Adequate training should be read as robust training under Regulation 187
By Cailie Currin, President / CEO
I read a lot of insurance compliance material, both original sources and analytical pieces, and I am a big fan of what Alan Prochoroff does with Insurance Compliance Insight. He has a piece titled, “New York Flags Principal Life for Annuity Replacement Violations” in his most recent edition. It is about the latest in a string of consent orders and fines related to replacements of deferred annuities with immediate annuities based on both Regulation 60 (Replacements) and Regulation 187 (Suitability). Rather than lay out this material again, I recommend you read his piece. (Disclosure: I have no financial ties to Insurance Compliance Insight. I do consider Alan to be a friend, which is I believe, reciprocated.)
One of the things that jumped out at me from the latest order is the emphasis on the duty to train. When the revisions to Regulation 187 first were promulgated, one of my primary concerns was that life carriers would significantly underestimate the obligation to do vastly increased amounts of training. Section 224.6 sets out insurer responsibility and supervision mandates. At § 224.6 (e) it states, (somewhat innocuously), “An insurer shall be responsible for ensuring that every producer recommending any transaction with respect to the insurer’s policies is adequately trained to make the recommendation in accordance with the 11 provisions of this Part, but an insurer shall not be required to warrant that a producer is acting in the consumer’s best interest.” (emphasis added)
A word like “adequately” is a compliance nightmare. It lacks anything approaching objectivity. It is so much easier to evaluate in retrospect than to predict or address in advance. It often becomes apparent only after the fact that a training program may have been inadequate. The causal connection between the training program and the quality of any given recommendation may not be clear either. Yet when faced with a “bad” recommendation, how does one support the claim that the training program was not to blame? That other producers took the same training and made better recommendations? The regulation does not look at many recommendations, it is connected to the recommendation.
From a compliance perspective, that means a very robust training program is the best answer we have. A robust program must ensure that producers understand not only the suitability program and standards in detail, but perhaps even more important, they must understand the products. If they do not understand the product, they cannot reasonably recommend it. There is a clear logic to that. But understanding is another subjective standard. Sadly, there have been multiple occasions in my own life when I thought I understood something only to learn that I did not. I did not get perfect 100% scores on all the tests I have taken. Does that mean I did not understand the material? If I understood enough to pass the class, is that a good enough understanding?
Taking the deferred to immediate replacement issue as an example, before these investigations began, how many deferred annuity product training programs went into detail about the underlying guarantees at annuitization? With experience telling us that extremely few people annuitize, I think it unlikely that many did. Of course, the likely DFS response to that is easy to imagine — if there was better training and the options were better understood, more people would choose annuitization. How can we know that is not true? When the training has not happened, we have no arguments to make. They get to look back and say training was not adequate and therefore there is restitution to be made and fines to be paid.
A robust training program gives us something concrete to point to. If some people fail and are not permitted to recommend a particular product, that is something else to put forward when questioned about the “adequacy” of the training. I know there is resistance and there is cost involved, but the risks of a “merely” adequate program are getting higher and it seems likely they will continue to go higher over time.