Legislative Analysis
Phone: (517) 373-8080
ANNUITY STANDARD OF CONDUCT
http://www.house.mi.gov/hfa
House Bill 6112 as reported from committee Analysis available at
Sponsor: Rep. Brenda Carter http://www.legislature.mi.gov
House Bill 6113 (H-1) as reported from committee
Sponsor: Rep. Ryan Berman
House Bill 6114 as reported House Bill 6115 (H-1) as reported
Sponsor: Rep. Gregory Markkanen Sponsor: Rep. Daire Rendon
1st Committee: Insurance
2nd Committee: Ways and Means
Complete to 12-2-20
SUMMARY:
House Bills 6112 to 6115 would amend the Insurance Code to change the standard of conduct
for the recommendation and sale of annuities by insurance agents.1 Under Chapter 41A
(Annuity Recommendation to Consumers), an agent now must reasonably ensure that an
annuity is “suitable” for a consumer based on certain information. The bills would instead
require the agent to ensure that the annuity is in the consumer’s “best interest.” The obligations
imposed by each of these standards are described below. Chapter 41A is based on a model law
from the National Association of Insurance Commissioners (NAIC); the bills reflect recent
changes to that model law.2
Annuities
As described by the NAIC, “An annuity is an insurance contract typically used in retirement
planning and designed to protect an individual from outliving his or her assets. An individual,
or annuitant, pays premiums into the annuity and the insurer promises to pay out money from
the annuity to the annuitant or a beneficiary in a series of payments.”3 Often the premium paid
by the annuitant is a lump sum, for example in investing one’s savings to provide an income
stream after retirement. Under a deferred annuity, premiums are paid and accumulated for some
time before any money is paid out. Because of how they are structured, annuities typically
provide for low liquidity: they must tie money up to make it perform as contracted, and there
are usually cancellation and withdrawal penalties. Taxes are generally deferred on money paid
into an annuity and assessed on what is paid out.
There are different kinds of annuities.4 Fixed annuities provide periodic payments of a specific
amount over either a set time period or an indefinite period such as the lifetime of the annuitant.
1
Although this summary mostly refers to insurance agents, note that the standards of conduct in both current law and
under the bills apply to the insurance company if no agent is involved in the transaction. Note, too, that the Insurance
Code generally calls insurance companies “insurers” and insurance agents “producers.”
2
See https://www.naic.org/documents/cmte_legislative_liaison_brief_annuity_suitability.pdf
3
See https://www.naic.org/documents/government_relations_annuities_issue_brief.pdf
4
For an overview, see https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities
or https://www.michigan.gov/documents/difs/FIS-PUB_5800_573249_7.pdf
House Fiscal Agency Page 1 of 11
 This basic framework can be modified to provide, among other things, for inflation-adjusted
payments or for payments that will continue to be paid to a beneficiary after the annuitant’s
death. Indexed annuities pay out a return that is based on a stock market index, such as the
Standard & Poor’s 500 Index. Variable annuities allow premiums to be invested in the stock
and bond markets, usually through mutual funds, with payouts that then vary based on the
performance of those investments. Because of their underlying risk, the U.S. Securities and
Exchange Commission (SEC) classifies variable annuities as securities rather than life
insurance products; insurance agents must meet additional requirements to sell them.5
Applicability of the chapter
Under both current law and the bills, Chapter 41A applies to a group or individual annuity that
is individually solicited. It does not apply to certain specified transactions, including direct
response solicitations that do not make a recommendation based on information from a
consumer; employee pension and welfare benefit plans covered by the Employee Retirement
and Income Security Act (ERISA); employer profit-sharing and pension plans and government
and private employer deferred compensation plans covered under the Internal Revenue Code;
settlements of personal injury litigation or any dispute or claim resolution process; and formal
prepaid funeral contracts.
“Suitability” standard (current law)
Currently, Chapter 41A applies only to recommendations (advice given by an insurance agent
to a particular consumer) that actually result in the recommended purchase, exchange, or
replacement of an annuity. An agent must have reasonable grounds to believe that such a
recommendation is suitable for the consumer based on facts disclosed by the consumer about
his or her investments, insurance, and financial situation and needs—including his or her
suitability information—before the agent can issue the annuity. The agent must make
reasonable efforts to obtain suitability information before finalizing the transaction.
Suitability information means information about a consumer that is reasonably
appropriate to determine whether a recommendation is suitable for him or her. It
includes all of the following:
• Age.
• Annual income.
• Financial situation and needs, including the resources used to fund 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.
• Tax status.
5
See https://www.michigan.gov/difs/0,5269,7-303-22535_23032-239476--,00.html
House Fiscal Agency HBs 6112, 6113 (H-1), 6114, and 6115 (H-1) as reported Page 2 of 11
 The agent must also have reasonable grounds to believe all of the following:
• That the consumer has been reasonably informed of certain features of the annuity,
such as market risk, potential surrender period, potential tax penalty, and certain
specified fees, charges, and limitations. (During a “surrender period” an annuitant
cannot withdraw money from the annuity without payment of a charge or fee.)
• That the consumer would benefit from certain features of the annuity.
• That the particular annuity and the transaction as a whole are suitable for the consumer
based on his or her suitability information.
“Best interest” standard (proposed by the bills)
Under the bills, Chapter 41A would apply to recommendations that are intended to result in a
purchase, exchange, or replacement of an annuity, as well as those that actually have that result.
The following would not be “recommendations” under the chapter:
• General communication to the public.
• Generalized customer services assistance or administrative support.
• General educational information and tools.
• Prospectuses.
• Other product and sales material.
House Bill 6113 would delete the “suitability” requirements now in law and instead require an
insurance agent recommending an annuity to act in the best interest of the consumer, under the
circumstances known at the time, without placing the agent’s or insurance company’s financial
interest ahead of the consumer’s interest.
An agent would meet this standard if, in making a recommendation, the agent exercised
reasonable diligence, care, and skill to do all of the following:
• Know the consumer’s financial situation, insurance needs, and financial objectives.
• Understand the available options. (This would not require an agent to consider products
or strategies beyond what the agent is authorized to recommend or sell.)
• Have a reasonable basis for believing that the recommended option effectively
addresses the consumer’s financial situation, insurance needs, and financial objectives,
as evaluated in light of his or her consumer profile information. All of the following
would apply in meeting this requirement:
o The agent must make reasonable efforts to obtain consumer profile information
from the consumer before making an annuity recommendation.
o The generally relevant factors to consider are consumer profile information,
characteristics of the insurance company, and annuity costs, rates, benefits, and
features. The weight given to each factor may vary on a case-by-case basis, but
these factors must always be considered together and not in isolation.
o The agent also must have a reasonable basis for believing that the consumer
would benefit from certain features of the annuity, such as annuitization, death
or living benefit, or other insurance-related features.
• Communicate the basis for the recommendation.
Consumer profile information would mean information about a consumer that is
reasonably appropriate to determine whether a recommendation addresses his or her
financial situation, insurance needs, and financial objectives. This information would
House Fiscal Agency HBs 6112, 6113 (H-1), 6114, and 6115 (H-1) as reported Page 3 of 11
 be nearly the same as “suitability information” in current law. It would include at least
all of the following:
• Age.
• Annual income.
• Financial situation and needs, including debts and other obligations.
• Financial resources used to fund the annuity.
• Insurance needs.
• Financial experience.
• Financial objectives.
• Intended use of the annuity.
• Financial time horizon.
• Existing assets or financial products, including investment, annuity, and
insurance holdings.
• Liquidity needs.
• Liquid net worth.
• Risk tolerance, including willingness to accept nonguaranteed elements in the
annuity.
• Tax status.
Nonguaranteed elements would mean the premiums, credited interest rates (including
any bonus), benefits, values, dividends, non-interest-based credits, or charges, or
elements of formulas used to determine any of these, that are subject to company
discretion and are not guaranteed at issue. An element would be considered
nonguaranteed if any underlying nonguaranteed elements were used to calculate it.
An insurance company could not issue an annuity recommended to a consumer without a
reasonable basis for believing, based on the consumer’s consumer profile information, that the
annuity would effectively address the consumer’s particular financial situation, insurance
needs, and financial objectives.
The above standards would apply to the annuity as a whole, the underlying subaccounts where
funds would be allocated when the annuity is purchased or exchanged, and any riders or similar
product enhancements. They would not require the agent to recommend the annuity with the
lowest one-time or multiple occurrence compensation structure.
Exchanging or replacing an annuity
Currently, for the exchange or replacement of an annuity, the insurance agent must additionally
have a reasonable basis to believe that the exchange or replacement is suitable considering all
of the following:
• Whether 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.
• Whether the consumer would benefit from product enhancements and improvements.
• Whether the consumer has had another annuity exchange or replacement, particularly
within the past three years.
House Fiscal Agency HBs 6112, 6113 (H-1), 6114, and 6115 (H-1) as reported Page 4 of 11
 House Bill 6113 would instead require that the agent additionally consider the whole
transaction for an exchange or replacement, including the following:
• Whether 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. (This is the same as current law.)
• Whether the replacing product would substantially benefit the consumer compared to
the replaced product over the life of the product.
• Whether the consumer has had another annuity exchange or replacement, particularly
within the past five years.
Disclosures
House Bill 6113 would require an insurance agent to prominently disclose to a consumer the
following information, on a form issued by the director of the Department of Insurance and
Financial Services (DIFS), before recommending or selling an annuity:
• A description of the scope and terms of the agent’s relationship with the consumer and
the role of the agent in the transaction.
• An affirmative statement of whether the agent can sell the following:
o Fixed annuities.
o Fixed indexed annuities.
o Variable annuities.
o Life insurance.
o Mutual funds.
o Stocks and bonds.
o Certificates of deposit.
• An affirmative statement describing the insurance companies whose products the agent
can sell, using these descriptions:
o One insurance company.
o Two or more insurance companies.
o Two or more insurance companies, although primarily contracted with one
insurance company.
• A description of the sources and types of cash compensation and noncash
compensation the agent will receive, including whether the agent will be compensated
by commission or by fee.
• A notice of the consumer’s right to request additional information regarding cash
compensation, as described below.
Cash compensation would mean any discount, concession, fee, service fee,
commission, sales charge, loan, override, or cash benefit received by an agent in
connection with the recommendation or sale of an annuity from an insurance company
or intermediary or directly from the consumer.
Noncash compensation would include such things as health insurance, office rent,
office support, and retirement benefits.
Intermediary would mean an entity contracted to facilitate the sale of an insurance
company’s annuities by insurance agents.
House Fiscal Agency HBs 6112, 6113 (H-1), 6114, and 6115 (H-1) as reported Page 5 of 11
 If requested by the consumer or his or her representative, an agent would have to disclose both
of the following:
• A reasonable estimate of the amount of cash compensation the agent will receive,
which could be stated as a range of amounts or percentages.
• Whether the cash compensation is a one-time or multiple occurrence amount and, if
multiple, the frequency and amount of the occurrence, which could be stated as a range
of amounts or percentages.
An agent would also have to identify and avoid or reasonably manage and disclose material
conflicts of interest, including those related to an ownership interest.
Material conflict of interest would mean an agent’s financial interest in the sale of an
annuity that a reasonable person would expect to influence the impartiality of a
recommendation. It would not include cash or noncash compensation.
When making a recommendation or sale, the agent would have to have a reasonable basis for
believing that the consumer has been informed of various features of the annuity, such as the
potential surrender period and surrender charge, the potential tax penalty if the consumer sells,
exchanges, surrenders, or annuitizes the annuity,