The practice of unnecessarily replacing an existing insurance policy or annuity contract with a new policy from the same or a different carrier to generate a new commission for the producer is a violation of state replacement laws. To further curb replacement rules abuse, on March 28, 2010, the National Association of Insurance Commissioners (NAIC) adopted a new comprehensive regulation, Model #245, which is now before the various state legislatures for consideration.
The following activities would constitute an annuity replacement under current states' laws: 1. Surrendering an old annuity and selling a new one in its place. 2. Financing the purchase of a new policy from the cash accumulations of the old contract, while keeping the old policy in force.
Scope of New Regulations
The new NAIC replacement rules model covers several important areas. Agents will be required to obtain additional customer information and perform a more thorough needs analysis. Insurers must enhance current oversight to assure compliance with stricter suitability guidelines. For the specified period after the sale, insurers must continue to monitor for any suspicious borrowing from the new annuity to spot any replacement violation. Finally, the NAIC model calls for four hours of continuing education industry training for producers before they are allowed to sell annuities.
Customer suitability for a particular investment product has been a focal point of regulation in the securities industry for many years. Insurers that also sell mutual funds and variable annuity products have already adopted tougher suitability guidelines in compliance with FINRA, the Financial Industry Regulatory Authority. The new NAIC model regulations, if passed into law by the states, will raise the bar of regulation and positively impact replacement abuse.