not. Yes: Comments apply to variable annuity, only. Field supervisors develop information regarding trends based on

exceptions flagged by the broker dealer. Yes: Provide updates on state activity to everyone via intranet, and IMO management on ad hoc basis only if there is a

trend within their group.

One Suitability Form Used in All States

14

0

1

2

3

4

5

6

7

8

Captive 7 1

Independent 8 2

One Form (generally)Multiple Versions (for differing

states)

Comments Noted on Survey:

“One Form” Comment: Although there are separate forms for our fixed and variable products, there is only one version of the form for each product.

“Multiple Form” Comment: NJ.

Willingness to Share Suitability Form

15

0

1

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3

4

5

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7

8

Captive 4 4

Independent 8 1

Yes No

Comments Noted on Survey:

We have enclosed a copy of the fixed annuity Suitability Profile. The profile is to be completed and submitted with each new fixed annuity application.

Willingness to Share Other Tools

16

0

1

2

3

4

5

6

7

Captive 2 6

Independent 2 7

Yes No

Top Challenges: Most Votes by Category

17

Top Five Challenges

# Votes

Having the resources to get the job done 12

Having the data needed to see producer and company trends

12

Ensuring quality suitability reviews 10

Managing state variations 9

Having effective senior management/board reporting

9

Having effective compliance oversight 7

Having the controls to manage work delegated to third parties

5

Field supervision of individual producers 4

Other 1

0

2

4

6

8

10

12

Comments Noted on Survey:

None of these stand out as a particular challenge.

Top Challenges: Based on #1 Vote

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0

0.5

1

1.5

2

2.5

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3.5

4

# 1 Vote 2 2 4 3

Having the resources to get the job done

Ensuring quality suitability review s

Managing state variations

Having effective compliance oversight

Top Challenges: Based on #1-#3 Vote

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0

2

4

6

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10

12

Votes 1-3 12 6 7 6

Having the resources to get the job done

Having data to see producer/ company

trends

Ensuring quality suitability review s

Managing state variations

Timing of Suitability Determination

20

0

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2

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4

5

6

7

Captive 7 0 1

Independent 6 1 1

Pre-issue Post-issue Both

Comments Noted on Survey:

Both: Suitability review for our variable products is completed pre-issue. Suitability review of fixed annuity product applications is currently conducted post-issue. We are developing plans to move some, if not all, reviews to be completed on a pre-issue basis.

Collection of Suitability Data: 403b/457/401k

21

0

0.5

1

1.5

2

2.5

3

3.5

4

Captive 4 3 1

Independent 2 4 0

Yes No Other

Comments Noted on Survey:

Yes: 457 are individual sales and follow the same suitability process. Other: 401K sales are exclusively group sales and follow a separate suitability protocol.

Annuity Replacement: Comparative Data

22

0

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8

Captive 6 2

Independent 3 8

Yes No

Comments Noted on Survey (Yes Replies):

Variable annuities only when sold by associated registered reps.

It depends on the situation. Additional information may be requested.

The company is in the process of applying a side-by-side comparison for all replacements in all states.

There are three states in which the side-by-side comparison forms are already required.

For internals always. Externals, difficult to get information.

Comparative data for fixed annuities is provided in states which require the comparative information. Comparative data is provided for all variable annuity sales.

A form used provides the necessary information which is required in order to determine if a switch is advantageous to

the customer. The suitability form also offers an open-ended section so the rep can provide comments on the reason for the transaction.

We may ask for this on an exception bases if we note a possible trend.

Use of Automated Suitability System

23

0

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7

8

9

Captive 6 3

Independent 4 9

Yes No

Comments Regarding Responses:

Four companies indicated they use an automated suitability system for 100% of sales. Four companies provided information regarding the percent flagged for a manual review: 77%, 20%, 15%, 10%. One “no” response indicated “fixed products.” One “no” response indicated the company was in the process of developing red flag reports.

Forms and Tools

24

Survey Responses

Forms and Tools

Hot Topics (as time permits)

Hot Topics

25

Survey Responses

Forms and Tools

Hot Topics (as time permits)

Questions

2009 ACLI Legal and Compliance Sections Meeting, Boston, MA

Reminder: See program binder/notebook for samples of forms and tools shared by survey respondents.