Insurance suitability rules are proposed

Md. seeks to protect public from being sold inappropriate coverage

August 07, 2002|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Maryland would become one of seven states to require insurers and agents to make sure the annuities and life insurance policies they sell are suitable for the buyer under proposed regulations to be announced today by the state's insurance commissioner.

"We seem to have an increasing number of instances where there are inappropriate sales being made by insurance agents," said Insurance Commissioner Steven B. Larsen.

The state has laws that protect consumers against fraud or misleading sales practices, but the Maryland Insurance Administration cannot take action against agents when consumers agree to buy a product that they don't understand and is inappropriate for them, he said.

In announcing the proposed suitability standard, Larsen highlighted three cases. In all of them, the insurers refunded or offered to return the customers' money after the agency's intervention.

"The fact that the companies readily agreed to refund the money suggests they understand these sales were inappropriate," Larsen said. "I applaud them for quickly coming to the table."

In one case, the insurance administration was able to recover $329,000 from Metropolitan Life Insurance Co. for a Baltimore County woman.

The case began about two years ago, shortly after the woman's husband died, said her son-in-law, George Shenk, Jr. of Annapolis.

She was told that it was the company's policy to hand-deliver the life insurance check, and the agent used the visit to make a sales pitch, said Shenk.

Over several weeks, the agent persuaded the 78-year-old to buy a $200,000 life insurance policy that cost $20,000 a year, Shenk said. He also persuaded her to cancel her annuities and buy others, which cost her $6,000 in penalties.

"He walked out with over a quarter of a million dollars, convincing her that her mutual funds and different investments were inappropriate. As far as I'm concerned, it was predatory," Shenk said.

In another case involving MetLife, a couple, on the advice of an agent, cashed out a retirement plan and savings bonds, and refinanced their mortgage to buy a life insurance policy. The couple's combined income was $80,000, and the annual premium on the policy was $36,000, which the couple planned to pay with credit cards, Larsen said.

MetLife agreed to return $107,000, but the couple refused the offer and might pursue legal action, Larsen said.

MetLife declined to comment on the details of either case. But spokeswoman Holly Sheffer said, "MetLife has been working with the Maryland insurance commissioner to resolve the two matters at issue in an appropriate manner to assure our customers are treated fairly."

In a third case, an agent persuaded an 84-year-old Baltimore County woman to withdraw money from an annuity and buy a similar one, promising her that the new annuity would provide a higher yield and offset any early-withdrawal penalties.

The agent deducted $15,000 for advice before forwarding her money to the insurer, Fidelity & Guaranty Life Insurance Co. in Baltimore.

The insurer returned $95,000 to her. Wayne Smiley, market conduct and compliance officer for Fidelity & Guaranty, said the product wasn't necessarily inappropriate for the woman but that the company made a business decision to return the money because she was unhappy.

The proposed regulations would require those selling annuities and life insurance to assess a customer's insurance needs and financial goals, and recommend only products that meet the client's objectives.

Larsen expects to have a draft of the regulations available for industry comment within 60 days.

He said the regulations could be adopted by the end of the year.

Insurers violating the regulations could be fined, and agents could be fined or lose their licenses, Larsen said.

The National Association of Variable Annuities and the American Council of Life Insurers agree that consumers should be sold appropriate products.

But Mark Mackey, president of the NAVA in Reston, Va., said the regulations are unnecessary because annuities are highly regulated by the Securities and Exchange Commission and the National Association of Securities Dealers.

"Regulation by the state in this area would be duplicative, unnecessary and costly," he said.

Chris Kankowski, legislative director for the life insurance council in Maryland, said his group is concerned that the kind of "suitability" rules that apply to securities sales won't work for life insurance.

J.J. MacNab, an insurance analyst in Bethesda, applauded the proposed regulations. "Most agents try to sell the right product to their clients. This will go after the rogues, the ones that will sell anything to anybody," she said.

States with similar requirements are Kansas, Iowa, Minnesota, South Dakota, Vermont and Wisconsin.

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