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

 In an [article] published today on Insurancenewsnet.com, Sheryl Moore, President and CEO of AnnuitySpecs.com discusses the so-called 10/10 Rule and its implications on product design, performance and consumer protection.  

Moore notes that the 10/10 rule, dubbed this due to its maximum 10 year surrender charge period and 10 percent surrender charge penalty, was designed to protect consumers.  She notes that "the rule seeks to avoid having 85-year old grandmothers on a fixed income being swindled into a product where she will not receive her full cash value for 11 years or more."  

Her conclusion is however, that this intent has the result of limiting the availability of products that would be suitable and desirable choice for some. The article presents one of the constant struggles with product regulation:  when is consumer protection more accurately paternalism? That line is seldom clear and often reasonable minds will differ on where it should lie.  

Moore sees companies left with little choice than to design products that are "10/10-friendly" and that means, she states, a "slew of 10-year products with 5 percent premium bonuses that pay 8 percent commission."  

Encouraging readers to contact their state insurance departments to protest the paternalistic limits in product choices, she concludes: "Limiting surrender charges on annuities because of bad agent behavior is like outlawing hammers because some murderers use them to bash their victim's brains in.  When used properly, indexed annuities of all durations are a valuable insurance product."  Moore states that even a 16 year surrender charge would be appropriate for her because she does not need income now.  

Obviously one issue is that we don't always anticipate the need for funds.  Many who are unemployed today may not have expected it a few short weeks or months ago and a surrender charge could seem pretty significant when faced with the present need for cash.  But is there a difference between a 10 year and a 16 year surrender charge in that case?  Where is the line between reasonable and unreasonable?  And who do we want making that decision? The individual or the regulator?  

It will be interesting to see how much, if any,  of this type of product feature regulation survives as we move toward federal regulation of insurance.   But if we modify slightly her analogy to hammers, Moore suggests gun control or cigarette/alcohol restrictions may be an appropriate place to look at the difficulties that arise when we, as a society, try to decide where an individual's right to make choices that may cause harm ends and when it is appropriate for government to step in to protect us from ourselves and others who may try and manipulate our actions.  

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The New Jersey Department of Insurance is getting bombarded with emails and phone calls relating to the individual fixed annuity act going into effect April 1, and expects to be swamped with filings.

A March 9 Bulletin addresses using only approved Buyer’s Guides, having separate approved Disclosure Statements, and providing a 10-day Free Look provision with specific refund language, among other suitability issues.

Reginald Young, Chief of the Life Bureau, told us yesterday that he will try to expedite review of the forms being filed to comply with the new requirements, but he’s reserving the right of the Department to respond within 60 days. He noted that although the Department issued the Bulletin less than a month before the compliance deadline, the Act was approved nearly 6 months ago.

Mr. Young said he was informed by his legal department that there will be no extension for compliance.

The Department itself has not yet adopted all of its own regulations to fully coincide with the Act, but, as we know, statutes trump regulations.

It looks like it’s going to be a scramble to get approvals for separate disclosure statements and for any Buyer’s Guides that aren’t yet approved by New Jersey, as well as notices that an annuity owner can cancel a contract within 10 days of receiving it and get a prompt refund.

With New Jersey’s reputation for utilizing the full 60 days it’s allowed to review filings, there may be a lot of hurry-up-and-wait.

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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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Yesterday, March 27, 2008, the NJ Governor, Jon Corzine, signed legislation that bans discrimination based on future travel.  (Note that some reports of this legislation have described it as a ban on past or future travel, but this legislation deals solely with future travel.) 

Unfair discrimination is defined in the law to mean: "any decision to issue, extend, or renew a policy of life insurance or the fixing of rates, terms, or conditions of a life insurance policy, on the basis of the individual's intent to engage in future lawful foreign travel, which is not based on sound actuarial principles or actual or reasonably anticipated experience." 

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The NJ Department received almost 200 comments on their proposed regulation on prohibiting discretionary clauses in life and health insurance products.   One of the issues raised was related to form filing and dealing with non-conforming forms that are out in the market.  In their Summary of Public Comments and Agency Responses, www.state.nj.us/dobi/proposed/ad070507_disc.pdf, the Department states:  "As proposed, the provision in question deemed withdrawn after January 1, [2008]  all newly issued or renewing policy and contract forms that contain noncompliant discretionary clauses.  Refiling noncompliant forms is not required."  Note that because of the timing of the effective date, the originally published  January 1, 2007 date was pushed back to January 1, 2008.  Because it is the Department's policy - as expressed in this regulation - that carriers will not have the sole discretion to interpret the terms of a policy or contract, and that covered persons retain access to their appeal rights under state and federal law, they seem to conclude that re-filing of noncompliant forms is unnecessary.  However, because as stated in the quoted language above, non-compliant forms are deemed withdrawn as of January 1, 2008, it remains somewhat  unclear what the status will be of previously approved products that contain discretionary clauses as of January 1, 2008. 

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