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 National Underwriter article entitled "Exec: Settlement Appeal is Growing"  by Trevor Thomas, he reports that the liquidity crunch has reduced the available capital  for buying life settlements, but  he also reports that institutional investors are considering that asset class.  

That is deeply troubling to me:  It appears to be blatant wagering on the death of others as a desirable "asset class"  because returns are so bad everywhere else!   

Thomas reported that Larry Simon, president of Life Settlement Solutions Inc. of San Diego, gave that disturbing  assessment in a comment on the state of the market.  The same turbulent conditions that are affecting liquidity are causing investors to explore investment alternatives, including life settlements, Simon says.

Many of the investors are attracted to the idea of getting returns backed by the credit ratings of the insurers issuing the underlying insurance policies, Simon says.  The investors exploring life settlement options include “household-name investment banks, hedge funds, pension plans, major foundations and endowments, and insurers,” Simon says. He goes on to indicate that "in the short term, the liquidity crunch has "created one of the best buying opportunities for investors that this industry has experienced."  

A secondary market in life settlements is generally disturbing for many reasons.  In the current environment when so many are losing their jobs and therefore their health insurance, and the rates of depression and anxiety are skyrocketing as we all have so many more worries, many who are sick would seem to be more likely to die sooner than they might in good times.  Many Americans may no longer be able to afford the medications that have kept them healthy and alive.  And to think that those tragedies could be the subject of a bet that institutional investors profit from is more than disturbing to me - it is appalling!  

 

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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 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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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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