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

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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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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A New Year's resolution (in addition to the usual exercise more and eat less) is to post here more often. I had hoped to get off to an early start by posting more this month, but as some of you know, I had an unfortunate collision with the sidewalk while running with a puppy at Thanksgiving. Bones were broken. As of today I have a cast on my left arm and a splint on my right arm, and I am starting physical therapy for the broken elbow soon. Typing is hard. So, the New Year's resolution will have to wait a bit.

In the meantime, I appreciate all of you; those who read and give me feedback regularly, those who are the more silent type, and those who pop in just occasionally. I like knowing you are there.

For those who celebrate a holiday this week, Merry Christmas or Happy Kwanzaa. For the rest of us, Happy New Year! 2010 is sure to be an interesting one in the world of insurance compliance.

Cailie

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In the December 2009 edition of Best's Review, Al Slavin wrote an article entitled "Settlement Strategies" in which the confusing state of life settlement regulation is made a bit clearer. There are helpful charts and tables setting out the differences between the NCOIL and NAIC models and indicating which states have gone in what directions. One thing he touches on, but does not focus on as much as I think he could, is the possible relationship between increasingly red state budgets, due to the recession, and the changing perspective of state regulators to sales of life insurance policies.

It is in quoting Scott Hawkins of Conning Research that this connection is made. He states: "Unfortunately, a lot of people will impoverish themselves in order to qualify for medicaid to have the state support them in the nursing homes...So to the extent that life settlements are one more option among many that a person may turn to at this point in their life, the states may be interested in expanding that discussion."

That seems to directly relate to the lead in Mr. Slavin's article where he describes ME and WA's new requirement that senior citizens and chronically ill individuals, who are about to surrender their policies, be told of the option to sell their life insurance policies to a third party. And that made me think a little differently about some of the issues presented. In addition to the tables and graphs mentioned above, two actual life settlements are sketched.

In one settlement a 54-year old in poor health settled his/her $928,526 face amount policy for $590,000 when the cash surrender value was $6,145. The article states that "The policy owner used the proceeds of the settlement to get out of personal bankruptcy and save her house." While no one wants to see someone lose their house while they are in poor health, the personal bankruptcy is what got my attention. How much of those proceeds are going to pay off creditors with unsecured claims? If any of those are health care related, a whole other set of public policy issues arise: Given the number of personal bankruptcy cases that are a direct result of health crises, that seems quite possible for a 54 year old. If the debts leading to the bankruptcy were not paid, what would have happened? Would any heirs have been responsible? Would s/he have been eligible for medicaid? If all the proceeds of the life insurance policy were used to pay these debts, what is left for the beneficiaries? Who are they and what are their needs?

I don't pretend to know what is right for this individual, or any other specific instance of a life settlement. And as a general rule, I am wary of paternalistic determinations of what is right for consumers. I don't usually support taking options away from individuals if they are capable of making reasonable decisions.

However, when issues converge as they do in life settlement cases like this one, it is very hard to be sure what any interested party's motives might be. And when medicaid and nursing home costs are involved, states are also interested parties. In the past, I would have been much more inclined to view this as a dispute between life settlement and life insurance companies than I do now after reading Mr. Slavin's article. I never thought these were simple issues, but I did not fully realize how truly complicated they can be.

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Currin Compliance has seen an increase lately in the number of telephone applications crossing our desks for review. A recent article in the National Underwriter (Nov. 2, 2009) may offer one reason why:

Hank George offers a nicely written piece titled [“Cigarette Smoking: Time to Upgrade the Underwriting.”]  He suggests that in telephone interviews, applicants are more likely to be forthcoming in answering smoking-related questions than in the traditional application-taking process. 

 

George goes on to offer an example of a person who smoked for 2 years as a young adult, quit for the next 60 years, then started smoking recently as a result of a personal loss. He’s classified as a smoker.  Yet the person who smoked 2 packs a day for those 6 decades, but has been nicotine-free for the last 5 years, is classified as a non-smoker.  Who is the greater life insurance risk? he asks.  George says framing questions to determine “pack years” makes more sense for underwriting purposes. And asking those questions over the telephone is a better way to get truthful answers.

 

Based on George's assertions, which certainly seem reasonable, it seems the applications we've been reviewing and filing will contribute to more accurate underwriting of smoking risk.  Assuming of course, that they are approved. 

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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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 Many companies have been asking us questions about the Maine 3^rd Party Notice of Cancellation requirements provided in Rule 585.  That Rule’s third-party notice provisions allow policyholders to establish --in advance -- a line of communication that will increase the likelihood that adequate notice is given if an insurer intends to terminate coverage for nonpayment of premiums. The second part of the rule establishes conditions and procedures to reduce the danger that persons suffering from organic brain disease will lose life insurance coverage because of their disease.

 A Third Party Notice needs to be filed with the Maine department for approval and must become part of the policy. The notice may become part of the application or may be a separate form. If a separate form it must clearly state it becomes a part of the policy.  

Though many companies are currently looking at Maine’s requirements some have asked what other states have similar requirements. There are currently 4 other states with similar requirements for Third Party Notices: Alaska, Florida, New Jersey and Vermont.

Because none of these states require the Third Party Notice be filed, the notice will not become a part of the contract. Unfortunately, this difference means the Maine Notice can not be used in these 4 states. Maine specifically says the notice must become part of the policy and must say so on the form. This brings us to a second Third Party Notice to be used in states that do not require a filing of such form.

We recommend taking the strictest requirements from the states above and create one form to be used in all 4 states. The only differences from the Maine form is the removal of the sentence about the form becoming a part of the contract and the addition of a signature line for the Designee (required by NJ).

We suggest doing a mailing to all current contract holders age 62 or older in these states. This shows the states the company made every effort to notify in-force contract holders.  Because 2 of the states require the notice be sent annually, going forward we would suggest making the Notice a part of the annual report for these 4 states. If your system can send the notices based on age to anyone 62 or older, this would be ideal.

 We also suggest in FL and VT the Notice become part of the documentation given to the client at time of application.

For more information, please contact Anne Martin, amartin@currincompliance.com or see the posting on our website:  www.currincompliance.com.  We have forms available that are consistent with the recommendations set forth above.  Anne will be happy to provide you with copies upon request.  

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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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An unusual dilemma for life insurers posed by NY law was once again addressed in a NY Office of General Counsel opinion dated December 30, 2008.   NY law does not include in the types of licenses available, an independent adjuster license for life insurance.  The 12/30 opinion states:  "The processing of life insurance claims, unlike other types of insurance claims, typically requires little discretionary authority on the part of the person or entity handling such claims."  

While that may be true for simple uncontested death claims, there are many benefits that are added to life insurance and annuity products that are not as clear cut as whether the insured is dead or not.   There are waiver of premium riders based on disability, there are accelerated death benefits based on various health conditions or life expectancy, and other benefits that may require that discretion be applied.  This is acknowledged in the opinion.  

However, without the availability of an adjuster's licence, that often-necessary discretion can only be exercised by a limited number of individuals with a direct relationship to an authorized NY insurer.  Without the independent adjuster license, employees of another insurer, affiliated with the NY company but not licensed as a NY insurer, cannot exercise discretionary authority in claims processing.  

In the words of OGC:  "Since [the unauthorized life insurer] does not come within any of the statutory exceptions, it may only perform ministerial functions with respect to the processing of life insurnace on behalf of [its affiliated NY-licensed life insurance company.]"

Due to the number of NY-only life insurers, this is often a problem that arises when there is a limited number of employees of the NY company.  

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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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 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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Yesterday I posted an entry questioning how new filings for 3211 compliance would be expedited within an already expedited (CL6) process.  Today I got at least part of an answer...within 3 hours an approval came back on one of these filings that had many different forms! 

 While not all of these conforming approvals have been approved quite so fast, expedited appears to really mean expedited!!  This is encouraging!  

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There was a change to the NY Insurance law, effective 10/5/2008.  The amendment provides for a 61-day grace period for UL-type policies and it changes the grace period notice provisions as well. After the law became effective, the  NYSID posted a Circular Letter on their website with guidance to the industry on required policy form changes.

Note that the Circular Letter states explicitly that a policy form containing a grace period other than as required by the new law and a policy form that contains a notice of grace period other than as set forth in the new law is not in compliance with law.  This likely means every company's entire UL and VUL product line is out of compliance as of 10/5 based on the Department's interpretation.  

I think this interpretation is very unfortunate given the very short time frames of this statutory change.  While the 61-day grace period might, in theory, require a policy form change, 61-days has been the standard in the industry for quite some time.  There are few companies that will need to revise their policies on that issue. 

The notice requirement is different.  The change to the notice provision was designed to bring consistency to previously inconsistent provisions of law. But due to the inconsistency, many companies had already worked their systems to reconcile the two and issue a single notice to comply with both timing requirements.   A company with the previously-mandated language in their policy could clearly comply with the new law without revising the policy language because the time periods overlap.  If some action was necessary, the Department could have mandated an assurance that companies would do so.  But that appears to be water under the bridge at this point.  

Instead, the Department has demanded a flood of policy forms to process.  They have indicated that the endorsements and new forms submitted to comply with their interpretation will be given priority in the CL6 process and the Circular Letter sets forth the submission requirements.  However, it is unclear how that can really be the case. 

CL6 already is the expedited process.  It is not as though the administrative folks at the NYSID are sitting on those filings or have nothing else to do.   There was no indication that any new people will be brought in to handle all these filings.  I know my office alone is working on close to 100 policy forms already that are impacted and either have been filed or will be filed shortly.  Who will handle these at the NYSID?  And if they are being expedited by the people who usually handle the CL6 filings, who will review those non-expedited CL6 filings?  For those companies still working on 2001 CSO filings, will this new influx of expedited submissions bump those?  How many expedited processes can really be on the table before the word "expedited" loses all meaning? 

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On this last day of September, we are 6 calendar days away from the effective date (10/5/2008) of the new laws on Grace Period notices and durations for UL and VUL products in NY, and yet the Circular Letter with promised guidance has not yet been posted on the Department website!   Despite the fact that there is an interpretation of the new laws that would have made filing already approved forms unnecessary, the Department did not adopt that interpretation and has instead decided to require all these forms to be re-filed.  But as of this moment, has offered no official guidance on how they want this done in the incredibly short time frames allotted.  

Companies have been waiting for the Department's instructions because they obviously want to do the filings right.  But most have decided that they can no longer wait and are going ahead based on the proposal that was floated but not posted. Given the number of products that many life companies have that are impacted by this change in the law, it is stunning that we are so close to the effective date with no official process in place for handling these filings.  Fingers crossed...the filings are on their way!!!  

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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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Sometime after my post on the Illustration guidance this morning, it was brought to my attention that the NYSID fixed the formatting and added columns so that the comparison between Reg 74 and the Model is much easier to follow! The link takes you to the much improved document on the NYSID website. 

Kudos for that - what a great improvement!!! 

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The NYSID recently published "Guidance for Life Insurance Policy Illustrations."  It begins with the statement that "It has come to the Department's attention that there may be some confusion between the NAIC requirements for Life Insurance Policy Illustrations and those required by New York's Statutes and Regulations."  The guidance goes on to indicate that some of the Department's concern is based on companies' reliance on the Q and As that were published with respect to the model illustration regulation. Much of the guidance is a "side-by-side" comparison between the model and NY's Reg 74, but because the provisions do not line up and the formatting is different, it can be a bit confusing to follow when viewed or printed from the website.  I found it helpful to cut and paste the two regulations to create my own spreadsheet that lines up more clearly and has columns of equal size.  The Department's points with respect to the differences they seek to highlight are more obvious to me laid out in this manner. Upon request, I would be happy to provide this document. 

For those who have experienced post-approval reviews of life products, it will come as no surprise that illustration issues are the subject of Department scrutiny.  Illustrations seem to now be a standard post-approval area of inquiry, and illustration issues have even been prominent in recent prior approval submissions as well.   One area that this posted guidance does not address, but which has repeatedly come up on post-approval reviews, is the effort to apply the Reg 74 standards discussed in this guidance - particularly those related to illustration of non-guaranteed elements - to variable policies when the illustration is used in lieu of a preliminary information/policy summary.  While this guidance is helpful, having a similar document that provides an analysis of which provisions of Reg 74 the Department has determined it has the legal authority to apply to variable policies - and under what circumstances - would be even more so! 

Continue Reading...

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We are starting to get a significant number of questions regarding  the product design implications of the recent changes to the NY Insurance law with respect to group key person life insurance. 

Without going into a lot of detail on what has been a complicated problem for life insurers in this market,  the new law - which was effective immediately - now permits group corporate-owned life insurance, where the insurable interest is established based on "lawful and substantial economic interest."    COLI can now be written on a group basis in both the "true COLI" market where insurable interest is established by statute to permit funding of nondiscriminatory employee benefit plans as defined by ERISA, and in the "key person" market where the insureds are often highly compensated employees. 

The new law requires that the employer notify the proposed insured in writing of the intent to insure, and that the policy holder will be a beneficiary on the death of the insured.  The insured must consent in writing to the coverage. 

The ability to write these policies on a group basis affords much more flexibility in product design.  No where is that more significant than in policies offering private placement investment options.   When writing on a group basis is feasible, this legislative change offers new possibilities for policies with more restricted liquidity than is permitted on individual variable life products. 

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In several recent policy form reviews, both prior approvals and post-approval reviews, the NYSID has raised an issue that may warrant some investigation of policy delivery practices at your company.  It arises when applications include a statement along the lines that the policy does not take effect unless the insured is insurable or in "good health" at the time the policy is delivered. 

At policy delivery there are two possibilities:  one is that money was collected and a conditional receipt or temporary insurance agreement provided.  The Department's position is that  when a conditional receipt was issued the insured need not be insurable at delivery and so the affirmation in the signature section is not permissible.  The other possibility is that no money was collected at application.  In that instance, a  statement in the base application regarding continued good health status is permissible, but the Department requires that a form such as a "Statement of Good Health" be used at delivery (this must be a filed and approved form) in order to collect information on health status.  

This position is likely to come up in future post-approval reviews, and so companies would be well-advised to review applications approved on a CL6 basis, as well as their actual practices on policy delivery to determine whether they are in compliance with the rules set out above or whether a revision to the form or the filing of a Statement of Good Health should be considered. 

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In a July 9 press release, the MIB Life Index reports that U.S. life insurance application activity in June 2008 was off 0.9% when compared to June of 2007. 

Year to date, application activity is down 2.5%% over the same period last year.  Interestingly, while application activity for all ages combined is down 2.9% when the 2Q of 2007 is compared to 2Q 2008, application activity for ages 60+ is up 4.2%.  Looking just at June similar reports are reported with ages 60+  being up 5.1% June-over-June while as indicated above all ages are down 0.9%. 

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On June 16, 2008, the NYSID published on its website an OGC opinion (080502)  dealing with insurable interest under section 3205(b)(3).  The context is a life insurance policy purchased by and for the benefit of a charity in order to advance an individual's goal of using a self-directed IRA to provide funding to a charity without adverse tax consequences.

The facts are very specific and the opinion quite fact-dependent, and so on first review it might appear to be limited in its applicability.  However, what I found to be the most interesting part was towards the end where the opinion compares this determination that there is an insurable interest with an earlier OGC opinion. That was an arrangement to raise funds through a securitization arrangement and to use the proceeds to purchase life policies and annuity contracts on a pool of donors.  There, section 3205(b)(3) was determined not to be satisfied because the transaction appeared to provide more benefit to third party investors than to the charity. 

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Those of you who have spoken with me over the last several months about a variable life insurance policy, know that there is a confusing interplay between Regulation 77 and Section 3211 of the Insurance Law.  Because of the different periods of time and different terminology found in these two provisions of law, a Company could find themselves either having to send two grace period notices or being unable to lawfully terminate a policy upon default.  The NYSID has now posted a Circular Letter to address this situation.  

The Circular Letter (CL7 (2008)) makes more clear how the policy provision can be drafted so that one notice contains all the necessary information and so that it is sent at a point in time that will satisfy both the variable life regulation and the general notice of premium due section of the Insurance Law. 

I myself found it helpful to put this in a format that is more visual:  a notice time line.  I would be happy, upon request, to provide the document that I created for this purpose.  Before starting to use it I asked Ms. Ryan, the author of this circular letter, to take a look at it and see if she was in agreement that it was correct. She was gracious enough to do so -  and to advise that it was accurate.  So please let me know if you would like a copy for your use. 

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The New York State Insurance Department has posted guidance for companies wishing to file policies or riders on a certified basis in advance of the 1/1/08 effective date for the new Reg 149.   Among other things, this new regulation will make Return of Premium riders more feasible in NY and it will permit term policies to extend beyond age 80 so companies wanting to be in a position to launch products in January may want to review this guidance and prepare submissions accordingly. 

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At today's policy forms filing task force meeting, the NYSID indicated that they are discussing internally what the process will be to allow companies to file revised policies during the period between now and when the new regulation becomes effective on 1/1/08. 

The issue is that certification is problematic when the regulation is not yet effective.   Forms drafted to comply with the new regulation would not be in compliance with the current regulation, but the certification is happening now.  Because the certification cannot be modified, companies cannot take it upon themselves to make changes to the certification that would make it accurate.  Therefore, a specific process is necessary.  It appears that guidance on how to handle this situation will be forthcoming so that companies can begin to put these submissions together and get them approved in time for a January 1 launch under the new regulation. 

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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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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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Group Life policies and practices are currently under review by the NY Insurance Department.  NY has long been concerned about conversion rights and how certificate holders receive notification of their right to convert.  I have seen this raised several times on exam and now the Department is taking an active and  more systemic approach to looking at this and other issues related to group life.  It is anticipated that over the coming months there will be new positions and policy form requirements announced.  In the meantime, the outline drafted in 2002 remains the best resource for determining NYSID interpretations of the group life statutes. 

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The New York State Insurance Department recently posted new guidance on whole life policies that do not have a maturity or expiration date.  www.ins.state.ny.us/acrobat/20070404.pdf.  This guidance indicates that it is intended for new submissions, but it is "expected" that all policies will be "administered" in a manner consistent with the principals set forth below.  Continue Reading...

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While no company wants to receive a post approval review letter from the New York State Insurance Department, the process can provide valuable information for use in the development of new products, policy form drafting, and the maintenance of internal files.  One example that has been raised  several recent post approval reviews is the Notice of Premium Due required by Section 3211 of the New York State Insurance Law.   That section does not explicitly require a policy provision, but the consistency with which the Department asks about compliance on post approval may make creation of a policy provision desirable to avoid the inquiry after issue.  An alternative  approach might be to document administrative compliance with this statutory mandate so that a response will be easier to prepare upon receipt.  This administrative notice appears to be just one of many issues that are being raised in post approval reviews that were never a part of the prior approval review process and reflect the combination of market conduct and policy form review that happens in the post approval review process. 

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