Life Insurance Law Blog : New York Life Insurance Compliance Lawyer & Attorney : Currin Compliance Services LLC : Annuity Compliance & Insurance Regulation

[Circular Letter 8 (2010)] dated June 29, 2010 and posted yesterday on the NY Insurance Department website, clarifies that as a result of amendments to §4223(c)(1), made at the time provisions relating to indexed annuities were added, recapture of bonuses on fixed annuities or fixed accounts of variable annuities, are not permitted. Note that this is based on statutory language, added in 2008, to the effect that the death benefit for contracts with cash surrender benefits may not be less than the actual accumulation amount. This is not a position being established by circular letter. Some companies may have already been advised of this statutory prohibition by post-approval review.

One thing that I really appreciate about this Circular Letter is that it is quite explicit about what is expected of insurers.  Contracts/ Certificates issued prior to October 5, 2008 were not subject to the prohibition and no action need be taken. "However, in accordance with Insurance Law §3103, any contract or certificate issued on or after October 5, 2008 shall be enforceable as if it conformed to the law. Accordingly, to prevent any confusion, every insurer must endorse any annuity contract or certificate issued on or after October 5, 2008 to remove any death benefit bonus recapture provisions or in the case of a fixed and variable annuity contract or certificate be endorsed to provide that the recapture will not be applied to the fixed account portion of the contract." Further, the Circular Letter explicitly states that an insurer does not have to endorse contracts/certificates on which the recapture period has already expired.

The Department indicates that companies must make restitution for any recaptures from contracts issued after October 5, 2008 and that if that is done the Department does not intent to take further action against a company.

From my perspective, this very clear explanation of what is expected in each of these scenarios is almost as important as the substantive announcement of the statutory rule. However, there is one "elephant in the room" issue left unresolved. That is how this relates to variable annuity contracts that have guaranteed living benefit riders that have yet to be analyzed by the Department for the §4240(d) exemption.

Because a determination that a guaranteed living benefit exceeds the §4240(d) 3% limit, and would therefore be subject to §4223, the nonforfeiture law, that determination would also mean that this rule on recapture of bonuses would apply to the variable annuity or variable portion of a combined product. Of course, in the face of such a finding, this bonus recapture is likely to be the easiest of many issues to resolve. But, it once again highlights the need for resolution, once and for all, of §4240(d)'s application to variable annuities with guarantee features.

Again, I applaud the Life Bureau for the clarity of this Circular Letter and hope we continue to see guidance of this type in the future. The effort made to analyze and set forth all the scenarios, and the steps required of companies in each, will make it much easier for insurers doing business in New York to be sure they are in compliance with regulatory mandates.

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Last week I attended the IMSA/AARP Suitability Summit, held in Washington, DC.  In attendance were a well-represented group of regulators, both state and federal, trade associations, consumer representatives, industry representatives, and IMSA Qualified Independent Assessors.

The discussion was open and, I think, helpful to all who were there.

The two SEC representatives, John Fahey and John Walsh, Branch Chief and Chief Counsel, respectively, while providing the usual disclaimer that the views were theirs and not the Commission's, presented 10 Hot Topics:

1) Annuity Suitability: They identified two components of this concern: inadequate policies and procedures at the selling firm and when policies and procedures are adequate, a failure to implement or follow those policies.

2) Supervision: Here the quality of training was a particular concern.

3) Trend towards more vanilla products.   They raised the question of what impact this will have on exchanges.  More bells and whistles have often been the rationale for exchanges and if the newer products have fewer, will there be fewer exchanges too?

4) Sales to Seniors: Here they specifically identified the need for the use of exception reports and supervisory action when there is a disproportionate number of sales to seniors.

5) Free Lunch Seminars:  Because these appear to be very successful sales tools, it is important to continue to monitor these for abuses.

6) Life Settlements: Generally, the applicability of securities laws was identified and specifically, excessive commissions was noted as a concern.

7) Exchanges/Replacements: The speakers noted that those looking to take advantage do not stay within the clear regulatory silos of fixed and variable products or insurance and securities, so regulators must also be able to work together and move outside those silos. For example, the SEC is moving towards the position that if one part of the exchange transaction involves a security, the Commission can act to enforce their rules.

8) Insured Principal Products: Here the focus of sales of the product is safety.  The SEC is interested in the portfolio insurance as the basis for the safety and guarantees.

9) Benefit of the Bargain: The question here is whether the conditions required for the guarantees to be effective are adequately disclosed.

10 Product and Sales Guidelines: Are these strictly defined and enforced?

This last topic seems to bring us full circle back to the initial topic of suitability because it looks at things like whether a product limiting issuance to individuals above a specified income is actually sold, when files are reviewed, to individuals with lower incomes than that required amount.  This discussion was not limited to annuities though, which is probably why it was its own topic rather than being included as part of the first in this list.

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There can be no doubt that one of the hottest issues in the life insurance and annuity industry is stranger-originated annuities. Last week's [opinion] from the RI Federal District Court is getting lots of attention, see e.g. [Insurance Compliance Insight's June 7, 2010 edition]. Personally, I found the bases on which the litigation was allow to proceed as interesting as the bases on which the motion to dismiss was granted, and it wasn't only the reference to Harry Potter's invisibility cloak that made it so, though I do like culturally relevant judicial opinions! See page 25. What was interesting is that the surviving claims are ones that many of us can take action on now as they do not need legislative changes.

But first....Motions Granted, i.e. the Insurer's causes of action were dismissed:

Insurable Interest - The Court said that RI's insurable interest statute does not apply to annuities.

Incontestability - The incontestability provisions of the contract are enforceable and do not violate public policy. The allegation of fraud does not bring the claim outside the incontestability provision.

Civil liability for the crime of insurance fraud - like insurable interest, the court held that the specific insurance fraud statute applies to life insurance only and not annuities.

Negligence - the negligence claim could not survive because the plaintiff companies did not assert any physical or emotional damages.

Now...Motions Denied, i.e. insurers can proceed with their case:

Fraud - The Court allowed the claims that the program sponsors, agents and brokers committed fraud as well as conspiracy and unjust enrichment to stand.

Breach of Contract - Also generally allowed to stand was the breach of contract against the brokers for violating the terms of the selling agreements with the plaintiff insurers.

While these synopses are obviously simplified and the whole opinion should be reviewed, one of the clear take-aways from this is that the contracts between annuity producers and insurers need to be brought up-to-date as quickly as possible because they may be the most effective line of defense for insurers.

Many of the Plaintiffs' claims were defeated because of statutory language that impacted the outcome of claims such as incontestability and insurable interest. Changes to those statutes may be long term efforts, but selling agreements are another story. They can be modified much more easily to provide more definition to the duties that run from agent to principal. Judge Smith here found that "fraud could create liability under at least two contract provisions cited in the Complaints." p. 42. Shouldn't there be more than two contract provisions that would create liability for fraud?

This case is a clear reminder that selling agreements should leave no doubt that a producer committing fraud, or allowing it among sub-agents, is liable to the company for damages.

No doubt, as this case proceeds, there will be more to learn about this new issue. Also, it seems certain there will be more cases to follow analyzing more state statutes and regulations on the causes of action that were dismissed based on Rhode Island law. But for now we can look to selling agreements and do what we can in that arena to protect against fraud, wherever it may occur, not only in the arena of stranger-originated annuities.

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 Yesterday, June 2, 2010, the NY Insurance Department posted a [proposed circular letter] regarding excess withdrawals and the impact they may have on guaranteed withdrawal benefits.  The Department expresses their concern that the reduction in the guaranteed benefit may be unfairly disproportionate when compared to the amount of the excess withdrawal.  The Department does recognize that insurers do need to limit exposure to anti-selection and that proportional reductions in the benefits are a common way to do this. 

I have submitted comments to the Department on this proposal and encourage others to do so as well.  My comments follow:  

My comments on the proposed circular letter are focused on three issues on which I think clarification is important:
1) What this means for CL6 submissions,
2) What needs to happen for in-force contracts and for disclosure at the time of request, and
3) Retro-activity and compliance: What about policy form compliance certifications that have already been signed?

CL6 Submissions:
I am concerned about the use of the word “should” in a circular letter because of the certification of compliance with circular letters in CL6 submissions. Can a company comply with this circular letter if they do not provide disclosure at both sales presentation and at the time of request? If not, then it is only fair to say that companies “must” provide disclosure. The word “should” suggests that there is a choice, that the Department recommends this practice, but does not mandate it. If the Department mandates disclosure, and the content of the disclosure, then the language of the circular letter must make that clear to the regulated entities. To leave the compliance standard ambiguous is unfair to companies and officers who certify to compliance.
I have a similar concern about the 30 day right to cancel the withdrawal. Can an insurer certify to compliance with this circular letter if they do not adhere to this “best practice”? Again, the question is whether it is required? If so, fairness to those signing the certifications mandates that the requirement be expressed unequivocally. Will the Department interpret the certification as a statement that this “best practice” is implemented? Or if this is the best practice, is it still possible to certify to compliance based on some lesser practice. That is unclear based on this language.

In-force Contracts/Disclosure at the time of request:
I have questions about the last paragraph. What does it mean that companies have to “provide a clear explanation” at the time of the request? What will the Department be looking for on a post-approval review? Will the requirement be for an individualized demonstration of the impact on his/her particular contract? Alternatively, will a statement and generic demonstration such as that provided in the circular letter itself be acceptable? How does the Department envision this explanation happening in practice? If a written request for a withdrawal is received by a company, are they then to send out a paper explanation, whether individualized or generic? Can it be provided with the withdrawal payment? If so, is that contingent on the “best practice” 30 day right to cancel the withdrawal? If not, do they need to have some acknowledgment of receipt of the explanation in order to meet a PAR burden of showing that the explanation was provided? What happens if the contractholder does not return the explanation or respond to attempts to clarify the intent after the explanation? Can the company go through with the requested transaction and still be in compliance with the Circular Letter? Can a clear explanation be provided by phone at the time of request?
The last sentence appears to require only the process for the disclosure but not the disclosure itself be submitted to Ms. Nelligan. Is that accurate? Will those be approved, acknowledged? Will a company be able to know what the Department finds acceptable prior to a post-approval review?

Need for retro-active compliance:
As you know, many companies have GWBs approved for use in NY today via CL6. Those signed certifications pre-date this circular letter, so none of them intended to certify to compliance with this when they signed the certification. Many companies may not be able to document what disclosure did or did not occur during the sales presentation or at the time of a withdrawal request. Is this Circular Letter applicable to sales and withdrawal requests happening only in the future, or on post-approval reviews, will this be imposed retroactively to any certified filing of a GWB rider? If this will be applied retroactively, in my opinion, fairness dictates that be more clear in the circular letter.

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At last week's Speed-to-Market seminar, Peter Dumar of the New York State Insurance Department presented on Supplement 1 to Circular Letter 27 (2008) (CL27). CL27 addresses the annuity issues that arise in annuities due to NY's recognition of same-sex marriages performed in other states. The Circular Letter itself is pretty straight-forward. Disclosure is required of the conflict between NY's position on same-sex marriage and the implications of the federal Defense of Marriage Act (DOMA). In addition, CL27 says "every insurer should review its policy forms to determine if revisions are needed so that a same-sex spouse will not be defaulted to the spousal continuation option, and to ensure that the default option for a same-sex spouse is adequately disclosed."

Reviewing all contracts as required by the Circular Letter is a significant burden, but it is understandable if what a company needs to look for are provisions that don't work anymore due to NY's recognition of same-sex marriage and DOMA's prohibitions on spousal continuation in the context of a same-sex spouse.

But...recently our office has been seeing post-approval reviews come in that require companies to add a default option where the contracts previously had none. This did not make sense to us because CL27 only required a review to determine if there was a conflict. No statute or regulation specifically requires a default option upon death of the owner. If there is no default option there can be no conflict. Not having a default option seemed the best way to preserve the most options for the most people and do so with the fewest possible policy form filings.

I asked Mr. Dumar about this at the seminar and he explained that the requirement for a default is not based on CL27, but on the entire contract mandate. It is the Department's position that the contract is not complete if it does not include a provision stating what will happen on the death of the owner if the beneficiary does not select an option for receipt of the applicable proceeds.

Therefore, all companies should be aware that if you have an annuity contract that does not have a default option stating what happens upon death of the owner of the contract, you will be required to add one on post-approval review. You will be required to make this change not only on a going-forward basis, but you will also be required to endorse your in-force contracts to add this default option.

If you make the default spousal continuation, you will also need the CL27 language.

In light of all of this, the option that makes to be the default from a filing perspective is likely to be a lump sum payment in 5 years. Then it is unnecessary to add the CL27 disclosures. In addition, in the event that DOMA is repealed, the rights of same-sex spouses to continue the contract when/if that becomes legal are preserved. However, the filing ease and long-term compliance simplicity of the lump sum will need to be weighed against the election paperwork burden on the opposite sex spouse if s/he wants to continue the contract and must make an affirmative election to do so. Because no actual payments can be made to a beneficiary who can't be found and any beneficiary who can be found will want his/her money, defaults are really about paperwork. Who has to fill out the paperwork for what.

Ultimately now that a default is mandated, that will be the business decision to make: election paperwork vs. complicated continuation provisions and the possibility of future filings to maintain compliance in this rapidly changing are of the law.

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In today's edition of Investment News, Darla Mercado has an article titled [Annuities provide boost to investment portfolio: Study]. She leads with the statement "Combining a variable annuity with a guaranteed-minimum-withdrawal benefit in conjunction with a traditional portfolio can help boost income - even in the face of the 2008 decline." She then lays out the results of an Ibbotson Associates Inc., study that looks at various hypothetical scenarios going back to 1979.

The study did find that the outlook for the combination of VA and GMWB may not be as good for those with a time horizon shorter than 30 years.

One thing that caught my eye was the final statement: "Further, the study doesn't consider the possibility that the insurer may default on the annuity contracts, but it does note that the likelihood of that is low." Given some of the statements by regulators about these benefits and the strain they could place on insurers, it would have been interesting to see an analysis of that risk and whether the existence of the benefit has any impact on the possibility that the insurer might default.

The analysis of the benefits is interesting as is the finding that while a diversified portfolio and the VA with GMWB both had steep losses in 2008, the portfolio experiences a 19.4% loss, while the combination "only" 18.4%.

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In a move that goes contrary to regulatory trend, Rep. Robert R. Damron, of Kentucky's banking and insurance committee, has sponsored a bill that would prohibit restrictions on owners selling their guaranteed living and death benefits in the secondary market. Darla Mercado reports in a recent [article] in Investment News that the bill cleared KY's House Standing Committee on Banking and Insurance. Mr. Damron says "To me, these benefits are something people purchase then they buy an annuity. You're paying for the living-benefits rider, and it belongs to you, so it's a property issue." While he reportedly stated to Ms. Mercado that the odds of passage this year seem slight, he was also quite clear that we would re-work and reintroduce it next year if necessary.

On a not-directly-related note, but one that was very interesting to me:

While referring to the move being one that bucks the trend among state insurance regulators, no specific state position was discussed in any depth. Instead, Ms. Mercado referred to the position of the Interstate Insurance Product Regulation Commission (the "commission"), and noted that among the 30 members of the commission that voted, only Indiana objected to a [new uniform standard] that permits insurers to terminate, at their discretion, guaranteed living and death benefits in the event of a change in ownership or assignment.

Despite the fact that product submissions can be made directly to the Kentucky Insurance Department, no reference at all was made to the Kentucky DOI's position on this - just the commission. Similarly, opponents of the measure proposed a study of the uniform standards promulgated by the commission rather than looking to study the position of the Kentucky DOI. That is a very tangible demonstration of where we are in product regulation today.

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Darla Mercado reports in today's edition of Investment News that while fixed annuity sales fell for 2009, down 2% from 2008 sales, indexed annuities did better— up $3.5 billion year-over-year. [ Fixed annuity sales slid in '09]. Based on Ms. Mercado's reporting, fixed annuities in several distribution channels and designs (book value vs. MVA) fared poorly, due to low interest rates, according to Scott Stathis of Kehrer-LIMRA. Variable annuities are only discussed in the bank channel, where she reports that in November sales were down .1 billion from other monthly sales figures in 2009, while they rebounded a bit in December to be .1 billion higher than those previous months. Mr. Stathis reportedly attributes the somewhat depressed sales of variable annuities to higher fees and decreased benefits.

Meanwhile on the life insurance front, the [MIB reported late last week] that U.S. application activity for individually underwritten life insurance increased 1.2% in January year-over-year. The MIB states that January 2010 represents the sixth consecutive month where year-over-year change is positive for the U.S. Life Index, and they report that as being the longest sustained trend of U.S. increases on record. Application activity for the period December 2009 to January 2010 remained virtually flat.

From where I sit, I look at the future and not the past. From here, I see a lot of product development with some significant innovation being discussed. It would not surprise me at all if this year sees a large increase in product filings and new products coming to market. My evidence is far less scientific than was reported above, but I like what I see; people I know who were laid off are finding jobs and product development seems to be churning. I like to know what the research says about past sales, but when I think about what the future holds, I have learned to trust my desk. And 2010 is shaping up as a busy year!

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The February 2010 issue of [Best's Review] has an interesting article, written by Lori Chordas, on LTC Annuities. I have heard a lot of chatter about these products over the last few months as we approached and then passed the 1/1/2010 Pension Protection Act changes. The change in the tax treatment of withdrawals from annuity account values when used to pay LTC premiums, makes these combo products more desirable for consumers now than they have been previously.

Because there is no taxable event when the premiums are deducted from the annuity's value, the cost of the LTC premiums is effectively lowered. Chordas quotes Scott Goldberg of Bankers LIfe and Casualty Co., on two advantages over stand-alone policies: 1) long-term care annuities lower the cost of long-term care insurance and, 2) they remove the 'use it or lose it' fear with respect to the annual LTC premiums.

Chordas' article provides general descriptions of three currently marketed products, each with unique design features; those of OneAmerica, Bankers Life and Casualty Company, and Mutual of Omaha. Although different in the design details, each of the products appears to achieve the goal of keeping the actual cost of LTC down. There was little discussion of the fee structure of the products, to know how those might impact performance, but all seemed to have the potential to achieve the combo product goals. Ms. Chordas cites LIMRA sales research showing that LTC sales have fallen considerably from the 580,000 policies sold in 2002. It will be interesting to see how the various products that are in development come to market and whether they are able to meet the challenges that stand-alone LTC policies have faced.

Of course I would love to have the opportunity to be involved in the development and filing of these new and innovative products as companies bring them to market, but even if I am not, I look forward to seeing how they develop and what their impact is when they get out there on the street.

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The New York State Department of Insurance (NYSID) demonstrated its flexibility and good sense yesterday when it allowed us to remove two words from its recommended disclosure language regarding the impact of DOMA (the federal Defense of Marriage Act) on annuity products.

As we have discussed here previously, the NYSID now requires that annuity products warn lesbians and gay men who are legally married to their same-sex partners that their tax-related benefits are limited by the federal government. This is because the federal government, including the IRS, defines marriage as between one man and one woman. NYSID recommends that specific disclosure language be included in annuity contracts in its Supplement No. 1 to Circular Letter No. 27 (2008). If different language is used, the product cannot be submitted in a certified filing, but must be submitted for review and approval, which is a much more time-consuming process.

We’ve had numerous endorsements cross our desks that duplicate the required language. When we were reviewing an individual annuity that included the required language right in the contract, we stumbled on this phrase: “To the extent that an annuity contract or certificate accords to spouses other rights or benefits…” (emphasis ours)

We thought it might be confusing to an individual owner to come across the word “certificate” in an annuity that has nothing to do with a group contract. We called Mr. Peter Dumar, an attorney at NYSID, and asked if we could delete the words “or certificate.” Without hesitation, he agreed that these words are irrelevant in this situation. He said we could remove them, and he said he would let others at the Department know that this change would still be considered compliant under the supplement’s guidance.

Thanks Mr. Dumar, you made our day. Sometimes, it’s the little things …

Suzanne Seay, Analyst

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The National Underwriter's Online News Service is reporting today that Ruark Consulting, LLC out of Simsbury, CT, concludes that use of the guaranteed minimum withdrawal benefit options has been lower than originally expected. If these trends continue, Ruark opines, that could be a favorable development for insurers' reserves and capital levels.

The Ruark study found in the 3 million policy years of data that only 1 in 5 are taking any partial withdrawals. Of those who are taking the partials, only 1 in 3 are taking the maximum amount allowed.

One of the things I would have been interested in that was not reported was how many of those taking partial withdrawals are taking excess withdrawals. Ruark finds 1 in 3 are taking the maximum, but I wonder how many may have gone beyond that maximum withdrawal. I look at a lot of numerical examples explaining how excess withdrawals impact values. It would be interesting to me to know how much of an impact those examples have, if any. I recognize that it is easier to determine the "how many" than the "why," but reading the report of this study made me wonder about the allocation of disclosure resources on excess withdrawals, when in fact such a small percentage of owners are taking withdrawals of any size.

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 Yesterday I posted about the new [Supplement No. 1 to Circular Letter 27 (2008)] related to same-sex spouses and annuity contract language.  The NYSID has now posted [Filing Guidance] for companies needing to file policy forms to comply with the requirements found in the Circular Letter.  "Any revisions needed to address the concerns raised in the supplement concerning default options must be made to both in-force and new issue starting November 1, 2009."  This post addresses issues I see in the disclosure portion of the Guidance.  A future post will address the more general filing issues for policy forms.  

It is interesting to note that the guidance appears to assert approval jurisdiction over the disclosures as well as any required policy form language needed to address the default options.  According to the [Office of General Counsel], disclosures are generally not considered policy forms as that term is defined by statute in section 3201.  

The filing guidance provides template disclosure language:  

"Pursuant to the Federal Defense of Marriage Act, same-sex marriages are not recognized for purposes of federal law.  Therefore, the favorable tax treatment provided by federal tax law to an opposite-sex spouse is NOT available to a same-sex spouse. Same-sex spouses should consult a tax advisor prior to purchasing annuity products that provide benefits based upon status as a spouse, and prior to exercising any spousal rights under an annuity."  

If this disclosure is used exactly,   then the certified,  or CL6, process can be used by a company going forward for form filings.  If there is any deviation from this text, then the forms may not be submitted on a certified basis because the disclosure will need review on a case-by-case basis, according to the Department's Guidance.  

This is an interesting assertion of authority.  On its face, it would seem that this disclosure is not different than many other types of disclosure mandated by the Department  where they think it important for consumer protection. However, unlike those other instances, here if a company deviates in any way from prescribed text, full prior approval is required.   This should not be understood as an objection to this disclosure as a way to resolve this challenging issue posed by a conflict between state and federal law.  My concern is that this approach of mandating specific and exact and keying it to approval methods takes state-oversight of drafting to unusual, and in my opinion, unnecessary, heights.  

Why can't a company use the following without losing the right to use an expedited process?

PLEASE NOTE:  the Federal Defense of Marriage Act does not allow recognition of same-sex marriages for purposes of federal law.  As a result, any favorable tax treatment provided by federal tax law to an opposite-sex spouse under this and other deferred annuity contracts is NOT available to a same-sex spouse in the same situation.  We recommend that same-sex spouses consult their personal tax advisor prior to purchasing annuity products that provide benefits based upon status as a spouse.  Further, we recommend that an advisor be consulted  prior to exercising any spousal rights under an annuity to determine if it is right for you in your situation.  

All the requirements of the applicable Circular Letter are addressed, but in different words.  Nonetheless, if a company adopts alternative language that, for example, their in-house legal counsel likes better, they lose the option of a certified process.  Instead, a non-substantive change in disclosure language results in the mandate of a prolonged and non-expedited filing process.  

Further, does this mandated language mean that if a company elects a non-contractual disclosure form - say a stand-alone disclosure, where perhaps the text could be in a larger or alternative colored font - that form, otherwise not a policy form under the OGC opinion, now needs approval which can only be certified if it mirrors the guidance's text?  

Is that really a necessary assertion of approval authority?   

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 On August 10, 2009, the New York State Insurance Department officially responded to inquiries regarding the application of Circular Letter 27 (2008) to annuity contracts that must comply with federal law, including DOMA,  to receive tax-advantaged  treatment.  A [Supplement to CL 27 (2008)] was issued to address the apparent conflict between state and federal law.  The conclusion is that:  "a same-sex spouse must follow the same rules that apply to any natural person who is not the spouse"  in several circumstances, or "be subject to detriment in the form of taxes or penalties."  From this conclusion flow 3 Department directives set out in the Circular Letter:

1) No later than 11/1/2009, any new annuity contract/certificate with spousal rights or benefits, "should include a clear an conspicuous disclosure to consumers that explains that favorable tax treatment provided by federal law to opposite-sex spouses is not available to same-sex spouses because of DOMA."  That disclosure must also advise same-sex spouses to consult a tax advisor prior to purchase of an annuity providing rights/benefit based on spousal status, AND prior to the exercise of any spousal rights under the annuity contract.  

2)  For contracts issued prior to 11/1/2009, insurers should provide the disclosure on or before that date, or in the alternative, provide the disclosure to the beneficiary upon the death of the contract holder or certificate holder.  

3) Insurers should review their policy forms to ascertain if there are any revisions needed so that a same-sex spouse "will not be defaulted to the spousal continuation option, and to ensure that the default option for a same-sex spouse is adequately disclosed."  

The Department indicates that they will post details of an expedited approval process for form filings made solely to comply with this Supplement on their website.  Peter Dumar is listed as the contact in the Life Bureau.  

-----

The NYSID seems to be walking a very tough line here trying to reconcile state law prohibiting discrimination and federal law, which mandates discrimination against same-sex spouses.  The interpretation of policy provisions may be a challenge as a result.  It appears that the word spouse will be interpreted under NY law to include same-sex spouses, so contractual references to "spouse", without more,  will include same-sex spouses.  

It is less clear whether the now- common definition of  "spouse" to be "as defined by federal law" will be permissible without limiting that definition to provisions of the contract where DOMA comes into play.   If DOMA does not create adverse tax consequences, state law and this Circular Letter mandate that spouse include same-sex spouses and those spouses cannot be excluded by such a definition.  

Further it is important to note that the disclosure requirement is not limited to same-sex spousal situations:  All annuity contracts must get these disclosures and all are subject to the November 1, 2009 deadline.  Therefore, with less than 90 days until that date, there is no time to waste in beginning the review of contracts and drafting the required disclosures so that they can be ready for use on time.   

Finally, there is much confusion out there in the country at large and in compliance departments of insurers as well about the differences between various states on this issue.  In looking at your company's policies and its definitions and various usages, you should be aware that the state of New York does not offer either civil unions or same-sex marriage itself.  NY recognizes same-sex marriages performed in other states or countries, but civil unions performed elsewhere do not fall into the same category and are not similarly recognized.  

 

Continue Reading...

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 I have been asked to present  a session on Rule 151A topics - the litigation and other issues related to the Rule -  at the October AICP national conference in Phoenix .   I would be very interested in hearing from any readers who may have information that you think I may not have seen or an experience you think I should know about.   I have no doubt that this discussion can easily fill the 1 hour and 15 minutes allocated to it, but I would love to hear from you and gather as many perspectives and as much information as I can in preparation.  Thanks - I hope to see you in Phoenix! 

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 I have been giving the SEC's brief in response to the Petition for review of the SEC's order on Reg 151A a preliminary look.  It is my reading material for this weekend!  One thing that immediately jumped out at me is that it is 90 pages long and that 6 attorneys for the SEC are listed on the cover of the brief.  That is a legal arsenal that most state insurance departments would rarely have at their disposal on a single issue.  Legal challenges to state regulations are pretty rare.  There are six pages in the Table of Authorities in this SEC brief.  Court challenges to federal regulations seem much more common.  Another interesting initial observation about this litigation is how it has publicly split the industry.  I am beginning to think that as an insurance regulatory attorney I am also going to need to brush up on my federal rules of civil procedure.  It has been rare for case law to be an important component of a regulatory practice, but as we seem to move toward federal regulation, that seems likely to change.  

I hope that most of you reading this have more fun reading planned for the weekend, so I will be posting more substantive thoughts on the brief after I read it in full.  (But for my friends who care about the balance in my life, do not worry:  I will be spending both days this weekend out on the course of the Tour of the Battenkill bike race, marshaling and spectating.  I do not have to worry about ALL work and no play.   Mornings and Evenings will be work and the middle of the day outside play - not bad for a lovely Spring weekend!!)  

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 Here is the You Tube link to a recent discussion of indexed annuities on CNBC's "On the Money."   It seems like a pretty balanced discussion to me.  While there are clear and pointed references to the long and costly surrender charges, it is also clear that for this individual the product seems to have been a good choice.  

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 In an [article] published today on Insurancenewsnet.com, Sheryl Moore, President and CEO of AnnuitySpecs.com discusses the so-called 10/10 Rule and its implications on product design, performance and consumer protection.  

Moore notes that the 10/10 rule, dubbed this due to its maximum 10 year surrender charge period and 10 percent surrender charge penalty, was designed to protect consumers.  She notes that "the rule seeks to avoid having 85-year old grandmothers on a fixed income being swindled into a product where she will not receive her full cash value for 11 years or more."  

Her conclusion is however, that this intent has the result of limiting the availability of products that would be suitable and desirable choice for some. The article presents one of the constant struggles with product regulation:  when is consumer protection more accurately paternalism? That line is seldom clear and often reasonable minds will differ on where it should lie.  

Moore sees companies left with little choice than to design products that are "10/10-friendly" and that means, she states, a "slew of 10-year products with 5 percent premium bonuses that pay 8 percent commission."  

Encouraging readers to contact their state insurance departments to protest the paternalistic limits in product choices, she concludes: "Limiting surrender charges on annuities because of bad agent behavior is like outlawing hammers because some murderers use them to bash their victim's brains in.  When used properly, indexed annuities of all durations are a valuable insurance product."  Moore states that even a 16 year surrender charge would be appropriate for her because she does not need income now.  

Obviously one issue is that we don't always anticipate the need for funds.  Many who are unemployed today may not have expected it a few short weeks or months ago and a surrender charge could seem pretty significant when faced with the present need for cash.  But is there a difference between a 10 year and a 16 year surrender charge in that case?  Where is the line between reasonable and unreasonable?  And who do we want making that decision? The individual or the regulator?  

It will be interesting to see how much, if any,  of this type of product feature regulation survives as we move toward federal regulation of insurance.   But if we modify slightly her analogy to hammers, Moore suggests gun control or cigarette/alcohol restrictions may be an appropriate place to look at the difficulties that arise when we, as a society, try to decide where an individual's right to make choices that may cause harm ends and when it is appropriate for government to step in to protect us from ourselves and others who may try and manipulate our actions.  

 

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The New Jersey Department of Insurance is getting bombarded with emails and phone calls relating to the individual fixed annuity act going into effect April 1, and expects to be swamped with filings.

A March 9 Bulletin addresses using only approved Buyer’s Guides, having separate approved Disclosure Statements, and providing a 10-day Free Look provision with specific refund language, among other suitability issues.

Reginald Young, Chief of the Life Bureau, told us yesterday that he will try to expedite review of the forms being filed to comply with the new requirements, but he’s reserving the right of the Department to respond within 60 days. He noted that although the Department issued the Bulletin less than a month before the compliance deadline, the Act was approved nearly 6 months ago.

Mr. Young said he was informed by his legal department that there will be no extension for compliance.

The Department itself has not yet adopted all of its own regulations to fully coincide with the Act, but, as we know, statutes trump regulations.

It looks like it’s going to be a scramble to get approvals for separate disclosure statements and for any Buyer’s Guides that aren’t yet approved by New Jersey, as well as notices that an annuity owner can cancel a contract within 10 days of receiving it and get a prompt refund.

With New Jersey’s reputation for utilizing the full 60 days it’s allowed to review filings, there may be a lot of hurry-up-and-wait.

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If so, read on..... In what appears to be a new position and new interpretation of NY Insurance Law section 4223 (the annuity nonforfeiture law),  the NYSID has raised on post-approval review, the statutory permissibility of contingent annuitants.   The legal staff states:  "When the annuitant dies, a death benefit equal to the actual accumulation amount should be paid in order to comply with [section] 4223(c)(1)....Section 4223 does not authorize" deferral of payment of the death benefit when the contract would provide that a contingent annuitant could be named.  

Has anyone ever heard  this interpretation?  If so, when? ...we'd love to hear from you! 

Section 4223(c)(1) defines minimum values.  It is talking about the how much of the death benefit, not the when.  Its focus is on the "actual accumulation amount" and then subsequently what can and cannot be deducted from that amount.   There is not a single  when word in section 4223(c)(1).  It is all about how much.   Section 4223 generally is a statute concerned with amounts - it is the nonforfeiture law, after all.  The first place to look if you want to know when a benefit must be paid is section 3219 - the standard provisions section.  If you want to know how much of a benefit must be paid, 4223 is the first go to section for a general account annuity.  

This new position turns that on its head.  No because the "how much" statute doesn't specifically authorize a deferral for a contingent annuitant designated by the owner because the owner wanted such an arrangement,  the designation is characterized as a statutory violation on a post approval review.  Silence in the nonforfeiture law about the actual payment of the death benefit means the owner cannot elect to designate a contingent annuitant. 

This designation of a contingent annuitant is done by the owner of the contract, not the insurer.  This interpretative position takes a right away from an owner and requires the insurer to make a payment that the owner doesn't want.  If the statute affirmatively mandates such a payment that is one thing, but here there is no mandate.  The legislature only defined the how much.  It is the Insurance Department that is telling the owner that he/she cannot designate a contingent annuitant in the event that the original annuitant dies prior to payment of the death benefit.  

And don't forget the Department is doing so in  a post-approval review.....  

 

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I have received quite a bit of feedback on my recent National Underwriter article on Rule 151A.  Thank you to all who have contacted me.  What is interesting is that much has been of the "Rule 151A is good and right" or "Rule 151A is bad and wrong" variety.   It is quite clear that there are still very  strong feelings on both sides of that issue.  But my primary concern is different.  I wonder where the regulatory line gets drawn once insurance policy holders are not directly receiving market returns.  What guarantees matter and what guarantees do not? I think the language and rationale used in the rule – even the final rule – which had not been published when I wrote the article – could be applied to many insurance products that have more traditional guarantees.   

I think that the new rule is about moving toward federal regulation of insurance and the SEC’s belief that they would do a better job regulating insurance than the state insurance regulators currently do.  Perhaps they would and until we see what Federal regulation of financial services will look like under the new administration and in the current crisis, we won’t know.   But I think the question of federal regulation should be addressed comprehensively, not piecemeal, on a product-by-product basis, which is what I believe Rule 151A does.  

 

 

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In a recent Office of General Counsel Opinion, posted yesterday (1/20/2009), the NYSID provided some  clarification regarding the application of Circular Letter 27 (2008).   However,  this very brief opinion adds to the discussion begun in November 2008 regarding its application, but it does not make clearer how insurance companies can comply with both the circular letter and the federal Defense of Marriage Act (DOMA), when both would be applicable to a particular product.  

We get asked about this daily here in the context of spousal continuation for annuities and there does not seem to be an easy answer.  There is a great deal of confusion within the industry about how to handle this issue.  The choice appears to be marketing a product that complies with NY's mandate for equality of treatment for all spouses, wherever married, and marketing a product that is consistent with DOMA, which disqualifies any product offering same-sex spousal equality the status of an "annuity" under 72(s).  This new Opinion does not specifically address that issue although, notably, it does not include annuities in the short list of products impacted by the Circular Letter.  (see below)

Perhaps the NY Insurance Department is considering exempting annuities from coverage which would resolve this issue for insurers, but retain a discriminatory stance towards many legally married New Yorkers.  Based on my conversations with Insurers, they would be happy to be able to offer spousal continuation to same-sex couples, but do not want to create a situation where the product no longer qualifies for tax-advantaged status under the Internal Revenue Code due to the operation of DOMA.  

The NY  opinion was based on a general inquiry, with no specific facts and the entire analysis set forth in the opinion is as follows:  

"Circular Letter No. 27 (2008) advises that same-sex spouses legally married in jurisdictions outside New York must be treated as spouses for purposes of the New York Insurance Law.  The circular letter draws on the Insurance Department’s Office of General Counsel Opinion 08-11-05 (Nov. 21, 2008), which analyzed, inter alia, Martinez v. Monroe Community College, 50 A.D.3d 189, 850 N.Y.S.2d 740 (4th Dep’t), lv. to appeal denied, 10 N.Y.3d 856 (2008), and concluded that New York’s “marriage recognition” rule applies to marriages between same-sex spouses validly performed outside the state.  Although that opinion focuses principally on health insurance, both the opinion and the circular letter note that the opinion’s analyses and conclusions are “applicable to all other kinds of insurance, too.”  Accordingly, Circular Letter No. 27 (2008) applies to group long-term and short-term disability insurance, which are types of accident and health insurance, and to group term life insurance."

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The edition of National Underwriter coming out today is devoted to Rule 151A.  I am excited to have a two-page article going into more depth regarding the legal analysis that "supported" the Rule and what I believe is an effort to lay a legal foundation for SEC regulation of insurance.  The general premise of my position is that while the current rule is clearly and definitively limited to indexed annuities, the analysis would apply to other products as well.  There is no logical reason to draw the line at indexed products once the SEC argument for looking at guarantees and crediting above those guarantees in this way is accepted.  The bright line was the minimum guarantee and that has now been crossed.  

As always I am interested in your feedback, either through comments to this blog or direct e-mails if you prefer:  ccurrin@currincompliance.com. 

 

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If the Coalition for Indexed Products has its way, Rule 151A will not take effect on January 12, 2011 as the SEC has slated.  In litigation filed today, the Coalition alleges that the SEC exceeded its authority and violated the Administrative Procedures Act. 

I agree with the assertions that there were significant flaws in the process and that the outcome goes against well-established principles.  Because of that, I have written that I believe much of what the SEC is doing is laying the analytical groundwork for pulling more and more insurance products into their regulatory net.  The commentary with the Rule clearly suggests that the SEC believes that they would be more effective regulators than state regulators have been.  They seem to be using this as a testing ground for a legal argument to erode the exemption for insurance products.  The outcome of this litigation will, I believe, be very significant in determining whether the SEC has developed an analysis that will allow them to reach into traditional insurance products that have previously been exempted from their regulatory authority.  

 

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There is so much to write about, and I anticipate future posts on this topic, but to start, the materials accompanying the final rule seems to draw a line in the sand on state regulation and federal:  solvency lies with the state and product regulation with the feds. 

At this point, the SEC does not go beyond Indexed Annuities with this rule, but as I discuss in much greater length in an article scheduled to appear in the National Underwriter's special January 19th edition on this Rule, the legal analysis could easily extend beyond indexed annuities and apply to many life and annuity products. (Unfortunately, the article's deadline was earlier than the release of the final rule, so it will be outdated upon publication.)

A key quote: "state insurance laws, enforced by multiple regulators whose primary charge is the solvency of the issuing insurance company, cannot serve as an adequate substitute for uniform, enforceable investor protections provided by the federal securities laws." 

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As most of you know, yesterday the SEC approved Rule 151A by 4-1 vote.  Under the rule, indexed annuities will now be considered securities.  The rule goes into effect on January 12, 2011 and virtually all indexed annuities will fall under the new rule.  They  will need to be registered with the SEC and be sold exclusively by registered broker-dealers. 

As a former state regulator with tremendous respect for my former colleagues at the New York State Insurance Department, I am no doubt somewhat biased.  But I have also represented life insurers for many years now and certainly know first hand the challenges of state regulation.  With that background, it continues to amaze me that at the same time as more and more federal regulatory failures come to light, those same federal regulators insist that they will do a better job than state regulators have done in protecting consumers! 

When the argument for federal regulation is on reducing red tape and regulatory obstacles to business, I think the feds are on terra firma.  They have done a remarkable job in reducing regulation.   The mantra has been "Look at banking as a model for insurance."  Ok, let's look at banking.   If the goal is to move more towards a regulation-free environment, then federal regulators have a proven track record.   Open, un-hindered competition and regulation-free business is a valid philosophical, economic and political world view.  My call is to be honest about that.  Say that federal regulation is about less or no regulation. 

What federal regulators have not done so well is protect consumers.   It seems that each day's press is full of reports of yet another industry where federal regulation has led to injury to individuals and consumers.  Yet this move to regulate indexed annuities at the federal level  is announced as necessary for consumer protection.  And we are supposed to believe that? 

If it is too hard for insurers to compete when there are 50 sets of consumer protection requirements and it would be easier for insurers to compete and thrive in a demanding financial environment if they did not have to comply with so many consumer protection regulations at the state level, then can't we be honest and say so?  My respect goes to those who say they support a free market and regulation runs counter to that so they are in favor of the system that regulates the least or not at all, because that is good for business and what is good for business is good for all.  I find it much harder to respect the position espoused in the adoption of this rule:  that consumer protection is the number one goal and the federal government is the entity to do that best.  That does not seem to reflect the reality of where we have been over the last few months. 

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In a notice dated 12/10/2008, the SEC has announced that an Open Meeting will be held on December 17, 2008 at 10 am to consider four agenda items, the last of which is "whether to adopt amendments that would define terms related to annuity contracts under the Securities Act of 1933, and whether to adopt amendments related to periodic reporting requirements under the Securities Exchange Act of 1934." 

In addition to this discussion of 151A, the SEC will consider the 2009 Public Company Account Oversight Board budget and related accounting issues and several filing issues related to the interactive data program. 

Based on public comments, I would guess the annuity issue will be the most passionate! 

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 NY has recently issues Circular Letter 27 (2008) dealing with same-sex spouses.  I sent the following e-mail to Mr. Dumar this morning:  

 

As you might expect, there is a fair amount of discussion "out there" this morning about the new Circular Letter.  A number of listservs are chatting about the significance for annuities, in particular.  In the context of life & annuity filings, the question the life insurance industry has is whether or not NY now mandates that insurers treat same-gender spouses the same as opposite-gender spouses for purposes of continuation of the contract after death of an owner.  As you probably know, the answer is crucial, as it relates directly to IRC 72(s) compliance and the tax-deferral treatment of inside buildup of non-qualified deferred annuity contracts. 

If the Dept requires same-gender spouses receive the same contractual continuation rights upon death of owner as opposite-gender spouses, then the industry will have to eliminate spousal continuation rights completely.  This is because (state-law-governed) annuity contracts are treated as annuity contracts for federal income tax purposes ONLY if their terms comply with the continuation after death of owner rules in IRC 72(s).  As you know, the IRC is subject to the Defense of Marriage Act (DOMA), which limits the application of the words spouse and marriage to the opposite-gender context.  In short, the IRC disqualifies deferred annuities if they provide for any continuation after death of owner to any person other than an opposite-gender spouse, regardless of what may be permitted or required by state law.

In recognition of the threat to the tax deferral treatment of annuities for the entire deferred annuity market, the Vermont Insurance Dept issued guidance to the effect that insurers were to treat same-gender parties to a civil union the same as opposite-gender spouses, except in the context of the continuation upon death feature.

http://www.bishca.state.vt.us/InsurDiv/regsbulls/insregs/REG_I-2000-1.PDF

http://www.bishca.state.vt.us/InsurDiv/regsbulls/insbulls/BUL128.htm

The more broadly the continuation rights are applied, the greater the opportunities for tax deferral, so most of the insurance industry would be thrilled to extended continuation to same-gender spouses.  However, unless DOMA is repealed, the consequences of post-death continuation being so extended are potentially catastrophic for every holder of a deferred annuity.

 Any guidance you could provide would be much appreciated.   

 

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The New York State Insurance Department recently issued "Equity index annuity contract or life insurance policy paid dividend disclosure under Section 3209(b)(2)(C)."  

Section 3209(b)(2)(C) was amended in the last legislative session to require a disclosure statement  "indicating whether paid dividends are included in changes in the equity index, together with a description of how such dividends, or lack thereof, would affect the changes in the equity index; the statement must provide the average dividend rate over the lesser of ten years or the calculable life of the index."  The guidance issued is to assist in "calculating and communicating" the average dividend rate.  

Several companies have posed questions to us over the last couple of months regarding the nature and timing of such disclosures.  In addition to providing a sample of satisfactory disclosure, the guidance states that the communication is required "by the first of the month following the end of the latest completed calendar year (i.e., by February 1 the average dividend rate for the most recent 10 completed calendar years would be provided in the disclosure required by Section 3209(b)(2)(C))."  Adding the required disclosure to these annual statements for indexed products (remember this applies to both life and annuity products) could take significant programming for some companies, so prompt attention to this guidance is strongly recommended.   

Companies can be sure that the Department will be asking to see these disclosures during post-approval reviews, market conduct exams or upon receipt of a consumer complaint.  

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 The New York State Insurance Department recently posted Guidance for Illustrations of Variable Annuity Contracts on their website.   This guidance is in response to inquiries received on Regulation 47's statement that "Except as approved by the superintendent, no hypothetical rate of investment return in excess of eight percent may be used in such illustrations."  The guidance is  helpful in that it does permit gross rates in excess of 8%, provided that in any year the accumulation at the gross rates used in the illustration does not exceed accumulation at 8%.  A sample calculation is provided.  

However, it is more troubling that the guidance also appears to be a step towards using Regulation 47 in a whole new manner:  to regulate variable annuity illustrations.  It concludes with the statement that "Circular Letter 6 of 2004 may be used for filings with illustrated forms that conform to the above guidance regarding variation in the eight percent rate in illustrations.  The submission letter should indicated that the forms are illustrated and this Guidance should be cited."  

In stating a relatively simple rule, the guidance glosses over more complex issues about how that provision applies to today's products.    The primary problem is that Reg 47 is tremendously outdated, having been promulgated in 1970.  In all likelihood, many people making submissions to the NYSID were not even born when this regulation was drafted!  Its revision has been on the NYSID's regulatory agenda  for well-over a decade.  Trying to apply regulatory concepts set down almost 40 years ago to products being developed in late 2008 and beyond ends up looking like contortionism.  

The discussion in this guidance ignores a number of the old regulation's definitions that are important for understanding the regulation as a whole, and section 50.8's limits on illustrations specifically:  the difference between a separate account annuity contract and a variable annuity contract and the pivotal rate of investment return to name just a couple.  Likewise, there is no mention of the clear exemption in section 50.8 which states:  "Nothing herein contained shall prohibit the use of hypothetical rates of investment return, clearly designated as such, to illustrate possible levels of variable annuity payments, if the use of such hypothetical rates is not in conflict with applicable requirements of the Securities and Exchange Commission."

This guidance creates a brand new requirement for a statement regarding the illustration of annuity products.  Unlike for life insurance, there is no illustration regulation that specifically requires that notification. There is no definition of an annuity illustration or what other standards may be applied to annuity illustrations once flagged in submissions.  This raises concerns about the openness of the regulatory process.  If NY is going to regulate annuity illustrations, something contemplated by the long-ago revisions to section 3209 of the Insurance Law, then there should be a fully vetted regulation that addresses today's products and makes sense in the modern annuity world.  

Recent Department exams and post-approval reviews have focused increasingly and piecemeal on annuity illustrations.  This appears to be another step down that path.  While the specific statement that hypothetical rates of investment return which vary from year-to-year is welcome, only time - and Department actions - will tell if this guidance ends up being something that is helpful to companies genuinely striving for compliance.  

It is time for Regulation 47 to be revised once and for all.  If annuity illustrations are to be regulated, a regulation following the mandated administrative process should be promulgated. Regulation 47 should be put into the history books, not allowed to have a 40th anniversary.   Let's have a regulation that fits the products, not try to fit products to an antiquated standard.

RIP Reg 47!  

 

 

 

Continue Reading...

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The SEC announced yesterday that it would, after all, extend the comment period on proposed Rule 151A: the rule that would treat equity-indexed annuities as securities.  While the original comment period closed on September 10, the new, extended period will run for 30 days after the extension notice appears in the Federal Register, expected to be sometime this week.  

It appears likely that many comments in this second period will look to the protection against downside risk that equity indexed annuities offer.   With recent losses to securities, it would seem to be much harder to argue that the risk posed by these products is similar.  Indexed annuities seem to have been performing better under current economic conditions than the investment products regulated by the SEC now.  

What will be interesting to watch is what the consumer response is to the performance of various designs during this period of tremendous volatility in the indices.  Some contract owners may find that the luck of their issue date and the index account option they chose makes huge difference in how their particular contract performs.  Some purchasers may not have realized how important those factors could be.  But it seems quite likely that many who were previously unsure of their purchase, are today very grateful for the downside protection these products offer.

Given all that has happened since September 10, it seems certain that there will be a different emphasis in the comments that are submitted during this comment period than those that were submitted in the initial period.  

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Today the NYSID has issued a press release aimed at AIG insurance company policy holders. Specifically it  warns policyholders  not to  make hasty decisions with respect to their AIG policies and it "reminds" producers of their obligations in replacement situations.  FAQs follow the introductory discussion.  

The press release also reiterates much of what has been in NAIC releases over the last few days regarding the strength of state-regulated insurers compared to federally-regulated financial institutions including, of course, the non-insurance AIG parent company.   While I think much of this is likely falling on deaf ears, perhaps some will take in the message.  It may end up being one of this industry's great ironies that after all these years of the ACLI and others calling for insurers to have optional federal charters as banks do because, the argument goes, that regulatory paradigm works it may be the  failure, insolvencies and bailouts of  federally-regulated entities that will ultimately lead to federal regulation of insurance as well.  

It would be impossible to represent as many life insurers in state regulatory matters as we do here without knowing that state regulation has significant  and costly inefficiencies.  But right now, of all times in history, to promote federal regulation as a better answer to the industry's problems -- in the midst of  this chaos and financial devastation --  leaves me questioning whether I am reading the same articles and hearing the same information that the people arguing for federal regulation are.  

As I write this I remember that little boy from the fairy tale who calls out during the parade to say that the emperor has no clothes!  While there is more than one "little boy" calling out in this story, it remains to be seen whether any one will listen at all.  

 

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Speaking at the LHCA Conference in Boston on Friday, Commissioner Burnes addressed a participant question regarding the unisex annuity legislation, discussed here previously.  The commissioner wanted to make sure that all attendees realized this was not a Division initiative and that they were doing what they could to mitigate the challenges of the fast-approaching implementation date of 1/1/09, but she also advised that companies would need to go to the legislature for relief as the Division's hands are tied by the terms of the new law.  She indicated that she would be meeting with LIAM Representatives tomorrow and directly with companies later in the week.  

As I continue to talk to companies about this, it is clear that there are those who do not realize that this legislation differs significantly from that in Montana, in that it is extra-territorial with respect to MA residents.  In this forum, I previously addressed some extra-territorial situations, but another that seems to be equally troublesome would occur when an individual has purchased an annuity in another state but then moves into MA.  The law appears to require that individual get a new contract with unisex rates at that time.  

With the well-known exception of NY's compensation laws, I do not think there has ever before been a state law that so directly challenged the standard provision in all life and annuity contracts, that the contract is subject to the laws of the state in which it is delivered.  Even NY's compensation requirements are at least set at the time of issue, even though they are extra-territorial.  Here, there is no certainty.  What would happen to the person's contract described above if, after living in MA for a couple of years, s/he moves and is no longer a resident of MA?  Does s/he retain the unisex rates?  Does her/his contract revert to the original?  Does it matter whether the original rates are more favorable or the unisex ones are?  These are but a few of the questions that are likely to arise under the law scheduled to go into effect on January 1.  

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Here in Boston at the LHCA conference, one major topic of discussion has been the SEC's proposed Rule 151A and the possible federal regulation of indexed annuities as securities.  At this morning's annuities session, there were several questions on this topic and the discussion closed with the hope that the comment period would be extended.  Barbara Price of the ACLI indicated that the trade association  had requested an extension.  So did some individual companies and the National Governor's Association, in a letter signed by Gov. Jon S. Corzine and Gov. M. Michael Rounds.  One LHCA speaker indicated he understood that comments were running at over 85% against the SEC's proposal.

But despite the requests for extension, the SEC closed the comment period.  The process now moves to closed deliberations. 

A review of the website suggests that The Hartford had the last public word of comment and that was generally in favor of proposal.  That comment indicates that while the Proposed Rule is overbroad as currently drafted, federal regulation would be a welcome and valuable addition to regulation by the states. 

And now we wait.....

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The NYSID has posted Filing Guidance for equity indexed annuities on its website, now that changes have been made to the nonforfeiture law to specifically address these products.  Most important is the explicit prohibition against using the CL6 certification process for these filings.  Properly marked, the Department states that submissions will be given priority in the prior approval queue.  

Because the "Deemer" process is statutorily mandated, it remains available.  It is worth noting that this guidance indicates that deemer filings "will be handled within the time frames specified by statute."  This may be a filing strategy worth seriously considering because experience has shown that priority given innovative product submissions often does not result in a very speedy review.   If EIAs move at a similar pace, the statutory time frames of the deemer law may be an attractive alternative and yet still result in a full review prior to marketing the product. 

In addition to this guidance, the Department has provided an important warning in preparing these submissions to which companies will want to pay close attention.  NY's new law (which will be effective October 8, 2008) requires submission of a demonstration that the present value of the possible 1% reduction in the guaranteed minimum interest rate does not exceed the market value of the benefit.  The Department notes here that the Memorandum of Variable Material (where some companies have placed their GMIR procedures under the current nonforfeiture law) is a publicly available document. If your company seeks confidential treatment of that present value demonstration, it must be separate from the other filing material and a specific request for confidentiality is required. 

Finally, the NY Insurance Department asks that EIA submissions include a sample sales illustration.  They further indicate that, on a case-by-case basis, marketing material may be requested. 

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This week's edition of Investment News has two articles on the SEC move to regulate equity-indexed annuities (EIAs).  In addition, comments continue to come in on the SEC's website.  

In Sara Hansard's July 14 article in Investment News:  State insurance regulators are angry about EIA proposal, she reports that Susan Voss, Iowa's Insurance Commissioner is scheduled to meet with SEC Chairman Christopher Cox tomorrow to address her concerns.  The SEC's proposed regulation, in a reversal of their 1997 determination that EIAs were insurance products, would regulate EIAs as securities, with the requirement of prospectuses and other federally-mandated disclosures.  In the same July 14 edition, Darla Mercado reports on Agents' concerns over the move by the SEC. 

That agent concern is certainly evident on the SEC's website where over 50 comments were posted on one day alone last week.  Many of those comments appear to be somewhat emotional reactions and I am hopeful that as we get closer to the deadline for input, there will be comments that reflect well-reasoned positions on the issues raised by this move. The Hansard article indicates that SEC spokesman John Nester stated, via e-mail, that SEC officials "look forward to hearing and considering all views" as the review the proposal.  It also reports that several organizations, including ACLI and NAVA, are still evaluating the proposal.

Mercado reports that agents are concerned about having to affiliate with a broker-dealer and the resulting costs and loss of control they would experience in order to sell EIAs.  Registered reps counter that federal oversight will improve sales standards.  

State regulators are pointing to the new suitability model regulation as a more appropriate vehicle to safeguard insurance consumers.   

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Many of you may have seen this already from various listservs or trade associations, but if you haven't already, you might want to set your DVRs for this one.....Sunday, April 13th, NBC's Dateline will broadcast (7 PM EST) a piece on annuity sales using hidden camera and undercover techniques.  The story will include an interview with Minnesota Attorney General Lori Swenson according to the NBC website article.    As you can also see from the website link, the piece "shows the widespread practice of agents cloaking themselves in fancy titles and insurance agents attending a seminar to learn these sales tactics." 

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On Monday, the Iowa Insurance Division issued a Press Release and Bulletin announcing the Annuity Disclosure Template Pilot Program for Fixed Annuities, Including Indexed Annuities, Sold in Iowa.  This pilot program, using ACLI disclosure templates, began on 1/28/08, but companies can begin whenever their system modifications are complete, according to the Bulletin.  Current disclosure forms can be used until those system modifications are complete and the new ACLI template disclosure forms are available. 

The Bulletin specifically states that it is not necessary to use the template forms for all products sold in Iowa. 

The Iowa Insurance Division must be notified of participation and they have set up a dedicated e-mail for this purpose.  The address is annuity.project@IID.state.ia.us. 

The Iowa Division and the ACLI have indicated that the templates will be evaluated during the one-year pilot project and modifications may be made to the templates, if necessary, during that time. 

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On January 10, 2008, the Connecticut Insurance Department issued Bulletin S-11 on "longevity annuities", or annuities without death benefits prior to annuitization. 

The Bulletin includes required sales practices , which include a requirement that a similar deferred annuity with a death benefit be offered and that 3 different illustrations be generated on a case-by-case basis.  Policy form requirements are also included. 

The Department indicates that a deferred annuity without a death benefit will only be approved when it complies with the Bulletin.  The Bulletin does not apply to group annuities purchased under a retirement plan or deferred comp plan established or maintained by an employer or an employee organization. 

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The Department has recently posted a document entitled Guidance on Equity Index Products on their website.  The guidance is not broken down by product type but rather addresses annuities and life products as well as individual and group.   One thing that jumps out at me is that there is not a single citation to law, regulation or circular letter.  This makes it more difficult to assess the basis for the positions as expressed in the product design guidance.  Some clues lie in the word groupings, but because the guidance applies to all products, some of these terms would not ordinarily apply to the product, based on where they are found in the law. 

For those companies that elected to file equity indexed products on a certified basis, there isn't a lot to determine what might come up on post-approval review that is based on law, regulation or circular letter.  However, the guidance does give a very good indication of what the examiners will be looking and asking for upon review.  And that is more than we have had in the past! 

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Recent post approval review (PAR) letters from both the legal and actuarial side have raised a number of issues related to 72(s).  This is surprising since tax counsel certifications were originally proposed as a way to avoid NYSID attorneys wading into these waters.  

Those companies that have received PARs know they often raise issues that were thought resolved long ago.  One such example is  the effect of spousal continuation of the annuity contract. 

The NYSID has recently objected in a PAR to the characterization of  post-continuation requests for withdrawals as surrenders.  Rather the actuary stated that they are more appropriately treated as death benefit claims even after the election period has expired.  The actuary's analysis seems to be that since the spousal beneficiary could have elected payment of the death benefit at one time, s/he should have access to the "death benefit" for all time, even as s/he "continues" the contract including possible additional premium payments, accumulation at interest and other contractual rights. 

Not only does this new position run contrary to provisions in annuity contracts with spousal continuation approved over the last decade, it raises a whole set of additional issues, legal, actuarial and administrative for companies.  Annuity contracts that are "continued" would probably have to be tracked differently because at least some (only up to the death benefit once available? what about interest or separate account performance on that death benefit? what about new contributions? what would be the implication of a partial withdrawal?) withdrawals would have to be surrender charge free.   Over a long period and many of these contracts, how could this be done?  Is this really what the IRS means by continuation? 

This is one of many issues that you may have thought clearly established, but which could pop up on your company's next post approval review. 

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It has come to my attention through the post approval review process that there is a new position at the NYSID with respect to payouts. 

The Department is requiring an endorsement of approved contracts, at least those picked up on post-approval review,  to state what happens when the beneficiary also dies before guaranteed payments are all paid out.  This issue apparently arose from consumers' questions and when told that it depends what the contract says and the Department looked to see what they did say, it was found that many say nothing.  Questions arose regarding what would happen and whether the payments would go to the owner or the beneficiary's estate.  To promote clarity, the Department began to require a contract provision on those it reviews.    

Companies should take note because this is enforced not only on a going forward basis, but those companies who are subject to post-approval review are being required to endorse their  in-force contracts to address this perceived ambiguity.   There is nothing we can do about all the policies and contracts we have filed before we knew of this unpublished position - it will be up to each company to address the issue as it sees fit if it comes up on post-approval review - but for contracts being drafted now, this is a provision that should be included to avoid a comment and possible endorsement on the back-end. 

 

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In a recently released OGC opinion (www.ins.state.ny.us/ogco2007/rg070613.htm)  the NYSID opined that Reg 60 paperwork is not required when the assets of a fixed-annuity IRA are rolled over into a non-insurance IRA. 

While that is an important clarification of Reg 60, perhaps even more helpful is the statement in the Analysis section:  Reg 60 "only applies to insurance-to-insurance replacement transactions."   Because of the Reg's emphasis on the new policy being delivered, I have had several companies ask about the situation where a non-insurance IRA product was being replaced with an IRA annuity.  While it has been my opinion that Reg 60 would not apply in that situation, this OGC opinion makes clear that the Department agrees.  Because the first product was not an insurance product, the transaction is not an insurance-to-insurance transaction and Reg. 60 does not apply. 

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At the recent  seminar, a representative of the NYSID set forth the Department's new rules for substandard annuities, as they are now approving them, when they are NOT issued in the structured settlement market.  These rules are:

1) Insurers must comply with the requirements of section 99.6 (i)(1) and (4) of Reg 151;

2) Cases must be underwritten individually;

3) Issuance on a substandard basis is limited to those who have serious and acute health impairments based on submitted medical information. 

Continue Reading...

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The May 28, 2007 edition of the National Underwriter, www.lifeandhealthinsurancenews.com, had an interesting article on these relatively new benefits.  As I read it I thought back to my post here on May 15, 2007 on a related topic and the NYSID's position that an asset-based charge is not permitted (unless it is capped at $50.00/year based on a restrictive interpretation of the non-forfeiture law).   One of my arguments to the Department on this issue has been  that an asset based charge can be viewed as pro-consumer.  The consumer can  look at the benefit's value to them - the value of the guarantee - and make a decision about whether the guarantee is worth the charge.  Especially with a fixed annuity when the asset base is more predictable, the charge can be evaluated.  The NU article concludes that the guarantee in these fixed products is significantly smaller than the guarantee provided by a similar benefit on a variable annuity, but that for some consumers, this guarantee does have value. 

 

Continue Reading...

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The NYSID has concluded that substandard immediate annuities can be written on a basis "similar to that permitted for structured settlements annuities."   In the 2006 Annual Report, www.ins.state.ny.us/downpdf.htm#annrpt, at page 41, the Life Bureau states that:  "As with structured settlements annuities, substandard underwriting for annuities must be limited to individually underwritten cases and to individuals with serious health impairments based upon medical information submitted to the insurer and an evaluation of a person's medical condition and life expectancy by an underwriter of the insurer.  Substandard annuitants must have demonstrable health problems that can result in shorter life expectancy.  Underwriters can either 'age-rate' up the applicant's age or adjust the mortality factors according to the impaired risk based on the applicant's medical records."  (footnote omitted). 

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One question I get asked frequently is whether the NYSID knows that variable annuities with guaranteed living benefits are being filed under the CL6 process.  My answer is that I am confident that they do - that the Life Bureau's tracking system is quite good and that I think they do keep track of what kind of submissions are coming in.   That opinion was strengthened  by a statement in the Life Bureau's opening section of the 2006 Annual Report, titled Faster New Product Introductions. www.lifeinsurancelawblog.com/Page 14 2006 Annual Report.pdf.  While the text does not specifically say how many of these VAGLB submissions are CL6 submissions, it is likely that a good number of them are, in fact, certified submissions. 

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I recently posted about a very specific issue that has come up recently on an annuity product.  But I have also been involved in efforts by a few companies recently to develop and get approval for innovative annuity products in New York.  The response has been a resounding "No" from the Department.  It was said very nicely, but firmly.  No,  these products are not permitted in New York.  These are products that were designed to meet very real needs of New Yorkers for longevity protection.  They are new and different - in order to meet the demand of consumers to provide a new and different array of benefits. 

There is no question that the new products carry different risks than old, traditional products.  Perhaps the risk is greater, but perhaps, it is just different.  Does that difference mean they can't be approved and offered in NY?   Even if the risk is truly greater, does that mean the products can't be offered?  Is there no room for real innovation?  Is it not possible to have meaningful regulation of these innovative products?  Isn't it worth having that discussion? 

 

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Recently an issue arose regarding rider fees on fixed account products subject to section 4223, the nonforfeiture law in New York.  As the issue developed, it highlighted some of the challenges facing companies trying to develop new products in NY.   This particular issue involved a rider on a fixed annuity.   The rider would impose an asset-based charge that the company felt was appropriate for the benefit offered in the rider. 

A review of the most recent annuity product outline, dated 3/16/2005,  indicated the following:  "The contract must specify the charge for the benfit and include a description of whether the charge is calculated based on amounts allocated to the fixed account, if any, as well as the separate accounts....The charges for the benefit must not reduce the benefits applicable to amounts allocated to the fixed account below the minimums required in the nonforfeiture law for fixed deferred annuities."  Looking at that interpretive language, it appears reasonable to believe that rider fees could be imposed on a fixed account product so long as the nonforfeiture minimums were not compromised.  However, that turned out not to be the case. 

Continue Reading...

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