2013 North Dakota Century Code Title 26.1 Insurance Chapter 26.1-34.2 Annuity Transaction Practices
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CHAPTER 26.1-34.2
ANNUITY TRANSACTION PRACTICES
26.1-34.2-01. Exemptions.
Unless otherwise specifically included, this chapter does not apply to recommendations
involving:
1. Direct response solicitations if there is no recommendation based on information
collected from the consumer pursuant to this chapter; and
2. Contracts used to fund:
a. An employee pension or welfare benefit plan that is covered by the Employee
Retirement and Income Security Act;
b. A plan described by section 401(a), 401(k), 403(b), 408(k), or 408(p) of the
Internal Revenue Code, as amended, if established or maintained by an
employer;
c. A government or church plan defined in section 414 of the Internal Revenue
Code, a government or church welfare benefit plan, or a deferred compensation
plan of a state or local government or tax-exempt organization under section 457
of the Internal Revenue Code;
d. A nonqualified deferred compensation arrangement established or maintained by
an employer or plan sponsor;
e. Settlements of or assumptions of liabilities associated with personal injury
litigation or a dispute or claim resolution process; or
f. Formal prepaid funeral contracts.
26.1-34.2-01.1. Scope.
This chapter applies to any recommendation to purchase, exchange, or replace an annuity
made to a consumer by an insurance producer, or an insurer when no producer is involved, that
results in the purchase, exchange, or replacement recommended.
26.1-34.2-02. Definitions.
1. "Annuity" means an annuity that is an insurance product under state law which is
individually solicited, whether the product is classified as an individual or group
annuity.
2. "Insurance producer" means a person required to be licensed under the laws of this
state to sell, solicit, or negotiate insurance, including annuities.
3. "Insurer" means a company required to be licensed under the laws of this state to
provide insurance products, including annuities.
4. "Recommendation" means advice provided by an insurance producer, or an insurer
when no producer is involved, to an individual consumer which results in a purchase,
replacement, or exchange of an annuity in accordance with that advice.
5. "Replacement" means a transaction in which a new policy or contract is to be
purchased, and it is known or should be known to the proposing producer, or to the
proposing insurer if there is no producer, that by reason of the transaction, an existing
policy or contract has been or is to be:
a. Lapsed, forfeited, surrendered or partially surrendered, assigned to the replacing
insurer, or otherwise terminated;
b. Converted to reduced paid-up insurance, continued as extended term insurance,
or otherwise reduced in value by the use of nonforfeiture benefits or other policy
values;
c. Amended so as to effect either a reduction in benefits or in the term for which
coverage would otherwise remain in force or for which benefits would be paid;
d. Reissued with any reduction in cash value; or
e. Used in a financed purchase.
6. "Suitability information" means information that is reasonably appropriate to determine
the suitability of a recommendation, including the following:
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a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Age;
Annual income;
Financial situation and needs, including the financial resources used for the
funding of the annuity;
Financial experience;
Financial objectives;
Intended use of the annuity;
Financial time horizon;
Existing assets, including investment and life insurance holdings;
Liquidity needs;
Liquid net worth;
Risk tolerance; and
Tax status.
26.1-34.2-03. Duties of insurers and insurance producers.
1. In recommending to a consumer the purchase of an annuity or the exchange of an
annuity that results in another insurance transaction or series of insurance
transactions, the insurance producer, or the insurer when no producer is involved,
must have reasonable grounds for believing that the recommendation is suitable for
the consumer on the basis of the facts disclosed by the consumer as to the
consumer's investments and other insurance products and as to the consumer's
financial situation and needs, including the consumer's suitability information, and that
there is a reasonable basis to believe all of the following:
a. The consumer has been reasonably informed of various features of the annuity,
such as the potential surrender period and surrender charge; potential tax penalty
if the consumer sells, exchanges, surrenders or annuitizes the annuity; mortality
and expense fees; investment advisory fees; potential charges for and features of
riders; limitations on interest returns; insurance and investment components; and
market risk;
b. The consumer would benefit from certain features of the annuity, such as
tax-deferred growth, annuitization, or death or living benefit;
c. The particular annuity as a whole, the underlying subaccounts to which funds are
allocated at the time of purchase or exchange of the annuity, and riders and
similar product enhancements, if any, are suitable, and in the case of an
exchange or replacement, the transaction as a whole is suitable, for the particular
consumer based on the consumer's suitability information; and
d. In the case of an exchange or replacement of an annuity, the exchange or
replacement is suitable, including taking into consideration whether:
(1) The consumer will incur a surrender charge; be subject to the
commencement of a new surrender period; lose existing benefits, such as
death, living, or other contractual benefits; or be subject to increased fees,
investment advisory fees, or charges for riders and similar product
enhancements;
(2) The consumer would benefit from product enhancements and
improvements; and
(3) The consumer has had another annuity exchange or replacement and, in
particular, an exchange or replacement within the preceding thirty-six
months.
2. Before the execution of a purchase, replacement, or exchange of an annuity resulting
from a recommendation, an insurance producer, or an insurer when no producer is
involved, shall make reasonable efforts to obtain the consumer's suitability information.
3. Except as permitted under subsection 4, an insurer may not issue an annuity
recommended to a consumer unless there is a reasonable basis to believe the annuity
is suitable based on the consumer's suitability information.
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4.
5.
6.
a.
Except as provided under subdivision b, neither an insurance producer, nor an
insurer, has any obligation to a consumer under subsection 1 or 3 related to any
annuity transaction if:
(1) A recommendation was not made;
(2) A recommendation was made and was later found to have been prepared
based on materially inaccurate information provided by the consumer;
(3) A consumer refuses to provide relevant suitability information and the
annuity transaction is not recommended; or
(4) A consumer decides to enter an annuity transaction that is not based on a
recommendation of the insurer or the insurance producer.
b. An insurer's issuance of an annuity subject to subdivision a must be reasonable
under all the circumstances actually known to the insurer at the time the annuity
is issued.
An insurance producer or, when no insurance producer is involved, the responsible
insurer representative, at the time of sale shall:
a. Make a record of any recommendation subject to subsection 1;
b. Obtain a customer signed statement documenting a customer's refusal to provide
suitability information, if any; and
c. Obtain a customer signed statement acknowledging that an annuity transaction is
not recommended if a customer decides to enter an annuity transaction that is not
based on the insurance producer's or insurer's recommendation.
a. An insurer shall establish a supervision system that is reasonably designed to
achieve the insurer's and the insurer's insurance producers' compliance with this
chapter, including the following:
(1) The insurer shall maintain reasonable procedures to inform the insurer's
insurance producers of the requirements of this chapter and shall
incorporate the requirements of this chapter into relevant insurance
producer training manuals.
(2) The insurer shall establish standards for insurance producer product training
and shall maintain reasonable procedures to require the insurer's insurance
producers to comply with the requirements of section 26.1-34.2-03.1.
(3) The insurer shall provide product-specific training and training materials that
explain all material features of the insurer's annuity products to the insurer's
insurance producers.
(4) The insurer shall maintain procedures for review of each recommendation
before issuance of an annuity which are designed to ensure that there is a
reasonable basis to determine that a recommendation is suitable. Such
review procedures may apply a screening system for the purpose of
identifying selected transactions for additional review and may be
accomplished electronically or through other means, including physical
review. Such an electronic or other system may be designed to require
additional review only of those transactions identified for additional review
by the selection criteria.
(5) The insurer shall maintain reasonable procedures to detect
recommendations that are not suitable. This may include confirmation of
consumer suitability information, systematic customer surveys, interviews,
confirmation letters, and programs of internal monitoring. This paragraph
does not prevent an insurer from complying with this paragraph by applying
sampling procedures or by confirming suitability information after issuance
or delivery of the annuity.
(6) Annually, the insurer shall provide a report to senior management, including
to the senior manager responsible for audit functions, which details a review,
with appropriate testing, reasonably designed to determine the effectiveness
of the supervision system, the exceptions found, and corrective action taken
or recommended, if any.
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b.
7.
8.
(1)
This subsection does not restrict an insurer from contracting for
performance of a function, including maintenance of procedures, required
under subdivision a. An insurer is responsible for taking appropriate
corrective action and may be subject to sanctions and penalties pursuant to
section 26.1-34.2-04, regardless of whether the insurer contracts for
performance of a function and regardless of the insurer's compliance with
paragraph 2.
(2) An insurer's supervision system under subdivision a must include
supervision of contractual performance under this subsection. This includes
the following:
(a) Monitoring and, as appropriate, conducting audits to assure that the
contracted function is properly performed; and
(b) Annually, obtaining a certification from a senior manager who has
responsibility for the contracted function that the manager has a
reasonable basis to represent, and does represent, that the function is
properly performed.
c. An insurer is not required to include in the insurer's system of supervision an
insurance producer's recommendations to consumers of products other than the
annuities offered by the insurer.
An insurance producer may not dissuade, or attempt to dissuade, a consumer from:
a. Responding truthfully to an insurer's request for confirmation of suitability
information;
b. Filing a complaint; or
c. Cooperating with the investigation of a complaint.
a. Sales made in compliance with the financial industry regulatory authority
requirements pertaining to suitability and supervision of annuity transactions must
satisfy the requirements under this chapter. This subsection applies to financial
industry regulatory authority broker-dealer sales of variable annuities and fixed
annuities if the suitability and supervision is similar to those applied to variable
annuity sales. However, this subsection does not limit the insurance
commissioner's ability to enforce, including investigate, this chapter.
b. For subdivision a to apply, an insurer shall:
(1) Monitor the financial industry regulatory authority member broker-dealer
using information collected in the normal course of an insurer's business;
and
(2) Provide to the financial industry regulatory authority member broker-dealer
information and reports that are reasonably appropriate to assist the
financial industry regulatory authority member broker-dealer to maintain its
supervision system.
26.1-34.2-03.1. Insurance producer training.
1. An insurance producer may not solicit the sale of an annuity product unless the
insurance producer has adequate knowledge of the product to recommend the annuity
and the insurance producer is in compliance with the insurer's standards for product
training. An insurance producer may rely on insurer-provided product-specific training
standards and materials to comply with this subsection.
2. a. (1) An insurance producer who engages in the sale of annuity products shall
complete a one-time, four-hour training course.
(2) An insurance producer who holds a life insurance line of authority on
August 1, 2011, and who desires to sell annuities shall complete the
requirements of this subsection within twelve months after August 1, 2011.
An individual who obtains a life insurance line of authority on or after
August 1, 2011, may not engage in the sale of annuities until the annuity
training course required under this subsection has been completed.
b. The training required under this subsection must include information on the
following topics:
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(1)
(2)
(3)
c.
d.
e.
f.
The types of annuities and various classifications of annuities;
Identification of the parties to an annuity;
How fixed, variable, and indexed annuity contract provisions affect
consumers;
(4) The application of income taxation of qualified and nonqualified annuities;
(5) The primary uses of annuities; and
(6) Appropriate sales practices, replacement, and disclosure requirements.
Providers of courses intended to comply with this subsection shall cover all topics
listed in the prescribed outline and may not present any marketing information or
provide training on sales techniques or provide specific information about a
particular insurer's products. Additional topics may be offered in conjunction with
and in addition to the required outline.
Providers of annuity training shall issue certificates of completion.
The satisfaction of the training requirements of another state which are
substantially similar to the provisions of this subsection are deemed to satisfy the
training requirements of this subsection in this state.
An insurer shall verify that an insurance producer has completed the annuity
training course required under this subsection before allowing the producer to sell
an annuity product for that insurer. An insurer may satisfy the insurer's
responsibility under this subsection by obtaining certificates of completion of the
training course or obtaining reports from a reasonably reliable commercial
database vendor that has a reporting arrangement with insurance education
providers.
26.1-34.2-04. Mitigation of responsibility - Penalty.
1. An insurer is responsible for compliance with this chapter. If a violation occurs, either
because of the action or inaction of the insurer or the insurer's insurance producer, the
commissioner may order:
a. An insurer to take reasonably appropriate corrective action for any consumer
harmed by the insurer's or by the insurer's insurance producer's violation of this
chapter;
b. A general agency, independent agency, or the insurance producer to take
reasonably appropriate corrective action for any consumer harmed by the
insurance producer's violation of this chapter; and
c. Appropriate penalties and sanctions.
2. Any applicable penalty under section 26.1-01-03.3 for a violation of subsection 1 or 2
or subdivision b of subsection 3 of section 26.1-34.2-03 may be reduced or eliminated,
according to a schedule adopted by the commissioner, if corrective action for the
consumer was taken promptly after a violation was discovered.
26.1-34.2-05. Recordkeeping.
1. Insurers, general agents, independent agencies, and insurance producers shall
maintain or be able to make available to the commissioner a record of the information
collected from the consumer and other information used in making the
recommendations that were the basis for insurance transactions for ten years after the
insurance transaction is completed by the insurer. An insurer is permitted, but is not
required, to maintain documentation on behalf of an insurance producer.
2. Records required to be maintained by this chapter may be maintained in paper,
photographic, microprocess, magnetic, mechanical, or electronic media, or by any
process that accurately reproduces the actual document.
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