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

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

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

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

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

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

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

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Life Bureau Chief Michael E. Maffei recently announced that the New York State Insurance Department intends to begin to implement sanctions for the most serious violations on certified filings. The sanction he specifically referred to was suspension in the right to use the certified process.

Noting that these are extremely fact-specific, he was not able to give a lot of information about what the Department considers "most serious." He did say, however, that they are looking at "knowing" violations as falling within this category. Mr. Maffei indicated that they have a variety of means for determining what was knowing and what wasn't, including looking at previous filings.

A question was posed to Mr. Maffei about what type of sanctions and anticipated and he responded that they haven't made any final decisions, but they are looking at a 90-day suspension. When asked, he also indicated that the suspension would be company-wide, even from companies that have multiple filing units and the violation was limited to a single unit.

Given the time frames that were reported in an earlier post and the experiences many have had with post-approval reviews, it seems likely that this development will lead some companies to reconsider prior approval as their preferred filing mode. Of course, if more companies start to go that route, it is likely those average times will get longer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 we all know, post-approval reviews often reveal new and unexpected positions on the part of the New York State Insurance Department. However, some are just downright astonishing—especially when accompanied by a demand for a "corrective endorsement" for in-force policies.

If your company issues UL policies, you are advised to note the following objection: "Minimum loan amounts are not authorized by statute and are not permitted. Please provide a corrective endorsement." The Department does not say that there is a statutory PROHIBITION against a minimum loan amount. There is simply no specific authorization for a minimum loan amount on UL policies. The legislature did not address this issue at all and there is no NYSID regulation governing UL products.

The Department did, however, draft a regulation regarding VUL products and guess what? Minimum loans are expressly permitted. Section 54.6(b)(10)(vii) of regulation 77 states: "The policy may specify a reasonable minimum amount which may be borrowed at any time, but such minimum shall not apply to any automatic premium loan provision." Can a company really be faulted for thinking the same standard would apply to UL policies absent anything in a law or regulation to the contrary? The Department created that standard for VUL itself, wouldn't you rationally think it would apply to UL policies too?

And of course here we are talking about having to do a "corrective" endorsement? What is being corrected? The Department permits reasonable minimum loans on VUL, but having a minimum loan amount is so egregious a "violation of law, regulation, or circular letter" that a corrective endorsement must be provided to all in-force business. But what law; regulation or circular letter you might ask? The silent law, the silent regulation, the silent circular letter.

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Over the last few months as more and more of my NY workload is comprised of post approval reviews, I have been thinking about the NYSID outlines.  I have serious questions about the value of the current process of trying to reach a consensus between the industry and the Department on various interpretations of laws, regulations and circular letters as well as the limits of the Department's discretionary authority on a variety of issues prior to publishing revised outlines.  The result of this process is that no outlines get published at all.   

The problem is this:  The outlines on-line are between 5 and 10 years old for the most part and they no longer accurately reflect many positions of the NYSID.  Those positions ARE reflected in the post-approval review letters, but no where else.  That means that these positions are selectively enforced, based on which companies' products happen to be reviewed post-approval.  It also means that companies do not have any  resources to consult for the NYSID's current positions prior to making CL6 filings.  

While it would be great if the industry and the Department could work quickly and effectively to examine positions, develop revisions to those positions and publish them on-line, many years have shown that not to happen - at least not in a timely manner.  The group term product outline has been touted as the closest to being ready for publication for years now.   Yet it has not been published.  

I would like to see publication of the Department's positions as they are.  Of course, I would love to see some movement in some positions that the department takes, but for my clients, that is secondary to knowing what is being enforced NOW.  

We have seen the Department do this in some instances.  Typically this has been in the form of guidance on particular issues and that is appreciated.  What I am asking for is something more.  I am looking for outlines that reflect the standards for post-approval reviews today, whether I agree with them or not.  It is more important to my clients from a compliance and disciplinary action viewpoint to KNOW what will be sought on post-approval review rather than to wait for the possibility that some interpretation will change somewhat.  In my experience, the actual movement on interpretations through this process is minor.  There are few radical changes in Department positions that result from the outline drafting process.  So what do we really gain from all the delay?  

I know in my office, I compile the comments and objections I see on PARs.  I imagine others do too and I certainly would expect that the NYSID has a compilation of the objections they raise that do not appear in the outlines and are new or different interpretations.  Again, those are the positions we need to know about when we are doing certified filings.  And we need to know them in real time as they develop.  

The current outline process started when I was at the department over 10 years ago.  It may have worked when we were in a slower paced, prior approval environment and even as we began certified filings.  But today things move so much more quickly and approvals and post-approval reviews happen much too quickly for that old process to work any longer.  We need current information quickly.

I would like to volunteer me and my staff to work with the Department on putting together such a process.  I think it is only fair to the companies doing certified filings to make the information necessary to minimize the risk of those filings available in a timely manner.   It can be done, and I would like to see it get done.  

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

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

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

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

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

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

 

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Let me know:  How many of you have been asked to endorse your in-force contracts as a result of post approval reviews to address NY Department desk drawer rules (AKA "interpretations") or make minor language changes?  I have been pretty vocal here and elsewhere in expressing my opinion that federal regulators are unlikely to be more efficient or more effective regulators of the insurance industry than state regulators are now. Overall that is.  

However, one area that just boggles my mind is the NYSID's current practice of asking for endorsements to in-force contracts on post-approval reviews when there is no clear violation of law regulation or even circular letter.  When I see these post-approval review letters, it makes me question my own sanity on the regulation issue. To me, it is the regulator's equivalent of excess and wastefulness, different only in scale from corporate jets, new office decor and expensive retreats.  It  seems to reflect a failure to ask whether resources are really most importantly allocated to this endorsement effort vs. other competing demands for those same resources: both at the regulating agency and at the company. Costs to taxpayers and company consumers are clearly increased and for what end?  Who benefits? How?   I just don't see it.  

When a regulator demands that a company send out an endorsement to all their policy-holders that has little or, much more often, no impact to the consumer,it is a complete waste of resources. People at the company have to draft and review the endorsement, load it onto a system, print copies on paper, stuff the envelopes, pay the postage,  pay the staff to answer the questions from policyholders, etc. Department examiners review it, write comment letters on it, use paper to print it out, sometimes hold meetings about it, send out letters to companies with postage to be paid.     Now, if the endorsement is to correct a real statutory or regulatory violation - no argument!  It must be done.  But as we all know, that is not the usual case.  I rarely see those situations. I most often see quite the opposite. Endorsements that do absolutely nothing to change the operation of the policy for the consumer but tweak a few words here and there to comply with desk drawer/ interpretative rules.  

I am a strong believer of insurance regulation - and strong regulation.  I think insurance needs a different type of regulation than other financial services.  But it needs to matter!  Regulatory action without a clear purpose is nothing other than wasteful.  When there is so much need for real and effective regulation, how can such waste be justified?  

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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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As regular readers know, the NYSID has developed and implemented a process to screen CL6 approvals for post-approval review priority.   In a recent discussion of this process, the Department asked that submission letters to be as detailed as possible because they are used to prioritize files for post-approval reviews. 

While one reaction to this request might be "Why should we provide additional information that could make it more likely that we will have a post-approval review?"  I must confess to having had that reaction initially.  It is hard not to get into a defensive mode when faced with the often adversarial feeling of post-approval reviews.  However, if you put yourself in the place of the person reviewing these approvals for prioritization, and then the person writing that first PAR letter, is that really how additional quality information would be viewed?  

It makes sense to think of what goes into the submission letters in the same context as that in which they will be reviewed.  Most of us are used to thinking about submission letters that will be read prior to the approval of the product - and drafting them to give the reviewer a sense of what they are looking at, but leaving the actual policy forms to speak for themselves with respect to compliance.  But these letters will be read for substance only after the product is approved.  So it makes sense that different information would be included.  In that light, some types of additional detail in the submission letter would be likely to help avoid PARs or, if the product is selected for a PAR, to get it off on the right foot. 

Continue Reading...

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The Department's 2007 Annual Report to the Legislature had a few paragraphs dedicated to the post-approval review process used by the Life Bureau.   The Department confirms what some may have experienced when they explain that a PAR often has 4 phases including development of an endorsement for in-force policies, remediation for non-compliance, submission of a new policy form for use on a going forward basis and finally possible disciplinary action against the company and/or the officer signing the certification.  This four-phase process is the explanation provided for the complicated and time-consuming nature of PARs. 

The Department also indicates that they are continuing to refine the process to prioritize approved files for post-approval review.  The highest priority, the Life Bureau reports, is given to "files with new, innovative or controversial features or files that raise solvency, consumer protection or market competition concerns."   They indicate that as of "January 7, 2008, over 1000 of the 3,692 certified approved files had been screened and assigned a priority rating and approximately 170 certified approved files had been assigned for post approval review."   (Note that this refers to files, not forms.  Each file could contain multiple forms.) 

The report does not say how many PAR files had been completed by January 7, 2008 or how many involved which of the four phases of review.   As has been indicated here recently, closings appear to be happening more frequently lately, but the ones we've seen have not included all four phases described above.  Additional data on the course and ultimate dispositions of PARs would be very helpful for companies analyzing which filing process to use. 

 

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In the last week or so, I have received a couple of closing letters from the NYSID on Post-Approval Review files.  They have been good news! 

Not only were the files closed, but these files were closed with no revisions for in-force business and no new forms for use on a going forward basis!  That result is a very good one.  The process, however,  was long and, more than once, very frustrating.  Well over a year is a long time for a company to be in limbo when there is an approved form's status in doubt.  There were many rounds of correspondence with both legal and actuarial.  There were many months in between each round. 

All that said, I am hopeful that working together we are making progress not only on the substantive issues over which there may be disagreement, but also with the process.  I am hopeful that these closing letters are an indication that with some additional experience on both sides, the process is improving and that it will go more quickly for future reviews than it did for these.    Good news makes me hopeful that more closing letters will come in and more PARs will come to positive conclusions!  

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Yesterday I was frustrated by one issue where it seemed that scarce resources were being spent on an issue that  seems small to me in the overall scheme of things, and today I am confronted by another - this time one from the NYSID. 

Post-approval reviews often raise the issue of terminology in when a change of owner/beneficiary is effective and when an assignment is effective.  The outlines indicate that the former should be effective upon receipt.  They are silent on assignments.  But if any word appears in the policy provision beside receipt, e.g. "received for recording"  an objection is very likely to follow.  Post-approval review letters are often quite assertive on this issue stating along the lines of:  A policy change subject to recording by the company has the potential for excessive delays which are beyond the control of the policyowner.  The Department has found such administrative delays to be unfair, unjust, and inequitable in violation of Section 3201(c)(2). 

This assertion is regardless of whether there is any evidence that any administrative delay has ever occurred or whether any policyowner has ever been disadvantaged.    Further, it is not considered sufficient to provide the Department with an assurance that received for recording (or whatever similar language is used by the particular company) merely means date stamping a piece of mail received, which is obviously no different than receiving.  An endorsement to in-force business to eliminate any reference to any word other than received or receipt is still demanded. 

Absolutely no change will be made to any company process as a result of this endorsement.  To the best of anyone's knowledge that I have talked to, this has never been a problem in the real world.  Obviously, an endorsement is very costly to the company both in actual immediate costs, and also in dealing with subsequent customer service calls asking what the endorsement is about.  

The Department is spending its very limited resources demanding these endorsements, reviewing them, approving them and overseeing their mailing to in-force business.  Increased company costs get passed along to the very same consumers who call (further increasing costs) asking what the endorsement means.  Those confused consumers get told not to worry, the endorsement doesn't mean anything because absolutely nothing changes in policy administration.   Where is the benefit here?  Is that what the post-approval process is really about? 

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I received the annexed message from Ms. Nelligan of the New York State Insurance Department this morning.   This will be greatly appreciated!  It is always nice to know that when concerns are voiced to the Department, they are heard and can result in changes in policy! 

After hearing the concerns expressed by the industry at the last policy forms meeting with respect to responding to the Department's post approval review letters, we are changing the response time to our letters from 15 calendar days to 30 calendar days. However, if the post approval review involves only minor issues we may at the discretion of the reviewer request a response time of only 15 calendar days. Please note that the new response time will be reflected in any post approval letters going forward.

The 15 day calendar response time remains in effect for any outstanding letters already received.

Your dissemination of this information would be appreciated. Thanks,

Kathy

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In a recent discussion with attorneys in NY's Life Bureau, I was advised that in post-approval reviews the NYSID is seeing - and not liking! - policy forms that refer generally to charges, but in other places within the form note that they do not apply.  I believe that in many cases the general reference is an attempt to use generic, national pages and the specific reference is often a NY-specific provision making clear that a certain charge does not apply in NY.  For example, one reference might say that "charges, if any, will be deducted"  in a particular situation.    In another location within the policy form there would be an explanation of the specific charges and when they do and do not apply.  If no charges would in fact be deducted in NY at the time the general statement refers to, the attorneys are now very likely to object on PAR.  

Continue Reading...

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

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

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

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

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

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

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

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

 

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In a recent conversation with Ms. Nelligan of the New York State Insurance Department, she assured me that the new language regarding continued use of the forms during the PAR process (discussed in yesterday's post) was not intended to cause alarm, but was rather intended to be sure that companies were aware that the number of policy forms issued is one of the factors in the determination of a fine, if a fine is appropriate in the circumstances.   She assured me that the intent was only to provide information, not to cause undue concern at companies receiving the letter. 

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I recently started seeing a series of questions on post-approval review letters that seem to be more adversarial than previous PAR letters were.  I do not think it is necessarily intentionally so, but I know the companies I speak with have felt quite concerned by the tone.  The series is as follows:

1. Has the policy form been issued?  If so, please identify the number of policy forms issued.

2.  Is the policy form still being issued?  If not, when did sales cease?

3.  Has the policy form been replaced by a subsequently approved form?  If so, please identify by form number, Department file number, and date of approval. 

These introductory questions are then typically followed by any substantive questions or requests for clarification.  But then the most alarming questions get asked - still in this first letter before there is any discussion of the issues, which are often quite minor.  These new questions read: 

--In view of the comments made herein, is it your company's intention to continue to issue the policy form?  If so, please note that penalties imposed for statutory and regulatory violations can take into consideration the number of forms issued. 

-- If you wish to replace this form with a corrected form for use on a going forward basis it will be necessary to make a new submission.. 

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Section 3103 of the NYS Ins. Law states that except as otherwise provided, "any policy of insurance or contract of annuity delivered or issued for delivery in this state in violation of any of the provisions of this chapter shall be valid and binding upon the insurer issuing the same, but in all respects in which its provisions are in violation of the requirements or prohibitions of this chapter it shall be enforceable as if it conformed with such requirements or prohibitions....In any action to recover under the provisions of any policy of insurance or contract of annuity delivered or issued for delivery in this state which the superintendent is authorized by this chapter to approve if in his opinion its provisions are more favorable to policyholders, the court shall enforce such policy or contract as if its provisions were the same as those specified in this chapter unless the court finds that its actual provisions were more favorable to policyholders at the date when the policy or contract was issued."   (emphasis added) 

This section simply says that regardless of what the policy actually says, it will be binding on the company and interpreted to comply with the law.   It seems to contemplate a situation where an approved form does not fully comply with the law and it provides a mechanism to interpret the minimum standards into a contract where on or more may be missing. 

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I have written before about the confusion over the post-approval review ("PAR") process -  more recently, about the process of getting a form revised via the PAR approved.  This week, some of my concerns came to fruition when I received an objection letter from the actuarial unit on a policy that was submitted at the NYSID's request for full prior approval upon completion of a PAR. 

This form is very similar to the one that was approved on a CL-6 basis but has the usual minor language tweaks that result from a post-approval review.  Both the Department actuaries and lawyers reviewed those revisions and the legal unit issued a letter indicating the PAR file was being closed and the revised form should be submitted for full prior approval.  The company and I (mistakenly) thought that meant the NYSID had signed off on the changes we made during the PAR.  It seems to defy logic that they would review changes but be dissatisfied and yet still close the file.  But now the actuarial objection letter asks for further revisions to the exact language that was the subject of revision in the PAR.    

In addition, a brand new issue was raised that is more significant to the product design than any that was raised in the PAR.  As we continue to make our way through this process looking for some finality at some point, it seems there must be a better way! 

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I have now had a couple experiences with the new process of submitting revised  forms for prior approval after a post-approval review ("PAR")  is complete.  In addition to the issues raised here previously about this, one question that has come up is the status of forms that are not revised in the PAR. 

For example, an original submission had 10 true policy forms and each had variable material.  The hypothetical PAR is complete and there were no violations of law, regulation or circular letter found, but the examiner requested a variety of minor changes in the review - but only on 3 of those forms and on 1 Statement of Variability.   Under the new procedure, a closing letter would be issued on the post-approval and a request made for a new prior approval submission. 

In my experience the request for a full prior approval submission would be for the 3 forms and 1 SOV as those were the only forms from the original submission that were revised during the review process.   But what then is the status of the other forms in the original submission?   The SOVs for the 3 true policy forms would have to be re-submitted because the 3 forms will need new form numbers so the original SOVs won't line up any longer.    The other forms were approved on a CL6 basis and apparently reviewed, but no comments were made on them and no revisions requested in the PAR.  The revised forms that have to be re-submitted will be returned with a full "Approved" stamp.  But what of those others?  Shouldn't all the forms that receive a full review by the examiners, even if it is in the context of a PAR, receive that "Approved" stamp?   Under this new process, a single original CL6 submission package could ultimately have several different dispositions after a PAR and resubmission on a prior approval basis.   This adds yet another level of complexity to already difficult product filing decisions.    

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The NY Insurance Department has recently initiated a new process for handling forms revised as a result of post-approval reviews.  I have received letters from both the actuarial side and the legal side explaining the procedural change.   The letter from actuarial came fairly early in the post approval review and it stated:  "If you need to replace any forms in this file with corrected forms for use on a going forward basis it will be necessary to make a new submission.  The revised policy forms will need to be submitted under the regular prior approval procedure and will be given priority in the prior approval queue once the post approval review has been completed.  The certified process may not be used for this submission.  Do not include new forms with your response in the post approval review file.  Only corrective endorsement if needed for in-force business should be submitted as part of this post approval review file."  The legal side stated:  "Please note that after we initiated the post approval review of these forms, an administrative decision was reached such that revised policy forms now must be submitted in a new prior approval submission if you wish to use the revised forms on a going-forward basis. The certified process may not be used for this submission." 

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Many companies have now received post approval review letters from the NYSID.  Common to all appears to be a request for policy form revisions.  No company I know of has ever been told that their forms were reviewed on a post approval basis and no changes were necessary.   It would be interesting to know if any company has received such a letter. 

In my experience most companies are asked to make some changes to their forms.  Typically the changes are minor wording changes or requests to add more detail.  Generally, they  do not go to the substance or design of the product, but they are changes nonetheless.   In various files, I have seen these types of changes handled in many different ways.  But recently I heard what the process is going to be going forward. 

 

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The Life Bureau announced yesterday that they will be initiating a new method of determining how files are selected for post-approval reviews.  Deborah Kahn, Associate Insurance Attorney, announced that the attorneys will review the CL6 filings shortly after approval in a limited manner.  They will review the submission letters and do a quick review of the policy forms themselves to assess the nature of the product.  The goal of this review is to assess a priority level to the post-approval review.  A paragraph will be prepared on each filing and a priority level assigned:  low, medium or high.   Knowing that submission letters will be used in this manner may suggest that additional thought and care be put into the description of any innovative features.  This is an interesting development in the on-going evolution of the post-approval review process. 

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Have you ever wondered how particular files get chosen to undergo a post approval review?  Well, according to the NYSID staff, the following factors can result in your file's selection:

1) Priority Level (See following post on this topic)

2) Training needs.  Post-approval reviews are used to train new staff and so for example if they need to learn universal life products, several UL filings may be selected for post-approval review.   A more experienced staff member may also be moving into a new substantive area and use post-approval reviews as the method to become familiar with a new range of products.

3) Examinations of the company.  Post-approval reviews may be incorporated into the scheduled examination of a company. 

It was also explained that the particular attorneys queue is a factor as well. 

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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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