Oregon Annuity Best Interest Standard

Annuity sales in Oregon: the best interest standard

An annuity is often the largest single purchase a retiree makes, and the features that make it useful (surrender periods, riders, indexed crediting, guaranteed income) also make it easy to sell to the wrong person. Oregon regulates annuity recommendations under a best interest standard.

Suitability in the sale of annuities (ORS 743.262; OAR 836-080-0170 to 0190)

Oregon’s annuity sales standard is ORS 743.262, operative January 1, 2024. It is based on the NAIC’s best interest revision of its annuity suitability model regulation, and the Director’s rules at OAR 836-080-0170 to 836-080-0190 implement it.

When it applies

The standard applies to any sale or recommendation of an annuity. A recommendation is advice a producer intends as an inducement to buy, exchange or replace an annuity, or advice that results in one. General communications to the public, general educational material, customer service and product brochures are not recommendations.

It does not apply to a direct-response solicitation where no recommendation is made based on the consumer’s information, or to annuities that fund:

• ERISA employee benefit plans and employer-maintained 401(a), 401(k), 403(b), SEP and SIMPLE plans
• Governmental or church plans, and section 457 deferred compensation plans
• Nonqualified deferred compensation arrangements
• Settlements of personal injury litigation or other claims (structured settlements)
• Formal prepaid funeral contracts

The best interest obligation

When recommending an annuity, a producer must act in the consumer’s best interest under the circumstances known at the time of the recommendation, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s.

The producer meets that obligation by meeting four component obligations:

1. Care
2. Disclosure
3. Conflict of interest
4. Documentation

1. The care obligation

The producer must use reasonable skill, diligence and care to:

• Know the consumer’s financial situation, insurance needs and financial objectives
• Understand the options available to recommend, after a reasonable inquiry
• Have a reasonable basis to believe the recommended option effectively addresses the consumer’s situation, needs and objectives, and that the consumer will benefit from features of the annuity such as annuitization, death or living benefits
• Communicate the basis for the recommendation to the consumer

Before recommending, the producer must make reasonable efforts to obtain the consumer’s consumer profile information. At a minimum, that includes:

• Age and annual income
• Financial situation and needs, including debts and other obligations
• Financial experience
• Insurance needs and financial objectives
• Intended use of the annuity
• Financial time horizon
• Existing assets, including investment, annuity and insurance holdings
• Liquidity needs and liquid net worth
• Risk tolerance, including willingness to accept non-guaranteed elements
• Financial resources for funding the annuity
• Tax status

For an exchange or replacement, the producer must consider the whole transaction, including whether the consumer will:

• Pay a surrender charge, start a new surrender period, lose existing death, living or other benefits, or pay higher fees or rider charges
• Substantially benefit from the replacement product over its life, compared with the existing annuity
• Have had another annuity exchange or replacement, particularly within the preceding 60 months

The care obligation does not create a fiduciary relationship, does not require recommending the annuity with the lowest compensation, and does not require the producer to hold a securities license unless the producer is giving securities advice.

2. The disclosure obligation

Before recommending or selling an annuity, the producer must prominently disclose, on a separate form:

• The producer’s role in the transaction and relationship with the consumer
• Which products the producer is licensed and authorized to sell, such as fixed, fixed indexed and variable annuities, life insurance, mutual funds, stocks, bonds or certificates of deposit
• Whether the producer sells for one insurer, two or more insurers, or two or more insurers while under a primary contract with one
• The sources and types of compensation the producer will receive, including whether it is a commission or a fee for advice
• The consumer’s right to request more information about that compensation, including a reasonable estimate of the amount on request

The producer must also have a reasonable basis to believe the consumer was informed of the annuity’s features, including potential tax penalties, the surrender period and charges, annual, mortality and expense and advisory fees, rider features and charges, limits on interest returns, non-guaranteed elements, and market risk.

3. The conflict of interest obligation

The producer must identify and avoid, or reasonably manage and disclose, any material conflict of interest, including one arising from an ownership interest. A material conflict of interest is a financial interest in the sale that a reasonable person would expect to influence the impartiality of the recommendation. Ordinary cash and non-cash compensation is handled by the disclosure obligation rather than treated as a material conflict.

4. The documentation obligation

At the time of the recommendation or sale, the producer must:

• Record in writing the substance of the recommendation and the basis for it
• Obtain a signed statement on a separate form if the consumer refuses to provide consumer profile information, acknowledging the refusal and its consequences
• Obtain a signed statement if the consumer buys an annuity that was not recommended, acknowledging that it was not recommended

A producer has no best interest obligation when no recommendation was made, when the recommendation rested on materially inaccurate information from the consumer, or when the consumer refused to provide profile information and bought an annuity the producer did not recommend.

Sidenote

Know this...

Giving the consumer a disclosure does not, by itself, make a sale acceptable. OAR 836-080-0190 provides that a disclosure about the nature of an annuity is not a defense to a finding that the sale did not meet the standard.

Duties of the insurer

• An insurer may not issue an annuity on a recommendation unless, after considering the consumer profile information, it has a reasonable basis to believe the annuity effectively addresses the consumer’s situation, needs and objectives
• It must maintain a supervision system, including producer education, product-specific training, review of recommendations before issue, procedures to detect recommendations that do not comply, procedures to identify suspicious refusals to provide information, and procedures to eliminate sales contests, quotas and bonuses based on sales of specific annuities within a limited period
• It must report annually to senior management on how well the system works
• An insurer remains responsible even if it contracts a supervision function out

Training

A producer may not sell an annuity without adequate knowledge of the product and compliance with the insurer’s product training standards. A producer who recommends or sells annuities must also complete a one-time four-hour annuity training course from a continuing education provider registered with the Department, covering the types and uses of annuities, the parties to a contract, how contract provisions affect purchasers, income taxation of qualified and nonqualified annuities, and appropriate standards of conduct, sales practices, disclosure and replacement. A producer who obtained life authority after January 1, 2024 may not sell an annuity until the course is complete. The insurer must verify completion before letting a producer sell its annuities.

Records and enforcement

The insurer and its producers keep all information collected from the consumer, all disclosures (including oral ones), and everything that formed the basis for the recommendation for at least three years after the recommendation or sale. The Director may order corrective action for any consumer harmed and impose civil penalties. A producer may not discourage a consumer from truthfully answering an insurer’s request to confirm their information, from filing a complaint, or from cooperating with an investigation.

Lesson summary

• Oregon’s annuity sales standard is ORS 743.262, operative January 1, 2024 and implemented by OAR 836-080-0170 to 0190. A producer recommending an annuity must act in the consumer’s best interest without putting the producer’s or insurer’s financial interest first.
• The best interest obligation is met through four obligations: care, disclosure, conflict of interest and documentation.
• Care means knowing the consumer’s situation, needs and objectives through consumer profile information, understanding the options, having a reasonable basis for the recommendation, and explaining it. Replacements require weighing surrender charges, lost benefits, the substantial benefit test and prior exchanges within 60 months.
• Disclosure is made on a separate form before the recommendation: the producer’s role, licenses, the insurers represented, and sources and types of compensation.
• Material conflicts are avoided, or managed and disclosed.
• The producer documents the basis for each recommendation and obtains signed statements when a consumer refuses information or buys an annuity that was not recommended.
• Producers complete a one-time four-hour annuity training course, and records are kept for three years.