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

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

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

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

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

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

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

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

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

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In a recent Office of General Counsel Opinion, posted yesterday (1/20/2009), the NYSID provided some  clarification regarding the application of Circular Letter 27 (2008).   However,  this very brief opinion adds to the discussion begun in November 2008 regarding its application, but it does not make clearer how insurance companies can comply with both the circular letter and the federal Defense of Marriage Act (DOMA), when both would be applicable to a particular product.  

We get asked about this daily here in the context of spousal continuation for annuities and there does not seem to be an easy answer.  There is a great deal of confusion within the industry about how to handle this issue.  The choice appears to be marketing a product that complies with NY's mandate for equality of treatment for all spouses, wherever married, and marketing a product that is consistent with DOMA, which disqualifies any product offering same-sex spousal equality the status of an "annuity" under 72(s).  This new Opinion does not specifically address that issue although, notably, it does not include annuities in the short list of products impacted by the Circular Letter.  (see below)

Perhaps the NY Insurance Department is considering exempting annuities from coverage which would resolve this issue for insurers, but retain a discriminatory stance towards many legally married New Yorkers.  Based on my conversations with Insurers, they would be happy to be able to offer spousal continuation to same-sex couples, but do not want to create a situation where the product no longer qualifies for tax-advantaged status under the Internal Revenue Code due to the operation of DOMA.  

The NY  opinion was based on a general inquiry, with no specific facts and the entire analysis set forth in the opinion is as follows:  

"Circular Letter No. 27 (2008) advises that same-sex spouses legally married in jurisdictions outside New York must be treated as spouses for purposes of the New York Insurance Law.  The circular letter draws on the Insurance Department’s Office of General Counsel Opinion 08-11-05 (Nov. 21, 2008), which analyzed, inter alia, Martinez v. Monroe Community College, 50 A.D.3d 189, 850 N.Y.S.2d 740 (4th Dep’t), lv. to appeal denied, 10 N.Y.3d 856 (2008), and concluded that New York’s “marriage recognition” rule applies to marriages between same-sex spouses validly performed outside the state.  Although that opinion focuses principally on health insurance, both the opinion and the circular letter note that the opinion’s analyses and conclusions are “applicable to all other kinds of insurance, too.”  Accordingly, Circular Letter No. 27 (2008) applies to group long-term and short-term disability insurance, which are types of accident and health insurance, and to group term life insurance."

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The edition of National Underwriter coming out today is devoted to Rule 151A.  I am excited to have a two-page article going into more depth regarding the legal analysis that "supported" the Rule and what I believe is an effort to lay a legal foundation for SEC regulation of insurance.  The general premise of my position is that while the current rule is clearly and definitively limited to indexed annuities, the analysis would apply to other products as well.  There is no logical reason to draw the line at indexed products once the SEC argument for looking at guarantees and crediting above those guarantees in this way is accepted.  The bright line was the minimum guarantee and that has now been crossed.  

As always I am interested in your feedback, either through comments to this blog or direct e-mails if you prefer:  ccurrin@currincompliance.com. 

 

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There is so much to write about, and I anticipate future posts on this topic, but to start, the materials accompanying the final rule seems to draw a line in the sand on state regulation and federal:  solvency lies with the state and product regulation with the feds. 

At this point, the SEC does not go beyond Indexed Annuities with this rule, but as I discuss in much greater length in an article scheduled to appear in the National Underwriter's special January 19th edition on this Rule, the legal analysis could easily extend beyond indexed annuities and apply to many life and annuity products. (Unfortunately, the article's deadline was earlier than the release of the final rule, so it will be outdated upon publication.)

A key quote: "state insurance laws, enforced by multiple regulators whose primary charge is the solvency of the issuing insurance company, cannot serve as an adequate substitute for uniform, enforceable investor protections provided by the federal securities laws." 

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The New York State Insurance Department recently issued "Equity index annuity contract or life insurance policy paid dividend disclosure under Section 3209(b)(2)(C)."  

Section 3209(b)(2)(C) was amended in the last legislative session to require a disclosure statement  "indicating whether paid dividends are included in changes in the equity index, together with a description of how such dividends, or lack thereof, would affect the changes in the equity index; the statement must provide the average dividend rate over the lesser of ten years or the calculable life of the index."  The guidance issued is to assist in "calculating and communicating" the average dividend rate.  

Several companies have posed questions to us over the last couple of months regarding the nature and timing of such disclosures.  In addition to providing a sample of satisfactory disclosure, the guidance states that the communication is required "by the first of the month following the end of the latest completed calendar year (i.e., by February 1 the average dividend rate for the most recent 10 completed calendar years would be provided in the disclosure required by Section 3209(b)(2)(C))."  Adding the required disclosure to these annual statements for indexed products (remember this applies to both life and annuity products) could take significant programming for some companies, so prompt attention to this guidance is strongly recommended.   

Companies can be sure that the Department will be asking to see these disclosures during post-approval reviews, market conduct exams or upon receipt of a consumer complaint.  

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

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

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

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

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A conference is being held at the American Enterprise Institute tomorrow (7/9/08) on the "Future of Insurance Regulation." Coincidentally, the US House Financial Services Subcommittee on Capital Markets and Insurance is also meeting tomorrow  to mark-up proposals of H.R. 5840, the Insurance Information Act, which would establish an Office of Insurance Information within Treasury, "NARAB II", a national system to process non-resident producer licensing, and the Increasing Insurance Coverage Options for Consumers Act.  

Of course I follow the discussions of federal vs. state regulation of insurance, but one of my frustrations with what I often read and hear is the assertion that federal regulation represents efficiency, with the optional nature of a proposed federal charter representing competition among regulators. State regulation on the other hand is generally presented as immovable and irretrievably mired in inefficiency and insensitivity to competitive demands.   This appears to be the dominant theme at the AEI conference, yet it seems simplistic to me in several ways.   One of them is that when we make such a comparison, we are looking at a system that has yet to be fully conceived versus one that has a very long and complicated history.  Who among us can't dream?  The challenges obviously arise when systems are implemented and develop and are presented with difficult decisions and must draft regulations and deal with real life on both a day-to-day basis and in crisis.  Then inefficiencies and bureaucracies begin to take hold and grow.  I have not yet read or seen any reason why a federal agency would not completely dominate an alternative state system and simultaneously grow to become large and inefficient. 

But there is another option that has been proposed by some that I hear much less about, but which I find very interesting.  This option is called the Single-License Approach to Regulating Insurance and it is discussed in a paper authored by Henry N. Butler, Executive Director of the Searle Center on Law, Regulation and Economic Growth at Northwestern University School of Law and  Larry E. Ribstein, the Mildred van Voorhis Jones Chair in Law at University of Illinois College of Law.  The paper  is available for download at no charge from the Social Science Research Network. 

One of the comparisons with insurance regulation that I found interesting in this paper was that with corporate chartering and a more real jurisdictional competition.  We have all heard the banking comparison, but in looking at corporate chartering as another alternative with which to compare, a single license approach emerges that, to me, seems to offer a real and viable alternative to the overwhelmingly dominant federal regulation movement. 

 

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Today a new law goes into effect regarding viatical and life settlements in Iowa, and the Iowa Insurance Division has issued a bulletin providing a high level discussion of some of the major changes to IA law, with guidance on how the law will be implemented. 

Among other provisions, the new law bans newly defined stranger-initiated life insurance, or coverage initiated for the benefit of a third-party investor who has no insurable interest in the insured.  The law has fraud provisions and gives authority for the Division to conduct on-site examinations of viatical settlement brokers and providers. 

Annual reports from viatical providers are required by the law, the first being due March 1, 2009. 

The Division indicates that while they are reviewing their existing rules, those rules remain in effect unless in direct conflict with the new law. 

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