Life Insurance Consumer Advocacy Center

In September, the Assembly Appropriations Committee of the California Legislature stopped SB 263 (Dodd) in its tracks by making SB 263 a “two-year bill,” meaning that the bill will not pass this year but may be taken up again next year by the sponsor, the California Department of Insurance (CDI), and the author, Senator Bill Dodd.

SB 263 was opposed by a coalition of consumer groups including the Life Insurance Consumer Advocacy Center, Consumer Federation of California, Consumer Federation of America, United Policyholders, and the Center for Economic Justice.  The bill would have created new standards applicable to agents who sell annuities, but those standards were drafted by industry lobbyists to deceive consumers. The language used in the bill makes it seem like agent conflicts of interest would be disclosed and that the agent is required to act in the best interest of the consumer. In reality, that is not the case.

SB 263 would require agents to disclose conflicts of interest to the consumer, but it defines “conflict of interest” to exclude “cash and non-cash compensation.” This defeats disclosure because nearly all conflicts of interest between agents and consumers stem from cash or noncash compensation. Thus, an agent would have to disclose stock ownership in an insurance company being recommended but would not have to disclose the commission of $20,000 or more that the agent could earn if the consumer accepted the recommendation. By defining “conflict of interest” to exclude “cash or noncash compensation,” SB 263 would authorize agents to lie to consumers by saying they are disclosing all conflicts of interest but still failing to disclose cash and noncash benefits they receive from the transaction. Cash and noncash compensation can impact the recommendations that an agent makes and should be disclosed to consumers as conflicts of interest.

SB 263 started out the legislative session as a strong consumer protection bill – the kind that California can be proud of.  The March 7, 2023 version of the bill required agents to act in the best interest of the consumer and to consider only the interests of the consumer – not the agent’s own interests – in making a recommendation of an annuity. However, amendments pushed by the insurance industry weakened the bill to something very close to, but even weaker than the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transactions Model Regulation 275-1. This occurred despite the major shortcomings of the NAIC Model, which was adopted in 2020 regardless of the objections of consumer organizations, CDI representatives, and at least one insurance agent organization.

The consumer group coalition was excluded from discussion of subsequent amendments to SB 263. This resulted in a bill that does a grave disservice to consumers by falsely making it appear that consumers are protected by a “consumer’s best interest” standard.  While the March 7 version of the bill required that agents consider only the interests of the consumer in making a recommendation, the bill was amended to allow agents to weigh their own interests equally with the consumer’s.  No guidance is provided on how an agent can weigh these two things.  Tracking the NAIC Model, the bill does not require agents to put the consumer’s interest first.  Yet agents will be allowed to tell consumers they are protected by a consumer’s best interest standard.  The consumer group coalition submitted a letter and fact sheet to the Assembly Appropriations Committee to provide a summary of the major ways in which SB 263 fails to protect consumers.

Fortunately for consumers, the Assembly Appropriations Committee put a stop to the industry’s efforts to ram the NAIC Model Regulation through the California legislature. But the industry’s efforts have been successful in many other states, with the notable exception of New York. New York has adopted a strongly pro-consumer approach. CDI, the sponsor of SB 263, embodied this same pro-consumer approach in the original March 7, 2023 version of the bill, before industry-backed amendments made the bill hostile to consumers. California should join New York in prioritizing protecting consumers.

Much work needs to be done next year to ensure this happens. A true stakeholder process should involve not just the insurance industry and CDI but also consumer groups, so that meaningful reforms can be adopted to protect California consumers.