Associations & Industry Groups

Strength In Unity

Understanding California’s SB 263

by Melissa Bova

Melissa Bova is Vice President, State Affairs, with Finseca. Visit www.finseca.org.

When it comes to financial security for all, having a united voice is a big deal. Just look at what happened with SB 263 in California.

In 2023, California introduced legislation that would have established a standard for life insurance and annuity sales that would have gone even further than a similar and very problematic standard in New York (Reg. 187). The introduction of this legislation would have been the potential beginning of a patchwork of laws and regulations in different states across the country, creating multiple standards for producers depending on the client’s location and hindering access to advice and products.

The bill, as introduced, would have:

  • Eliminated all forms of non-cash compensation, including health and retirement benefits,
  • Created a required list of 15 factors that must be collected from the consumer, and if the financial security professional is not able to collect the information or the consumer does not provide it, you cannot issue a recommendation,
  • Held a financial security professional to a higher standard of care than a client who purchases a product directly from a carrier,
  • Required multiple disclosure requirements over the course of the process and would set an incredibly high threshold to recommend a product replacement, and
  • Potentially, making it impossible for a commission-based sale.

Strong Industry Opposition

A coalition led by the Association of California Life & Health Insurance Carriers (ACLHIC), which consisted of Finseca, ACLI, NAIFA, IRI, NAFA, FACC, and the Big I, united in strong opposition to the introduced legislation.

Thanks to the work of this coalition, the legislation was amended throughout a year-long legislative process to align with the NAIC Best Interest Standard for Annuities. Governor Gavin Newsom recently signed SB 263, and California joined 44 other states in adopting the NAIC standard.

Let’s take a look at why that is so important.

Over 80 years ago, Congress gave states the responsibility to regulate insurance, and insurance regulators from across the country have been working together and convening under the umbrella of the National Association of Insurance Commissioners (NAIC) to consistently prioritize the interests of consumers when regulating all facets of insurance.

The NAIC is made up of regulators from every single state, reflecting a broad political spectrum, and its work requires bi-partisan support to ensure policies can be implemented broadly in individual states around the country. That is why the work the NAIC did in developing the Suitability in Annuity in Transactions Model Regulation (#275) is so significant.

In response to the 2016 proposed Fiduciary Rule from the federal government, a rule that was struck down by the U.S. Court of Appeals for the Fifth Circuit, the NAIC began work on a best-interest standard that would apply to annuities. This work took time and much debate, yet the NAIC remained steadfast in its commitment to formulating a standard consistent with the Securities and Exchange Commission’s (SEC) Reg. BI. This standard preserves consumer choice by accommodating both fee and commission-based products while upholding a rigorous level of consumer protection.

The work for a model regulation doesn’t end at the NAIC, though. Because the NAIC may overwhelmingly adopt a regulation, it is up to each state to go through the process of adopting the model regulation in some form in their jurisdiction...

Model regulations are generally rare within the NAIC because they need broad support in its passage. This is why the NAIC more commonly develops model bulletins or guidance as opposed to model regulation. In the case of a model regulation, the regulation must first receive a majority vote of the task force or working group where it was initially developed. The regulation then must receive at least two-thirds support from its parent (letter) committee. Upon achieving that vote, the regulation must go before the plenary committee—which comprises the full NAIC membership—where it must also receive a two-thirds vote. This process tends to take years from beginning to end, and after that work, Model Regulation 275 was adopted in 2020 with only one opposing vote.

It’s Up To Each State

The work for a model regulation doesn’t end at the NAIC, though. Because the NAIC may overwhelmingly adopt a regulation, it is up to each state to go through the process of adopting the model regulation in some form in their jurisdiction. This process varies, as each state tends to have its own process for adoption. Some states may be able to undergo a regulatory adoption, while others are required to introduce legislation and go through the entire legislative process. Still, others have to introduce legislation, pass legislation, and then go through a regulatory adoption process afterward. These processes allow for input, changes, and replacement of language—similar to any other issue.

Holistic financial planners are licensed in multiple states across the country, and many are licensed in all 50 states. Can you imagine the difficulty of operating if you are required to follow 50 different laws and regulations depending on where a transaction occurs?

Let’s look at an example, New York, and the impact of Reg. 187, a standard different than 49 other states. Data reported by Life Annuity Specialist showed a decline in the number of people covered by individual life insurance. For example, in 2021, the new policy count in New York stood at 362,207, down 15% from the 2018 total, the year before the rule took effect. But, over the same period, the policy count nationally increased by 3 percent. Further, from 2019 to 2021, life insurance premiums from individuals climbed 11.5% across the United States but only 3.6% in New York, based on data from S&P Capital IQ Pro. Meanwhile, over the same period, retail annuity premiums rose 8.9% nationwide but dropped 4.2% in New York.

If you talk to anyone licensed in New York, operating is more difficult, and product availability has dropped. There is no question that New Yorkers have been less served since this different standard took effect. Imagine if there were 49 other variations of that.

This is why the NAIC Best Interest Standard for Annuities is remarkable. It shows the dedication of the NAIC, individuals, state regulators, and the industry to protect consumers while maintaining access to advice. The standard has been adopted by 45 states, promoting consistency and compliance. It spans across political ideologies, upholding states’ authority to regulate these products and safeguarding consumers. Again, California’s efforts exemplify how collaboration between industry and regulators can lead to financial security for everyone.

 

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