This post is part of a series sponsored by AgentSync.
Insurance manufacturers must adhere to different standards of care when it comes to serving their customers. Even if fraud and deception are never okay, depending on the situation, it does not diminish to just be honest about an insurance product.
For most of the history of US insurance regulation, insurance manufacturers have maintained a similar standard of care as other retail industries. Basically, do not be a shy.
Insurance manufacturers are the experts when it comes to helping individuals protect almost everything from their home and car to their pets and family members. However, some types of coverage have a different risk and impact than others.
Consider a company̵7;s fire protection. You have a coverage interval in mind and a rate you want to pay, and your insurance manufacturer can help you find the intersection of the two that works for your company’s budget. You probably do not expect the producer to talk through long-term, in-depth visions of your company’s future, or read through the policy. Sure, the regulations and exceptions are important, but in the end you are more concerned that you have a product in place than that it is the best perfect. This is simply because the risk of a fire is small in the schedule for all the risks that your company will face.
Police officers who will almost certainly be used, for example, as an annuity or permanent life insurance, are a little more critical on a personal level. And when it comes to choosing the right types and amounts of coverage for these complex insurances, people trust even more that their agents give them guidance – not just to put some old plan in place.
In these examples, it is understandable that an insurance producer who sells a fire policy for companies will be held to different standards than one who sells a permanent life insurance policy. Insurance companies are generally expected to meet a “standard of care” for their customers, but what does that really mean? Let’s discuss some of the standards that insurance manufacturers adhere to and what these standards mean for their customers.
The vast majority of insurance agents are kept to the suitability standard. This means that agents are only expected to recommend the products that fit their client’s goals, budget and timeline. The insurance manufacturer must make a thorough examination of its customer’s suitability information before submitting any proposals, and there must be a reasonable basis to believe that the consumer has been informed of all policy features and transaction results.
When it comes to suitability?
The suitability standard governs most insurance sales, but in recent years, life insurance manufacturers who sell annuity products have moved to somewhat stricter standards. Apart from these, fitness standards apply for most of the rest of the time. Basic transaction transactions, manufacturers, adjusters, brokers – everyone should work with the realization that they can not recommend products outside the customer’s means and goals. A customer with a stated insurance requirement of $ 5 million should not be insured for an insurance of $ 20 million, even if they can afford a higher premium. On the other hand, an insurance manufacturer should not recommend a low cost policy to someone who clearly needs more coverage than it provides.
How is the suitability standard regulated?
The suitability standard is largely regulated by state courts. A large part of the standard includes legal decisions and common law understanding of what is fair and expected.
Broker: Brokers often stand out as impartial shop stewards who act in the client’s best interests. But depending on what state they are in and very specific nuances, it may be true … or not.
For example, legal decisions in Texas make it clear that producers are always kept to a standard of suitability.
2. Best interest
The term “best interest” is used in several areas including the medical, legal and financial industries. When it comes to the financial industry, best interest means that agents always put aside their own personal beliefs and prejudices for the customer’s best interests.
This is a fairly new standard for the insurance industry, and one that we have decided to put in a separate category based on the NAIC’s Model Ordinance for Suitability in Annuity Transactions, whose latest draft was adopted in 2020. Do not let the name fool you: The latest draft of the NAIC: s regulation advocates a higher standard than suitability.
The NAIC Model Regulation requires insurance agents selling annuity products to act in the best interests of their customers in order to effectively meet the needs of all customers at the time of the transaction. This means ensuring that the benefit to the customer is a higher priority than the benefit to the producer.
For a look at what this standard looks like in practical application, go ahead and check out our breakdown of Mississippi’s adoption of the NAIC model. Some of the most important differences that the best standard of interest brings into the picture:
- Manufacturers need to mitigate conflicts of interest
- Manufacturers need to find not just one “suitable” product, but one that fits best
- Producers must provide ongoing services to customers
- Manufacturers must carefully document why they have recommended a specific annuity product
When does the best interest standard apply?
The best standard of interest is for agents who sell annuities, as these transactions can serve the insurer’s financial interests over the client’s. When it comes to annuities, the best interest rate standard provides consumers with an extra layer of protection.
How is the best interest norm regulated?
The NAIC Model Ordinance is adopted in waves by states across the country, and is fast becoming the country’s law. In addition, the Department of Labor’s (DOL) trust rule may also apply here, but it’s actually an area of intense debate and interest, so hold your breath and we’ll dive into it in the trust section.
The last standard we will cover is the trust standard. Although there is some confusion about the difference between the trust and best interest standard, most regulators agree that the trust standard goes beyond both the suitability and best interest standard, making it the highest standard of care.
In a trust standard, you make the decisions for your client as if you were the client. You take responsibility for their well-being and personal circumstances as if they were your own.
DOL’s trust rule, or, if you prefer the real name, the exemption for prohibited transactions 2020-02, Improving Investment Advice for Workers & Retirees, keeps insurance manufacturers to a standard of trust when selling annuities. However, this is a strong area for disagreement. The Securities and Exchange Commission (or SEC, which has a standard similar to the NAIC model, but from the securities side of the industry) and the NAIC both explicitly state that a best interest standard is not a trust standard. DOL explicitly does not agree.
So, what gives? The NAIC and the SEC claim that a fiduciary duty is a standard that is fixed – once you are a shop steward, you are always a shop steward. Their position is that if a standard of best interest only applies to a certain set of products or situations, then it is not the same as a trust standard. DOL claims that this is a mutual use of the trust norm.
How do we know who is right? In classic American style, we will probably find out if it ever goes to the Supreme Court. Meanwhile, if we were an insurance manufacturer, we would not test it to find out.
When working below the trust standard, professionals not only recommend products that are appropriate and in the customer’s best interests, but there is also the question of “would you buy this product if it was your own money?”. Basically, insurance professionals would only suggest products that they would buy themselves if they were in the customer’s position.
When does the trust norm apply?
According to DOL, the trust norm applies to producers who sell annuity products.
Broker: According to the state of California, the trust standard also applies to brokers.
If you’re looking for more reading on the subject, Plaintiff Magazine contained an interesting column with quotes from states that each deal with it differently, with decisions from Louisiana, Illinois and New Jersey all pointing out that brokers must follow a trust norm.
Another twist: Double-licensed insurance professionals can also have a Series 65 license, which commits them to a duty of confidence in securities matters. If a client who sees the securities advisory professional also asks them about insurance, at what point do they stop being a trustee? DOL’s trust rule is a step forward, but these situations still have many gray areas to explore.
How is the trust norm regulated?
DOL’s trust rule and legal matters regulate the trust standard and its implementation between insurance producers across states.
Agents owe customers a certain standard of care
The bottom line is that sometimes insurance is purely transactional, but the more impact it can have on a customer, the higher the standard of care the insurance manufacturer should consider.
Annuities in particular are an area to look forward to, and brokers should be particularly concerned about regional variations in healthcare standards.
Do you know what standard you are up to? If you do not, check with a supervisor or attorney. You do not want to use what we call the method to fool around and find out.
Together with liability towards customers, insurance professionals have a responsibility to operate in accordance with a number of different rules and regulations. AgentSync can help prevent rule violations before they occur. If you are interested in reducing costs and compliance risks at your agency, see AgentSync in action today.