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

The February 8 issue of [Insurance Compliance Insight (ICI)] had a very informative piece entitled Best Practice Tip: Use FINRA Regulatory Notice as Guidance for Insurer Social Media Policies.

Just last year I attended an insurance compliance conference and in a regulator session that was not on this topic but had an open Q & A session, I asked a state regulator what his state was doing about social media. He gave me a line describing what he thinks of Twitter that got a lot of laughs and was very funny, but revealing in that it made clear that his department had not seriously addressed these issues. FINRA is taking a different approach and ICI suggests that companies would be wise to look to FINRA's Notices when they draft their own social media policies and procedures.

As a blogger, one of the areas discussed in the ICI piece that is of particular interest to me relates to blogs and is the distinctions between static content blogs as advertising and those which are interactive, which are called an interactive communication forum. In the latter situation, prior approval is not required from FINRA, but if it appears that the firm as somehow endorsed or approved the content, then the comments could be considered to be endorsed or approved by the firm. Most of my posts here could be viewed as static, in that comments are not often submitted (though they are welcome!) but it is also potentially interactive in that the comment facility does exist and is sometimes used, (though most often comments are sent to me privately via e-mail). So how does that fit?

My understanding is that since this blog is not used to engage in real-time, interactive communication, it would be considered static content. However, under the FINRA Notices, I would still be concerned about the possibility that the comments that are made could somehow be attributed to me or be viewed as being approved by me. FINRA looks at whether there is a disclaimer saying that third party posts don't reflect the views of the firm and have not been reviewed for completeness or accuracy.

Clearly, it would seem such a disclaimer is a best practice. Though mine is not a firm regulated by FINRA, that type of disclaimer is going on the To Do list!

The Insurance Compliance Insight article makes several other "Best Practices" recommendations that make good sense for all of us who use social media in business. These include:

• Establishing appropriate usage guidelines for customers and other third parties that are permitted to post on firm-sponsored Web sites;
• Establishing processes for screening third-party content based on the expected usage and frequency of third party posts; and
• Disclosing firm policies regarding its responsibility for third-party posts.

My guess is that the regulator who made the Twitter comment just a few short months ago would not do so today. Social media can't be laughed at or ignored. It is just too big. We all need to be looking at it and these best practices make sense for today's social media. Keeping up with the new developments is what will be the challenge for regulators as well as companies…  Wouldn't it be nice if we could just make fun of Twitter?

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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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For a variety of reasons, over the weekend, I spent a fair amount of time thinking about why I do what I do. Much to the surprise of many, I am quite passionate about my work. I was thinking about that in the context of some recent jobs and posts here. I realized several things, none of which are rocket science, but here they are nonetheless:

1) I totally love what I do. I loved it at the NYSID. I loved it when I was in-house. I have found my place. I am happy to get up every morning and go to work, because I love what I do. I am very lucky.

2) I have tremendous respect for the people I work for and with.

3) I love that I am not asked by my clients to cut corners or find ways around the right way.

4) I believe in regulation, not for the sake of regulation, but in effective regulation.

5) I believe in fairness in regulation.

It is this last point that I really spent time working with, in the context of the others in my list. In my opinion, the most important aspect to fairness in regulation is openness, consistency and predictability. I think in many cases it matters less what the rules are, than that the rules are known and change only with advanced warning.

When the rules change without warning—especially if the changes are applied retroactively—it feels unfair. When negative consequences are imposed for acts that were not against the rules when they were done, but at some unknown point in time became so, it feels incredibly unfair. It starts to feel impossible to stay compliant over time because it is impossible to know what the rules are at any given point in time. It is a short step to an attitude of "why should I bother?" "If I can't succeed, why should I try?" "If I am going to be punished even when I try hard to do things right, why should I try?"

If we as a society want insurance and we want a compliant industry, compliance should be made as easy as possible, given that this is a complicated industry. Insurers should have the best possible chance to be compliant while they are doing what they really do, which is sell insurance.

I think a big part of why I like what I do so much is that I get to give some of  that. I get to help make it easier for companies be compliant. I can't make it easy, but I can make it easier. I get to help keep good, strong, and intelligent people from getting to the point where they don't think compliance is possible and they stop trying because they can't figure out what the rules are today. I love that!

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Happy New Year!

With the new year upon us, many insurers are working on annual filings. Some companies may have done their annual illustration filings for 1/1/2010, but if your company uses a later date in the year for NY, be sure to consult the [guidance] issued by the NYSID last fall on this topic.

Of particular note is the section titled How Should Policy Forms be Listed? This will come as a surprise to many, I believe. The Department states: "Many certifications only contain lists of policy forms that are currently being issued; however, the certification also pertains to illustrations for existing policies on forms no longer being issued." They emphasize that the list must include all forms for which in-force illustrations subject to the regulation could have been made. The guidance says that the list should distinguish between forms currently being issued and those no longer issued. Note also that all riders "involved" in illustrations must be listed in the annual certification as well as the base policy form.

While guidance setting out best practices and recommendations for clean submissions are always appreciated, this seems to be a new interpretation of this long-standing requirement. Nonetheless, the guidance does indicate that this is one of the Department's "expectations" and it seems likely that those companies submitting lists formatted in ways that have been accepted previously may find they are not accepted this time around.

For those submitting via SERFF, the filing guidance is quite helpful: TOI "Life Insurance & Annuity Products" Sub-TOI "General" and filing type "Life Annual Illustration Certification."

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As a quick FYI, today the House Financial Services Committee unanimously passed, by voice vote, H.R. 2609, the Federal Insurance Office Act. "Today, the Financial Services Committee completed its initial work to reform the regulatory structure of the financial services industry by passing my Federal Insurance Office Act," said Chairman Kanjorski. "I have been working on this bipartisan bill since 2008, and I am pleased that the new Administration recognizes the importance of ensuring that the federal government has a knowledge base on insurance. With the improvements made to the bill today through amendments, we can now continue to move this important bill and the other regulatory reform bills through the legislative process. I am eager to pass these bills in the House." The bill is available [here.]

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The NAIC announced late today that PIMCO has been selected as the third party financial modeler to assist state regulators in their determination of the risk based capital (RBC) requirements for residential mortgage-backed securities (RMBS). 

In today's press release, Roger Sevigny, NAIC President stated:  “Creating this new assessment process is an important step toward providing more transparency about these complex securities.  This unique treatment of residential mortgage-backed securities distinguishes the NAIC as the only regulator to analyze these securities and require capital based upon the expected loss amount for a particular company. ”

An open  Valuation of Securities Task Force call is scheduled to take place on November 30 as the next step. There will also be a task force briefing at the NAIC Winter National Meeting on December 7 in San Francisco.  Because companies need to begin reporting under the appropriate designation in early 2010, the pressure will remain to keep this process moving quickly. 

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Earlier this year the NAIC formed the Rating Agency Working Group to look at the use of ratings by state insurance regulators and the risk posed by the use of these ratings in the regulatory process.  Last week a [proposal was approved] by the NAIC membership that will result in a new model for determining the treatment of residential mortgage-back securities.  In addition, it will produce ratings designations for roughly 18,000 of these securities for year-end 2009 RBC calculations.  An independent third party will be partnering with the NAIC to develop the model and responses to an RFP were due last week.  The selection will be announced mid-November according to a [press release] issued by the NAIC. 

Time is of the essence as we rapidly approach year-end.  Taking on a project of this scope on such a short timeline could be significant in demonstrating the effectiveness of state regulation over the solvency of insurers. NAIC President Roger Sevigny stated in the press release: "Compared to the rest of financial services, the insurance industry has weathered the impact of the credit crisis extremely well."  This project could tell us quite a bit about how state insurance regulators are weathering the resulting regulatory challenges. 

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Last week I attended the ACLI Compliance and Legal Section conference in Boston.  Although the ACLI reported attendance was just about the same as last year, it seemed lighter to me than previous years when I have gone.  I also heard rumblings about the content not being as strong as in past years.  I thought there was lots of good information shared in the formal sessions but as is so often the case, the informal discussions were the most productive and informative for me.   I saw folks I haven't seen in years and that was wonderful as well.  I am looking forward to staying in contact and continuing some of the discussions begun in Boston over the coming months!  

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 On Friday the New England Chapter of the AICP held our annual Education Day and it was a great event.  Of course, attendance was down, but those of us who were able to make the trip got a tremendous amount of information and had much more time to personally interact with those regulators who were there.   Despite budget cuts at companies and insurance departments there is a lot going on and many new developments across our region (and in NJ, an honorary member of NE for the conference).   Thanks to everyone who worked so hard to make it happen in these tough times!  

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The IAdCA meeting has been quite good this year.  I have connected with a few people that I haven't seen in years and had some great conversations about regulatory issues that face our industry.  It is always interesting to share a conference with marketing personnel because so often we can find ourselves at odds, but looked at differently we often share a common goal.  It is just easy to lose site of that given our respective pressures on a day-to-day basis.  

Yesterday I enjoyed the presentations of Jim Young from the Virginia Bureau of Insurance and Amy Sochard of FINRA.  These days I often find myself looking for clues about what a federally regulated world will look like and it is of course notable that so much advertising must be filed with FINRA compared to state insurance regulators.  When the FINRA discussion got into specifics it was primarily over the use of hypotheticals and how difficult they are to make helpful for the full range of products.  We also discussed the new variable products regulation and while the comment period at FINRA ended in September 2008, the final reg is not expected before the end of this year at the earliest.  FINRA received 18 comments and is working their way through the comments.  

While Ms. Sochard appeared to be quite sincere in her appreciation for the comments, it certainly did not seem to be an example of how federal regulation would increase the speed with which regulatory change happens to meet new product development.  I did come away with a sense that she would take back the additional comments and questions of the group and that there was some possibility that the issues raised could impact the final regulation, when it ultimately comes out.  

Another interesting area of discussion in that session was Reg 151A.  Ms. Sochard deferred to the pending litigation, but indicated that it would be a challenge to bring indexed annuities into the VA rules, but that is what she thought would be likely for FINRA regulated transactions.  There was a discussion of trying to make the hypothetical rules apply and the challenges they pose.  Both in the context of Rule 151A and variable products, I think there were helpful tips for the use of hypotheticals in FINRA-regulated materials.  

Overall, I found both regulators' discussions of what they are focusing on in their advertising reviews today quite interesting and helpful.  As advertising comes under increasing focus it has been a very good opportunity to have interactions with those who review it for their respective agencies.  I look forward to hearing George Nichols from New York Life and Kelly Ireland from the ACLI bring their perspectives this morning.  And then I hope for an easy trip home this afternoon!  

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 The New York State Insurance Department today issued a [press release] announcing that it sent a letter to Tom Wilson, CEO of Allstate after he authored an [Op-Ed piece] for the New York Times on Wednesday, published yesterday.  As many know by now, in that piece Mr. Wilson pushed for federal regulation and indicated that his company "played only a small role in unregulated insurance markets."  

Well, not surprisingly, now the New York State Insurance Department wants to know more about that role so that these state regulators can determine the scope of their actions, and has  sent them a [letter] demanding information under Section 308 of the NY Insurance Law.  Mr. Wilson must have  thought through the possible consequences of submitting that Op-Ed piece to the major newspaper in one of the NY Department's home cities, but it is sure hard to see that from the piece.  It not only makes the usual claims of a "hodgepodge" of state regulations, but it seems to place responsibility for much of the economic meltdown at the feet of state regulators.  It insults the very people who now regulate them.  To their face, in a major newspaper and in their hometown.  

As I have said here I understand there are problems with state regulation that cannot and should not be ignored.  However, I do not know how it can be said with sincerity that federal regulators would somehow, by definition, be more "sophisticated" than state regulators have been.  Recent examples are numerous of exactly how unsophisticated federal regulators have been in many industries and surely in every type of financial institution they have regulated.  Sophistication clearly does not come merely because one works for the federal government rather than the state government.  

The New York Insurance Department is acting in a way that could have been predicted and I think that this company may see in the review of the information provided in response to today's letter that some sophisticated minds can be brought to the task they now have at hand.  

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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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The NYSID has quite recently proposed legislation to regulate life settlements.  Superintendent Dinallo stated:  "In these times of economic uncertainty, there is strong pressure on people pressed for cash to sell valuable assets, such as life insurance policies.  This bill protects consumers by establishing a transparent marketplace with specific licensing, registration and disclosure requirements."  

If reinforcement of the need for such legislation were needed, Jason M Breslow of Bloomberg.com is reporting in an [article] today that prices on policies are falling as more senior citizens turn to their life insurance policies as a salable asset to get them through these hard times.  The lead in Mr. Breslow's story is "Retirees seeking extra cash last year could sell a $5 million life insurance policy to investors for $1 million.  Today, the price is as low as $600,000."  A number of factors are at work in falling prices, but an increasing supply of policies for sale is one.  Breslow quotes Brian Pardo, Chairman of Life Partners Holdings of Waco, Texas as saying:  "Senior citizens 'are really seriously in financial trouble' with no real way to raise cash besides selling assets that they may not want to part with at "garage-sale prices...We don't have enough investment capital to buy all of that."    It  is seriously troubling to me to think about seniors facing choices such as losing their home or selling a life policy they bought to leave for their beneficiaries.  I am glad life settlements have the attention of state regulators across the country! 

 In a section of Mr. Breslow's article that exemplifies just how mercenary this industry has become, he reports that investors are now only interested in larger policies on older individuals with shorter life expectancies than just a year ago.  Of course, shorter life expectancies and older policyholders mean higher returns for the investor.  Remember though that these returns on investment accrue only upon the death of an individual - a real human being.  Someone's parent or grandparent must die for these disinterested investors to get the 16 percent return that Breslow's article reports is the current investor expectation! In today's economy how many places can one get a 16 percent return? So more and more people elect to bet on someone else's death to make money.  But they want a sure thing and with desperate policy owners forced to take "garage sale prices" for their policies they are getting their 16 percent this  year according to Doug Head, executive director of the Life Insurance Settlement Association in Orlando Florida.  Last year investors were satisfied with just 11% according to Head.  

Why be satisfied with "just" 11% when more desperate senior citizens can be convinced to sacrifice their life insurance policies and  16% is possible?  

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 Mary Schapiro announced yesterday that she has named Didem A. Nisanci as SEC Chief of Staff.   Previously Ms. Nisanci was Staff Director to the US Senate Banking Subcommittee on Securities, Insurance and Investment.  Schapiro indicated that Nisanci will now "help lead the agency as we work with other financial regulators and Congress to improve investor confidence in the markets."  The SEC's press release specifically notes that Nisanci played a key role in increasing the SEC's budget for fiscal 09.  

In Treasury before her Senate position, Nisanci was involved in several issues that impact insurance and may suggest a regulatory philosophy:  She received the "Treasury Secretary's Certificate for development of the Administration's money laundering strategy and legislation [and] the Treasury Secretary's Certificate for the passage of financial modernization legislation."  

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On Monday morning my Google Reader inbox is always overflowing: this Monday was no exception.  A couple of things jumped out at me on the general topic of regulating insurance.  The first was a press release from Mary Schapiro, Chair of the SEC.  She issued a statement about the 13% budget increase for the SEC in President Obama's proposed budge:  

The President's requested budget increase for the SEC would enable us to increase our staff and use new technology to pursue risk-based approaches that would better detect fraud and ensure stronger oversight of the nation's securities markets. We appreciate these additional resources that would help strengthen and reinvigorate the SEC and rededicate our commitment to the protection of investors.

Are there any state regulators out there looking at a possible 13% increase in your budgets? How about companies?  How are regulated entities whose staff - including significant numbers of compliance staff - is being decimated by layoffs, going to comply with a new regulatory framework? 

An article by Darla Mercado in Investment News raises this issue in the context of FINRA's variable annuity suitability Rule 2821.  She reports that at the recent NAVA conference in NY, broker-dealers discussed the extra paperwork and processes under the Rule as a source of frustration.  One issue that got significant attention, according to Mercado, was the "growing concern" that FINRA would be looking at the share class chosen, particularly for seniors.  While there are no restrictions on seniors purchases of L shares or B shares in FINRA's rules, the B share scandals in the mutual fund world have left regulators on alert.  It was reported that litigation worries have resulted in insurers developing their own internal forms as well.  Even in an electronic format, the paperwork requirements can be significant.  Just because paperwork requirements are substantial doesn't mean they are effective.  That is what sometimes seems to get lost in this more is better world we live in. 

In another Mercado Investment News article, this one devoted to the NAVA conference, she reports on a panel discussion entitled "Selling in a New Regulatory Environment."  There Thomas Selman, Executive VP of Regulatory Policy at FINRA, stated:  "A failure to manage risk and protect investors are two sides of the same coin."  Therese Vaughan, CEO of the NAIC responded that "The idea of a single regulator overseeing systemic risk at the federal level might make sense for the marketplace, but only if there is collaboration with state insurance regulators."  

It seems to me that the current scenario is ripe for regulatory confusion.  Federal regulators may have significantly more resources and mandates to regulate in a way that is brand new to them. At the same time, experienced state regulators are having their budgets slashed and are trying to manage crises on multiple fronts. Companies and firms are dealing with their own significant and sometimes survival-threatening problems.  In this scenario, where is the leadership to come from to enact meaningful regulation?   

The new regulatory world that virtually everyone acknowledges is coming clearly needs to be a world where regulation means something more than paper pushing and hoop jumping.  I know no one wants that, but it is so easy for that to become the reality.   And the articles that filled my mailbox this morning did little to ease my concerns in this area.  Maybe next week.....

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As if there weren't enough tough publicity about insurance companies and financial services these days, the Wall Street Journal's law blog yesterday had a post titled:  "'Dead Peasant' Policies: The Next Big Thing in Insurance Litigation."  In her post, Ashby Jones refers to an article in the WSJ online written by Ellen Schultz that deals with a specific case in Texas.  

Ms. Jones describes these policies as "often secret" and "taken out by companies on unwitting employees, which can yield sizable corporate tax breaks."    In her article, Ms. Schultz opens as follows:  "For years, American companies have taken out life insurance on millions of their employees, harvesting tax advantages that fatten their coffers and collecting death benefits when they die.  Now, some family members are crying foul."  

The facts of the particular case in Texas are wrenching:  A bank employee suffering from brain cancer allegedly being told he was eligible for $150,000 in supplemental life for which he enrolled.  Shortly thereafter, he was fired by the bank and he died a few years later at the age of 41 leaving a wife and two young children.  They received no life insurance because the supplemental policy terminated when he was fired.  Some time later, the wife apparently received a check that was sent to her in error for over one and a half million dollars - it was payable to the former employer-bank that insured then fired her husband.  

Of course, these issues are not new and the Wall Street Journal has covered them extensively in the past.  The majority of comments to the blog post were on that fact.  However, there were also general discussions of COLI policies and key person insurance vs. coverage on non-key employees.  One commenter concluded, I believe erroneously, that "Currently, COLI is used primarily for masses of non-key employees in order to get tax benefits, a practice known as "janitor insurance" or "dead peasant insurance."  Another commenter said:  "I did not know that insurance companies issued life insurance policies on individuals without physical exams of the person to be insured.  This sounds like a lottery.  Can anyone get in or is this only for the "big" guys?"  The world is a different place than the last time this issue surfaced.  

I am certainly no litigator and I  don't know if Ms. Jones and Ms. Schultz are right that there is an impending surge in these cases, but I do think that negative publicity around life insurance generally couldn't come at a worse time.  I hope that as the discussion around the future of insurance regulation develops, these are not the type of facts and policies that dominate the press coverage.  It was "bad" facts such as these and publicity generated from those facts  that gave the SEC the justification they needed to sweep indexed annuities into their jurisdiction based on the need for additional consumer protection.  

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 Insurance regulators and banking regulators have a longstanding difference of approach in advertising the existence of protection in the event of default by a regulated institution.  Banks have clear notices of FDIC protection of deposits and with the recent increases in protection limits, those notices are even more prominent than in the past.  But insurance regulators have traditionally taken a different approach and required the state guaranty funds to stay generally out of sight.  

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 When I watched excerpts of Harry Markopolos' testimony before a Congressional hearing last night, I was once again struck by the irony of Rule 151A and the idea of the SEC moving more purposely into the regulation of insurance.  At a time when it is clear that they have failed,  miserably and repeatedly, at regulating the financial services and products that they have jurisdiction over, they expect us to believe that their oversight of guaranteed products is necessary for consumer protection!  

In covering the Markopolos testimony, the Financial Times newspaper reports today that "Senior SEC officials, who came under fire during the hearing, said they were reconsidering the way they regulated investment advisers, and might impose more frequent inspections, tougher filing requirements and tighter custody and audit rules."

The FT went on to report that "The SEC also wants to improve its risk assessment and to coordinate regulation of brokers and investment advisers to prevent firms from hiding activities from its examiners."  

The argument for federal regulation of insurance has typically focused on the anti-competitive position of insurers relative to other financial services.   Those other entities have clearly been less regulated:  that becomes clearer and clearer!  The SEC has not been a competent regulator, though I am sure not all the staff is "illiterate."  There are many criticisms against state regulators, in my view some more valid than others, and there is always room for improvement.   While I hear such criticism, I have never heard  a state insurance regulator called illiterate or described as being incapable of understanding the products they regulate. For the most part the state regulators I work with win praise for their knowledge and expertise.   I cannot imagine the state regulators I know being described in the way we heard federal regulators described yesterday in Washington.  And that is good for insurance consumers.  

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In a recent National Underwriter article entitled "Exec: Settlement Appeal is Growing"  by Trevor Thomas, he reports that the liquidity crunch has reduced the available capital  for buying life settlements, but  he also reports that institutional investors are considering that asset class.  

That is deeply troubling to me:  It appears to be blatant wagering on the death of others as a desirable "asset class"  because returns are so bad everywhere else!   

Thomas reported that Larry Simon, president of Life Settlement Solutions Inc. of San Diego, gave that disturbing  assessment in a comment on the state of the market.  The same turbulent conditions that are affecting liquidity are causing investors to explore investment alternatives, including life settlements, Simon says.

Many of the investors are attracted to the idea of getting returns backed by the credit ratings of the insurers issuing the underlying insurance policies, Simon says.  The investors exploring life settlement options include “household-name investment banks, hedge funds, pension plans, major foundations and endowments, and insurers,” Simon says. He goes on to indicate that "in the short term, the liquidity crunch has "created one of the best buying opportunities for investors that this industry has experienced."  

A secondary market in life settlements is generally disturbing for many reasons.  In the current environment when so many are losing their jobs and therefore their health insurance, and the rates of depression and anxiety are skyrocketing as we all have so many more worries, many who are sick would seem to be more likely to die sooner than they might in good times.  Many Americans may no longer be able to afford the medications that have kept them healthy and alive.  And to think that those tragedies could be the subject of a bet that institutional investors profit from is more than disturbing to me - it is appalling!  

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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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This week has brought more developments with respect to SEC/federal regulation of insurance. 

In yesterday's confirmation hearings for President-elect Obama's nomination for chairman of the SEC, Mary Schapiro, there was discussion of federal regulation of insurance.  What, to me, was the most interesting was Sen. Shelby's, ranking Republican on the Senate Banking Committee, use AIG as his justification.  He reportedly stated:  "I never thought I would say this, but I think we have to visit insurance - look at AIG.  Who regulated AIG? Primarily the New York State insurance commissioner.  My gosh. Does anybody in this room believe the New York insurance commissioner knew anything of the risk they were taking?...The answer is obviously, 'no'." 

What? AIG?  An example of how state regulation of insurance failed?  What about the AIG holding company?  Where do we see an example of where federal regulation succeeded?  Who in any of the federal regulatory agencies knew anything about the risks that the federally regulated portion of AIG was taking?  If they did know of them, what steps were taken to protect the public?  Who in any of the federal regulatory agencies knew  anything about any of the risks the bailed out banks were taking? If they did know of them, what steps were taken to protect the public? If we were to judge federal regulators by their recent record of regulating financial services companies, they would not be allowed to regulate much of anything! 

It seems that some members of Congress are of the opinion that they will be able to put together an effective regulatory scheme this time around. We, apparently, are to take that on faith.  

Of course, there will be a new administration next week and perhaps they will be able to put together something new and different:  effective financial services regulation.  But in the midst of all of this financial carnage, can't Congress and the federal agencies stick to fixing what is already on their plate first?  Perhaps when they have a proven track record of regulation of the other financial services branches, it would make sense to add some insurance regulation, but until the federal government demonstrates that they can regulate better than they have so far, it seems quite premature to add anything new to their jurisdiction. 

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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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In an article written by Arthur D. Postal for the National Underwriter, according to the head of the Federal Deposit Insurance Corp., "Congressional approval of federal regulation of insurance appears to be unlikely for 2009, and an optional federal charter may never be created." 

Early indications are that the new Obama administration and Congress will more likely look for ways to consolidate existing regulatory agencies instead of creating new ones.  According to FDIC Chair Sheila Bair, the Obama administration’s priorities in 2009 will be:

·          Regulation of mortgage-backed securities and credit default swaps.

·         Standards for the mortgage lending industry and for all mortgage brokers and originators.

·          Stronger disclosure rules for executive compensation and balance sheets.

In my opinion, one of the most important aspects of regulation is certainty, or what passes for certainty in a rapidly changing world.  When regulated entities cannot reasonably predict the actions of regulators on specific, known issues, it makes conducting business very difficult.   Obviously, not all regulatory action at the state level is predictable, and new issues arise continuously.  But for those of us who have been around for a while, the "wild cards" of state regulation are well-known.  Long, sometimes hard, experience has taught us which regulators are likely to respond in what ways to new issues as they arise.  And, after all, consistent unpredictability does, in its own way, lead to a certain kind of certainty.  At the federal level, where so much about regulation is under scrutiny, there are many more unknowns --  and unknowns are major business hazards! 

It will be very interesting to see what happens on the issues identified by the FDIC chair to get a sense of what regulation will mean in 2009 and beyond at the federal level.  It appears that we in the insurance industry will have the advantage of watching regulatory developments in other financial services industries to get a sense of what federal regulation would look like.   Being "on the back burner" in the current situation seems, to me,  like a pretty good place to be! 

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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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In a recent ( 11/18/08) column by Michael Skapinker in the Financial Times, he discusses the tension between executive management,  who often have personal stakes in short term outcomes, and shareholders/employees/pensioners, the latter two in particular have longer term stakes in the financial well-being of the institution.   The column is titled "Every fool knows it is a job for government."    What struck me was the complete absence of any discussion of the interest of depositors, borrowers or other consumers of the services the institutions offer.   Much of the discussion relates to financial institutions and it seems to be the assumption that consumers of most financial services can move from one institution to another pretty easily.   Of course that ability to move from one provider to another is a basic tenet of the free market.  

No other financial institution has as long-term commitments to their customers  as insurers and life insurers in particular.  It is often not economically rational to move between insurers:  note all the replacement regulations designed to make this as clear as possible to consumers.  This long-term relationship is obviously not news to anyone in the life insurance industry.  But it  it continues to shock me, as more and more people seem to take federal regulation of insurance as a given in the fairly near future, that the articles dealing with the direction of regulation do not make a distinction between the short-term relationships that many financial institutions have with their customers and  the long term relationships that are important in life insurance and annuities.  

It is likely that corporate governance will again be raised as an important component of the new financial services regulatory landscape.  And  corporate governance is important, but corporate boards have a duty to shareholders, and as Michael Skapinker points out in his column, shareholders are increasingly transitory and are likely to have short-term interests too.  That is why for life insurers, regulation through the boardroom may not be as effective as it may be for other insititutions.  

Insurance consumers will always be more difficult to protect because of the long time horizons and the nature of the guarantees involved.    As we watch Insurers apply to become thrifts,  the lines among financial institutions continue to become more and more blurred.  The danger is that in the eyes of inexperienced insurance regulators, the lines between the consumers of financial services will also be blurred, and if insurance companies are not regulated in a way that safeguards their customers, not "just" their shareholders, employees and pensioners, insurance regulation will not be effective insurance regulation.  

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Having recently attended the AICP conference in Atlanta, I was struck by how accessible state regulators, including a number of commissioners, were despite all the turmoil on Wall Street and the economic situation generally.   While the national and international market turbulence was clearly on everyone's mind and was reflected in almost all of the conference sessions, the state regulators never lost their focus on insurance and how the developing economic situations impacted insurance consumers and insurance companies.  I was struck by the fact that each of the commissioners brought interesting ideas on all of the issues discussed there.  Of course,  too many chefs can be a problem in a kitchen, but sometimes there is great value to the expertise and insights that different people bring to the table.  I think now is one of those times.  

When I was in my room, I watched news coverage on how the federal government put mind boggling amounts of money into the hands of a single federal regulator and I realized that I felt much more confident in a regulatory system that provides for the input of many.  I have seen quick action by state regulators when necessary and yet I am not asked to trust any one individual with the future of the industry.   While changes to the regulatory landscape seem certain, I am hopeful that whatever the ultimate outcome is it does not add the regulation of insurance to the plate of the Secretary of the Treasury.  I want the occupant of that office to be focused on spending our money wisely and monitoring the now partly nationalized, federally-regulated, banks!  I want the folks I listened to and talked to in Atlanta - the state commissioners and their staffs - who focus on insurance and insurance in the context of the wider economy, to bring their expertise to bear.  

We all know there are challenges with state regulation, but watching the federal regulators at work has not given me any confidence that they would do a better job:  not for consumers, not for the regulated financial institutions, and not for the economy as a whole .   

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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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A conference is being held at the American Enterprise Institute tomorrow (7/9/08) on the "Future of Insurance Regulation." Coincidentally, the US House Financial Services Subcommittee on Capital Markets and Insurance is also meeting tomorrow  to mark-up proposals of H.R. 5840, the Insurance Information Act, which would establish an Office of Insurance Information within Treasury, "NARAB II", a national system to process non-resident producer licensing, and the Increasing Insurance Coverage Options for Consumers Act.  

Of course I follow the discussions of federal vs. state regulation of insurance, but one of my frustrations with what I often read and hear is the assertion that federal regulation represents efficiency, with the optional nature of a proposed federal charter representing competition among regulators. State regulation on the other hand is generally presented as immovable and irretrievably mired in inefficiency and insensitivity to competitive demands.   This appears to be the dominant theme at the AEI conference, yet it seems simplistic to me in several ways.   One of them is that when we make such a comparison, we are looking at a system that has yet to be fully conceived versus one that has a very long and complicated history.  Who among us can't dream?  The challenges obviously arise when systems are implemented and develop and are presented with difficult decisions and must draft regulations and deal with real life on both a day-to-day basis and in crisis.  Then inefficiencies and bureaucracies begin to take hold and grow.  I have not yet read or seen any reason why a federal agency would not completely dominate an alternative state system and simultaneously grow to become large and inefficient. 

But there is another option that has been proposed by some that I hear much less about, but which I find very interesting.  This option is called the Single-License Approach to Regulating Insurance and it is discussed in a paper authored by Henry N. Butler, Executive Director of the Searle Center on Law, Regulation and Economic Growth at Northwestern University School of Law and  Larry E. Ribstein, the Mildred van Voorhis Jones Chair in Law at University of Illinois College of Law.  The paper  is available for download at no charge from the Social Science Research Network. 

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