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OLDWICK, N.J.–(BUSINESS WIRE)–AM Best expects changes to the Suitability in Annuity Transactions Model Regulation (Reg 275) to be credit neutral to U.S. life/annuity writers in the long term; however, implementation is likely to present challenges due to increased compliance training.

The NAIC Executive (EX) Committee and Plenary recently adopted much-anticipated revisions to Reg 275, which establishes procedures to ensure that producers act in the best interest of consumers when recommending annuities. A new Best’s Commentary, titled, “NAIC Suitability Rules: Credit Neutral in Long Term, Process Challenges in Short Term,” notes that the new regulation adds required disclosure forms for producers and consumers to complete. Producers must disclose products they are licensed to sell, from what companies they can sell and how they are being paid. Consumers must disclose if they provided limited or no information required by the regulation.

In addition, consumers must disclose if they purchased an annuity that was not based on a producer recommendation. Reg 275 requires producers to have adequate product knowledge when recommending annuities, and that insurers establish supervision systems to track compliance with the designated roles of producers. As with prior versions of suitability regulations, Reg 275 does not apply to direct-to-consumer transactions, ERISA-covered plans (401(k), 403(b), etc., non-qualified deferred compensation plans, injury settlements or prepaid funeral plans.

Reg 275 requires producers to assess consumer needs and objectives by evaluating the consumer’s financial situation, insurance needs, financial objectives, liquidity needs, risk tolerance and tax status. The availability of as much information as possible should improve producer-consumer relationships and increase the transparency of sales transactions. Reg 275 includes disclosure requirements in the event consumers provide limited information, in which case they could lose certain protections provided by the regulation. Furthermore, disclosure is required if a consumer buys an annuity that was not based on a producer recommendation.

States can now begin the process of adopting Reg 275 as it is or with amendments. While the disclosures will increase transparency, insurers must closely monitor these for accuracy. In addition, there is some flexibility on the producer disclosure form depending on the business model of producers. Reg 275 may not be adopted consistently across states, leading to further differences in what eventually does get approved by states. In addition, timing for state approvals will vary depending on state legislature scheduling.

To access the full copy of this commentary, please visit

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