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

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. 

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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! 

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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.  

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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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