Disclosure & Agent Responsibilities
Florida's Senior Consumer Law (con’d)
The Senior Suitability provisions were the primary focus of the 2008 update, but the Seibel Act included a number of other important amendments to Florida’s Insurance Code. These provide additional protections to the general insurance-buying public, not just “senior consumers”.
Buyers Guides & Contract Summaries
Sales of life insurance policies require the delivery of some standard disclosure documents: the Buyer's Guide and a Policy Summary. Both of these are drawn up in accordance with NAIC guidelines. In the case of fixed annuities, state law mandated the delivery of a Buyer's Guide and a Contract Summary. Under prior state law, these documents were not required in the sale of variable annuities. (A prospectus, a federal disclosure requirement, must accompany the sale of variable annuities.)
The Seibel Act now requires a Buyer's Guide and Contract Summary for the sale of all annuity contracts -- fixed, variable or indexed. (Sales of variable annuities must still be accompanied by a prospectus.)
Prior to the Seibel Act, state law mandated a 10-day "Free Look" period for the sale of all life insurance products and fixed annuity contracts. The "free look" provision is designed to give purchasers an opportunity to review the terms of the contract, and if they choose, to return the contract within the first ten days for a full refund on the premiums. Issuers could avoid the "free look" refund provision by giving the prospective purchaser a Buyer's Guide and Policy Summary (for life insurance)/Contract Summary (for annuities) ten days prior to purchase. But if these documents are delivered at the time of purchase — as they usually are — the contract must include the refund provision.
The Seibel Act extends the "Free Look" period from 10 days to 14 days. The Act also broadens the Free Look refund provision to include variable, as well as fixed, annuities.
Florida law prohibits both "twisting" and "churning". Both practices rely on misrepresentations, and therefore are considered unethical. Twisting is the replacement of one insurance product for another issued by a different company, based on false or misleading information with the agent's intent to earn a commission. Churning is sometimes called "internal twisting": the client is induced to exchange one company's product for another product issued by that same company. A related, prohibited practice, is known as "stripping" -- in which the cash value in one insurance product is used to finance the purchase of another insurance product (again, based on misrepresentations).
The Seibel Act modifies the definition of “churning" to cover direct or indirect churning. Indirect churning occurs when a policy is surrendered and the resulting funds are used to purchase an immediate annuity (specifying payments to begin at once) which is then used to fund a deferred annuity or a life insurance policy. It is often done because the agent can receive a double commission for the immediate annuity and the deferred annuity or life insurance policy that it funds.
Fraudulent Signatures / Forgeries
One commonly used type of insurance fraud involves forged signatures on applications and other documents.
The Seibel Act creates a new prohibited act and makes it a third degree felony to willfully submit to an insurer an insurance application or policy-related document on behalf of a consumer that contains a false or fraudulent signature.
Unlawful designations or credentials
Another type of misrepresentation occurs when agents use credentials to mislead prospects into thinking the agent is more experienced and knowledgeable than is indeed the case. There are a number of organizations that, for a fee, will simply hand out credentials and official-looking designations to bolster the agent's resumé.
The Seibel Act prohibits the agents from using designations or misrepresenting the agent qualifications:
¨ When making a sales presentation or solicitation for insurance, an agent is prohibited from utilizing designations or titles that falsely imply that he or she has special financial knowledge or has obtained specialized financial training or is certified or qualified to provide specialized financial advice to senior citizens.
¨ Terms such as “financial advisor” may not be used to falsely imply that an agent is licensed or qualified to discuss, sell, or recommend financial products other than insurance products.
¨ When making a sales presentation or solicitation for insurance, an agent is prohibited from falsely implying he or she is qualified to discuss, recommend, or sell securities or other investment products in addition to insurance products.
The law makes exceptions for bona fide credentials. An agent who also holds a designation as a certified financial planner (CFP), chartered life underwriter (CLU), chartered financial consultant (ChFC), life underwriter training council fellow (LUTC), or the appropriate license to sell securities from the Financial Industry Regulatory Authority (FINRA) may inform the customer of those licenses or designations and make recommendations in accordance with those licenses or designations.
Prior to the passage of the Seibel Act, those violating the “Unfair Insurance Trade Practices Act” (which include twisting and churning) could be fined for up to $2,500 for each non-willful violation up to an aggregate $10,000 fine. Willful violations could result in fines up to $20,000 for each willful violation up to an aggregate $100,000 fine. Willful violations of these provisions was also subject to criminal prosecution as a second-degree misdemeanor
The Seibel Act increases the penalties for agents or insurers who engage in certain unfair trade practices, such as twisting, churning (directly or indirectly), deceptive use of credentials or fraudulent signatures. Violations of these rules are now punishable with a $5,000 fine for non-willful violations up to an aggregate of $50,000. Willful violations could result in fines up to $50,000 per incident, up to an aggregate $250,000 fine. Willful violations of the twisting, churning or misleading use of credentials are also subject to criminal prosecution as a first-degree misdemeanor. Willfully submitting fraudulent signatures on policy-related documents is a third-degree felony.
And as noted above, the Seibel Act also gives the Office of Insurance Regulation the power to rescind unsuitable contracts — which may impose additional financial losses on companies. Likewise, the Department of Financial Services may take reasonable corrective action against agents for harm their unsuitable recommendations cause clients. While technically not "penalties" — the mitigation provision should act as additional disincentive for unsuitable recommendations.
Compliance with Florida's continuing education requirements is a necessary condition for the issuance and renewal of any appointment to represent an authorized insurer. In general, life or health agents must complete at least 24 credits (hours) of continuing education every two years. Agents licensed for a period of six or more years must complete only 20 credits every two years, but these credits must be in intermediate or advanced level courses as approved by the Department. Since 2005, Florida has required life and health insurance agents, as part of their CE requirement, to complete a minimum of three credits of continuing education on the subject of "ethics".
Under the Seibel Act, for compliance periods beginning in January 2009, any agents licensed to sell annuities -- that is, all Florida life-licensed agents — must complete at least three credits in the subject of "suitability". [This course meets that suitability requirement.] Credits earned to meet the "suitability" requirement may be used to meet the "ethics" requirement (but not vice versa).
Agent Email & Phone Number
The Seibel Act requires all Florida-licensed insurance agents to provide the Department of Financial Services with their email address, home phone and business phone numbers. If the agent changes any of these, he or she must notify the Department of the change within 60 days. Failure to do so could result in a $500 fine. (These are the same rules that apply to notifying the Department of changes in the agent's home, mailing or business address.) Changes can be filed electronically at the Department of Financial Service’s website.
NAIC and Annuity Suitability
The National Association of Insurance Commissioners works to promote standardized state regulations nationwide. It does this by drafting "model laws" that can be the basis of actual legislation adopted by the states. Much of Florida's Insurance Code is based, at least in part, on NAIC model laws. Annuity suitability is no exception. The NAIC's initial efforts regarding annuity suitability were aimed at protecting older consumers -- and the first NAIC model law on suitability, Senior Protection in Annuity Transactions Model Regulation, was adopted by the NAIC in 2003. This model law covers the sales of annuities to consumers aged 65 and older. Florida's initial suitability legislation in 2004 was based on that model law. Other states have pursued other forms of investor protections — some states extended the annuity protections to consumers of all ages, others extended suitability provisions to the sale of annuity and non-annuity insurance products, other states followed a model law drafted by the North American Securities Administrators Association (NASAA).
In 2006, the NAIC drafted and approved a new model law, Suitability in Annuity Transactions Model Regulation that extends suitability protections to sales of annuities to consumers of all ages. When Florida updated its original suitability law in 2008, it faced a choice — and the Legislature chose to continue to apply the suitability requirements only to the sale of annuities to senior consumers. With intense focus on this issue, it is quite possible that Florida, in the future, will join other states that expand that requirement to the sale of annuities to all consumers. There certainly is nothing unethical if a Florida agent wishes to apply the senior rules to younger clients -- even if Florida law does not require it. The disclosure requirements in Florida's senior law offer agents a convenient checklist of questions to ask prospects of any age before making a fixed (and indexed) annuity recommendation. As we'll see in the next section, FINRA's requirements make no distinction based on age when it comes to recommendations for variable annuities. FINRA and the NAIC seem to agree that suitability requirements should be "ageless" — and perhaps that is good advice for all agents.