Over the past few months, there has been increased scrutiny of insurance and financial products sold to senior citizens. This scrutiny has taken many forms and has appeared in many forums. Both national and local media have run stories on senior sales and products. A recent example is the New York Times article on the claims practices of long-term care insurers.
Legislators have also responded. Congress has held hearings on the suitability of products sold to senior citizens, the marketing of Medicare Advantage products, and on the qualifications and “designations” of financial advisors who market products and make recommendations to seniors.
Regulators at the state level have also entered the fray. State insurance departments and attorneys general are very active in this arena. For example, two months ago the New York State Insurance Department established the New York State Insurance Department Elder Protection Unit. In establishing the unit, the Department stated that the “suitability of products for seniors and the deceptive marketing practices of both life insurance and annuities are among the areas of prime concern to the Department.” New York State is just one of many state insurance departments that have or will be taking action in this area.
State attorney generals are also aggressively pursuing what they perceive to be abusive sales and marketing practices in the senior market. In Minnesota, the attorney general is taking insurers to court for allegedly selling deferred annuities to senior citizens without determining whether the products were suitable for the seniors purchasing the products. The attorney general has already settled one of the suits. The settlement includes a significant fine, a restitution process and the imposition of a suitability process within the company subject to the suit. Minnesota is not alone, however; several other state attorney generals are also looking at sales to seniors.
Although there probably have been some questionable practices in this area, regulators and legislators must be careful not to overreact. First, policymakers should not lump all products sold to seniors under one umbrella. There are significant differences between complex financial products (both in cost and in structure) and some straightforward insurance products. In addition, for some products sold to seniors, the answer is not new laws, but rather the enforcement of existing statutes and regulations.
For example, states already extensively regulate the sale and design of both long-term care and Medicare supplemental insurance. The NAIC’s Long-term Care Insurance Model Regulation includes standards for marketing and suitability. It also includes provisions relating to required disclosures provisions, required provisions for application forms, and a requirement to deliver a shopper’s guide. In addition, the model regulation includes model regarding disclosures and personal worksheets, among others. The NAIC’s Model Regulation to Implement the NAIC Medicare Supplement Insurance Minimum Standards Model Act includes similar requirements and protections.
Regardless of whether policymakers heed the call to enforce rather than legislate, insurers must expect to see, and be prepared to respond to, increased regulatory scrutiny. Regulators will expect to find, and insurers should have, processes in place to monitor the marketing and selling of products to seniors. What should this process encompass?
Obviously, a first step is for insurers to identify the products that they market and sell to seniors. Insurers should also identify existing state statues regulating the marketing of products to seniors. State market conduct examiners will expect insurers to be able to identify these statutes and to show the steps that the insurers have initiated to implement a compliance program. For products like long-term care and Medicare supplement, the presence of a compliance program based on state law should be sufficient to show suitable sales.
However, for potentially more complex products, such as deferred annuities, regulators might expect or require processes that are more detailed. The Minnesota Attorney General’s settlement discussed above provides some guidance as to the type of suitability requirements that regulators might demand when complex products are sold to seniors
That settlement provides that, as part of the application process, the insurer subject to the settlement “will request and obtain additional information from consumers that is necessary to determine whether a deferred annuity is suitable for the particular consumer. This additional information includes whether the consumer has sufficient liquid assets and disposable income to pay for ongoing living expenses and emergencies without having access to all of the money that would be paid into the long-term deferred annuity.
The settlement provides that the insurers must obtain the following information from seniors: “1) monthly income; 2) monthly living expenses; 3) monthly disposable income; 4) total liquid assets; 5) percentage of liquid assets placed into the annuity; and 6) anticipated significant changes in household monthly income, living expenses, or liquid assets, such as a reduction in income caused by retirement or pension changes or by an increase in expenses such as housing, medical, nursing home, or assisted living expenses.”
In addition, under the settlement, the insurer’s suitability process must also include a “manual ‘elevated review’ of annuity applications if a consumer is 65 years of age or older and:
- the consumer has liquid assets, after purchase of the
annuity, of less than or equal to $75,000; or - the consumer anticipates a significant increase in living
expenses or a significant reduction in net income or
liquid assets during the annuity’s deferral or surrender
charge period, whichever is longer; or - the premium the consumer paid for the annuity exceeds
25 percent of the consumer’s net worth (excluding the
consumer’s home); or - the consumer’s annual income is less than or equal to
$20,000; or - the premium the consumer paid for the annuity is
greater than four times the annual income of the
consumer.”
Although this is only one state’s opinion as what is required when marketing complex products to seniors, it is a good example of how seriously states are taking this issue. Insurers that operate in the seniors’ market must anticipate that their sales practices will be subjected to heightened scrutiny.
Chris Petersen is a partner in the firm’s insurance group. He concentrates in legal and compliance services relating to the Health Insurance Portability and Accountability Act (HIPAA), privacy, state small-group and individual insurance reform regulation and the interaction between state and federal law. Chris received his bachelor’s degree from Washington University in St. Louis, Mo., and his law degree from Georgetown University.