New York Life Insurance Compliance Lawyer & Attorney : Currin Law Office : Annuity Compliance & Insurance Regulation

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. 

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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. 

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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. 

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