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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 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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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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Disclaimer:  I speak only for myself here.  I do not purport to speak for "the industry."  I do not purport to speak for my clients.  This is just me.  So....

In the policy forms meeting with the Department today there was an extended discussion  about the process for making fund changes and a good deal of dissatisfaction expressed.  I can understand wanting more flexibility in Variable Material, particularly with respect to fund changes.  However, as of today, we have a clear process.  We know what to do, the guidance is easy to comply with and it is fast!  For me, this is the definition of a good process.  We can argue around and around about what is necessary from a legal and regulatory viewpoint, but on a day-to-day basis, this process is a good one because it is clear.   I like knowing that within 5-10 days of getting final fund change information I can have documented approval for them to be used because I know exactly what to do and how long it will take. 

What I am very concerned about is opening up a protracted discussion which will, by definition, create uncertainty.   But not only that, most importantly, who is going to be involved in this discussion?  At the Department, it is going to be the people we need to have spending time on other, in my personal view, more important matters.  I would like Kathy, Ralph, Deb, Dennis and Tom and the people who report to them, spending time on innovative products, on revising the outlines, on new regulations, on wrapping up post-approval reviews and on the myriad of other things that need their attention so that life insurers can do their business in New York.  They will likely spend hours internally - and with us - talking about Variable Material and fund changes - all to fix something that may not be perfect, but it works!  At least we know how to get fund changes approved! 

Who can get an "innovative product" approved quickly?  And we won't be able to if the staff is spending all their time debating fund change nuances and other items already dealt with in the recently posted guidance.  Some may not have gotten everything they want, that rarely happens in a regulated industry.  But can't we pick our battles, deal with it and get on to more pressing issues?  After all, there are only so many hours in a day.....

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Several companies have recently had their filings rejected based on statements of self-support that include the statement "and other relevant factors."   In the Circular Letter that was issued after the revisions to section 4228 that first included the statement of self support requirement , the Department initially recommended this language.  See  www.ins.state.ny.us/circltr/1998/cl98_08.htm.   However, in an opinion issued by the Office of General Counsel in 2001, www.ins.state.ny.us/ogco2001/rg106291.htm it was concluded that the requirement went beyond the language of the law. 

It was my experience that many companies left the language in their certifications after that opinion by choice, and for many years there was no reaction by the Department.    However, the Department now contends that the OGC opinion made use of that phrase impermissible.  The use of  "and other relevant factors" today will result in a CL6 file being rejected. 

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