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

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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 The New York State Insurance Department recently posted Guidance for Illustrations of Variable Annuity Contracts on their website.   This guidance is in response to inquiries received on Regulation 47's statement that "Except as approved by the superintendent, no hypothetical rate of investment return in excess of eight percent may be used in such illustrations."  The guidance is  helpful in that it does permit gross rates in excess of 8%, provided that in any year the accumulation at the gross rates used in the illustration does not exceed accumulation at 8%.  A sample calculation is provided.  

However, it is more troubling that the guidance also appears to be a step towards using Regulation 47 in a whole new manner:  to regulate variable annuity illustrations.  It concludes with the statement that "Circular Letter 6 of 2004 may be used for filings with illustrated forms that conform to the above guidance regarding variation in the eight percent rate in illustrations.  The submission letter should indicated that the forms are illustrated and this Guidance should be cited."  

In stating a relatively simple rule, the guidance glosses over more complex issues about how that provision applies to today's products.    The primary problem is that Reg 47 is tremendously outdated, having been promulgated in 1970.  In all likelihood, many people making submissions to the NYSID were not even born when this regulation was drafted!  Its revision has been on the NYSID's regulatory agenda  for well-over a decade.  Trying to apply regulatory concepts set down almost 40 years ago to products being developed in late 2008 and beyond ends up looking like contortionism.  

The discussion in this guidance ignores a number of the old regulation's definitions that are important for understanding the regulation as a whole, and section 50.8's limits on illustrations specifically:  the difference between a separate account annuity contract and a variable annuity contract and the pivotal rate of investment return to name just a couple.  Likewise, there is no mention of the clear exemption in section 50.8 which states:  "Nothing herein contained shall prohibit the use of hypothetical rates of investment return, clearly designated as such, to illustrate possible levels of variable annuity payments, if the use of such hypothetical rates is not in conflict with applicable requirements of the Securities and Exchange Commission."

This guidance creates a brand new requirement for a statement regarding the illustration of annuity products.  Unlike for life insurance, there is no illustration regulation that specifically requires that notification. There is no definition of an annuity illustration or what other standards may be applied to annuity illustrations once flagged in submissions.  This raises concerns about the openness of the regulatory process.  If NY is going to regulate annuity illustrations, something contemplated by the long-ago revisions to section 3209 of the Insurance Law, then there should be a fully vetted regulation that addresses today's products and makes sense in the modern annuity world.  

Recent Department exams and post-approval reviews have focused increasingly and piecemeal on annuity illustrations.  This appears to be another step down that path.  While the specific statement that hypothetical rates of investment return which vary from year-to-year is welcome, only time - and Department actions - will tell if this guidance ends up being something that is helpful to companies genuinely striving for compliance.  

It is time for Regulation 47 to be revised once and for all.  If annuity illustrations are to be regulated, a regulation following the mandated administrative process should be promulgated. Regulation 47 should be put into the history books, not allowed to have a 40th anniversary.   Let's have a regulation that fits the products, not try to fit products to an antiquated standard.

RIP Reg 47!  

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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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In the Capital Confidential blog this afternoon, Rick Karlin reports that NYS agency commissioners, including the Superintendent of the Insurance Department, have been ordered by Governor Paterson to "focus their operations on their agency's core mission."  Gov. Paterson reportedly set "savings targets" for many state agencies. 

The list that accompanied the post indicates that the Insurance Department has been directed to save $13,377,000. 

That does not bode well for filling the staff positions necessary to get CL6 submissions moving quickly again! 

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