INS-43-06-00003-RC Term Life Issuance and Renewal Restrictions

10/10/07 N.Y. St. Reg. INS-43-06-00003-RC

NEW YORK STATE REGISTER

VOLUME XXIX, ISSUE 41

October 10, 2007

RULE MAKING ACTIVITIES

INSURANCE DEPARTMENT

REVISED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. INS-43-06-00003-RC

Term Life Issuance and Renewal Restrictions

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:

Revised action:

Amendment of Part 42 (Regulation 149) of Title 11 NYCRR.

Statutory authority:

Insurance Law, sections 201, 301, 3201, 4221 and 4511

Subject:

Term life issuance and renewal restrictions; nonforfeiture values for certain life insurance policies.

Purpose:

To modify the restrictions on issuance of term life insurance, bring basic policy anniversary nonforfeiture requirements into closer alignment with those of the rest of the states, provide guidance on miscellaneous nonforfeiture issues.

Expiration date:

January 23, 2008.

Substance of revised rule:

The present Part 42 is renumbered to be Subpart 42-1.

The use or the reference of “Part” has been change to “Subpart” throughout Subpart 42-1. References to specific areas in Subpart 42-1 have been updated to reflect that they now are in a Subpart instead of a Part.

Section 42-1.2 is the applicability section for Subpart 42-1. The beginning date of effectiveness remains unchanged. It has been revised to indicate that Subpart 42-1 will no longer be applicable to policies issued after the operative date of Subpart 42-2.

Section 42-2.1 sets forth the purpose of Subpart 42-2. Subpart 42-2 clarifies the requirements of section 4221 of the Insurance Law in regard to nonforfeiture requirements.

Section 42-2.2 is the applicability section for Subpart 42-2. This Subpart applies to all individual life policies issued on or after the operative date of Subpart 42-2, other than those subject to 4221(n-1), universal life insurance type policies, and those Subject to Part 54.7(b) of this Title, variable life products. Compliance with this subpart is mandatory as of January 1, 2009 with voluntary election of compliance allowed on a plan by plan basis.

Section 42-1.4 placed a restriction on the renewal of term insurance past age 80. Section 42-2.12 substitutes a restriction limiting renewal to the oldest age in the applicable mortality table.

Section 42-1.5 required that cash values for plans of insurance involving either non-level premiums and/or providing non-level benefit be calculated on a segmented approach. This involved breaking a product into periods where the benefits and premiums were level for that period and then apply nonforfeiture testing to each possible combination of contiguous level periods. This is not being continued in the new Subpart 42-2.

Section 42-2.3 contains the definitions for the Subpart.

Section 42-2.4 provides guidance on acceptable methods of rounding when cash values are calculated.

Section 42-2.5 deals with the minimum nonforfeiture values and policy disclosures for life insurance when two lives are insured.

Section 42-2.6 has special rules for indeterminate premium products. This section requires that the cash values be calculated on both the current premium scale and the guaranteed premium scale. The higher result at each year end is then the minimum cash value. This was also required by Subpart 42-1 and is consistent with the National Association of Insurance Commissioners (NAIC) standards.

Section 42-2.7 provides guidance as to what must appear in a policy form to satisfy the statutory requirement that the basis for calculating cash values must appear in the form.

Section 42-2.8 provides guidance on calculating cash values when the benefits during a policy year are not level.

Section 42-2.9 sets forth requirements for nonforfeiture values at times other than policy anniversaries. This section allows for an actuarial approach or use of linear interpolation between the anniversary values with an adjustment for premium paid.

Section 42-2.10 sets forth the Department's determination that the ability of an insured coverage to continue on a yearly renewable basis after the expiry of the main plan may be considered a supplemental benefit under section 4221(c)(2) of the Insurance Law.

Section 42-2.11 sets forth requirements for products that tie the death benefits to an index. These are the standards adopted by the NAIC.

Section 42-2.12 restricts the renewal of term insurance to the last age of the mortality table required for the calculation of the minimum cash values. For products based on the 1980 CSO table, the age is age 100. For products based on the 2001 CSO table, the age is age 120.

Section 42-2.13 provides guidance for calculating minimum nonforfeiture values when the death benefits are not payable in a lump sum.

Revised rule compared with proposed rule:

Substantial revisions were made in sections 42-1.3, 42-1.5, 42-1.6, 42-2.2, 42-2.7, 42-2.8, 42-2.9, 42-2.11 and 42-2.14

Text of revised proposed rule and any required statements and analyses may be obtained from:

Andrew Mais, Insurance Department, 25 Beaver St., New York, NY 10004, [phone], e-mail: [e-mail]

Data, views or arguments may be submitted to:

Dennis Lauzon, Insurance Department, One Commerce Plaza, Albany, NY 12257, [phone], e-mail: [e-mail]

Public comment will be received until:

30 days after publication of this notice.

Revised Regulatory Impact Statement

1. Statutory authority:

The superintendent's authority for the adoption of the First Amendment to Regulation 149 (11 NYCRR 42) derives from sections 201, 301, 3201, 4221, and 4511 of the Insurance Law.

These sections establish the superintendent's authority to promulgate regulations governing the terms of a life insurance contract. Sections 201 and 301 of the Insurance Law authorize the superintendent to effectuate any power accorded to him under the Insurance Law and to prescribe regulations interpreting the Insurance Law.

Section 3201 of the Insurance Law requires insurers to obtain approval of their policy forms prior to use in this state. Section 3201(c)(5) forbids the superintendent from approving any policy forms subject to sections 4221 or 4511 unless either a detailed statement of the method used by the insurer in calculating any cash surrender value and any paid-up nonforfeiture benefit is stated in the policy form or a statement that such method of computation has been filed with the insurance supervisory official of the state in which the policy form is delivered.

Section 4221 sets forth the nonforfeiture standards for life insurance contracts issued in this state by life insurance companies. Section 4221(l) in part indicates that “in the case of any plan of life insurance which is of such a nature that minimum values cannot be determined by the methods described in subsection (a), (c), (d), (g), (h), (i) or (k) of this section, then: … (3) the cash surrender values and paid-up nonforfeiture benefits provided by such plan must not be less than the minimum values and benefits required for the plan computed by a method consistent with the principles of this section, as determined by the superintendent”. This amendment addresses the common areas where the superintendent is called upon to make determinations as to whether the proposed nonforfeiture values are consistent with the principals of section 4221.

Section 4511 sets forth the requirements for life insurance issued in this state by fraternal benefit societies. Section 4511(c) calls on certificates of life insurance issued by fraternal benefit societies to be subject to the requirements and exceptions of section 4221.

2. Legislative objectives:

The Insurance Law sets forth the nonforfeiture requirements on the anniversaries of life insurance. This is to ensure that the owner of the insurance, in the event of termination of the insurance, receives an equitable return of that portion of premiums. In general, mortality costs increase with age. This means for policies with level premiums, the premium exceeds the expected claims in the earlier years, with the excess being set aside to subsidize the premium in later years when the expected claims will exceed the premiums then being paid. Nonforfeiture requirements specify the minimum amount of this prefunding of future claims that the owner of the insurance is due in the event of termination of the insurance. In addition, an allowance is included in the calculation of the nonforfeiture values to reflect the insurer expenses in issuing the policy. Nonforfeiture requirements attempt to balance the treatment of terminating policyholders and continuing policyholders.

The legislature in section 4221 also balanced the equity of returning an appropriate portion of the premiums prefunding future benefits against the increase in premium that results from the additional administrative and benefits costs to provide nonforfeiture benefits. To have term insurance available at the lowest possible cost, section 4221(o)(1)(G) allows term insurance with level benefits and level premiums to be written without any nonforfeiture values, provided that the term is 30 years or less and that the policy ends before age 81. Again, in an effort to recognize that providing nonforfeiture benefits increases premiums, section 4221(o)(1)(H) allows for policies that would produce relatively modest cash values to be exempt from having to provide nonforfeiture values. The test for modest cash values is that the calculated cash values for every policy year be less than or equal to $25 per thousand dollars of insurance in effect at the beginning of the policy year.

3. Needs and benefits:

The Insurance Law sets forth the nonforfeiture requirements for the anniversaries of life insurance. The requirements set forth in the Insurance Law assume that premiums are annually paid at the beginning of each policy year, and that any surrenders or lapses occur at the end of the year. In practice, premium may actually be paid throughout a policy year (i.e. monthly), and surrenders may occur at times other than on a policy anniversary. Nonforfeiture requirements deal with the fair treatment of policyholders. Consider two whole life policies of life insurance that are basically identical, except one has an annual premium while the other has monthly premiums. Both are surrendered one month after a policy anniversary. The Department would consider it inequitable for both to receive the same amount, since the annual premium has already paid for the next 11 months of coverage.

In addition, the death benefits may not be level during each policy year, and the death benefit may be affected by the premium mode used.

This amendment addresses the issues that arise when these sorts of variations occur. By having these issues addressed in a regulation, insurance companies will have guidance as to what is considered acceptable, which, in turn, should enhance their ability to get policy forms approved more quickly.

This amendment also seeks to clarify the requirements of section 4221 in a number of areas where the Department has found problems with policy form submissions. For example, section 4221 requires the mortality table used to calculate the nonforfeiture values be stated in the policy. Some companies would merely state that the 1980 CSO table was used. However, there are a number of variations of the 1980 CSO table (i.e. Male, Female, Unisex) that might apply, and this amendment points out that the specific version of the mortality table must be specified. This again is an effort to provide insurance companies with guidance to enhance their ability to get policy forms approved more quickly.

The standards set forth in the regulation were developed after extensive discussions with the Life Insurance Council of New York (LICONY). LICONY is a trade group representing a significant number of the life insurance companies licensed in New York. A number of revisions and clarifications were made based on their recommendations.

The current version of the regulation requires a significant number of calculations for products that do not have level premiums and level benefits. This is commonly referred to as the “segmented approach.” The segmented approach breaks the policy up into segments for each period of time where the premiums and benefits are level. A segment could be as short as one year. The cash values are then calculated for each possible combination of contiguous segments. Then the highest result across all the possible combinations is used. This amendment will bring the New York requirements into closer alignment with the rest of the country, where the unitary approach is used. The unitary approach just looks at the policy as a whole. This will greatly reduce the number of calculations needed to be made for New York policies. This will reduce the cost of doing business in New York, by both reducing the required calculations and by not requiring special calculations just for New York.

While the most significant change to the nonforfeiture calculation was the switch from a segmented approach to the unitary approach, a number of other requirements or clarifications were also made. Effort was made to keep as many of these as close to, if not identical, to the standards adopted by the National Association of Insurance Commissioners (NAIC) as possible. The differences from the NAIC standards are generally in areas where it was felt that additional details as to the requirements were needed. Having the Department's rules formally spelled out is in keeping with the agency's ongoing efforts to speed up the approval process.

The amendment should have a positive impact or no impact on jobs and employment opportunities.

4. Costs:

There should be little or no cost to insurers. Some companies may make policy form submissions to take advantage of the changes.

Costs to the Insurance Department will be minimal. There are no costs to other government agencies or local governments.

5. Local government mandates:

The proposed amendment imposes no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.

6. Paperwork:

The proposed amendment allows for a twelve month period of time from January 1, 2008 to January 1, 2009 to allow insurers to come into compliance with the requirements of new Subpart 42-2. The regulation calls for an insurer to notify the Department in writing if it elects to issue a policy form under Subpart 42-2 prior to January 1, 2009. It is anticipated that most insurers will satisfy the requirement for a written election by including a sentence to that effect in their submission letters when they submit their policy forms.

Some companies will need to submit new forms along with new actuarial memorandums to the Department to comply with Subpart 42-2. Many companies already have forms that are in compliance with Subpart 42-2 but will want to submit new forms along with new actuarial memorandums to take advantage of the changes made.

7. Duplication:

The proposed amendment does not duplicate any existing law or regulation.

8. Alternatives:

The standards appearing in the regulation were developed after extensive discussions with the Life Insurance Council of New York (LICONY). LICONY is a trade group representing a significant number of the life insurance companies licensed in New York. A number of revisions and clarifications were made based on LICONY's recommendations.

The proposed amendment originally contained a fixed date for compliance with Subpart 42-2. At LICONY's request, the amendment was revised to permit an election of an operative date by insurers in section 42-2.2 on a plan-by-plan basis.

The proposed amendment did not originally contain a maximum age for term policies. However, without a final age, the policy could not be considered term insurance; thus, a maximum age was added.

9. Federal standards:

The Age Discrimination in Employment Act (ADEA) prohibits discrimination against any individual with respect to his compensation, terms, conditions, or privileges of employment on account of an individual's age. The current regulation places non-actuarial restrictions on the renewal of term insurance past age 80, unless a stated exception is satisfied. ADEA requires that coverage be continued for employees but does allow for actuarially justified decreases in coverage. This means that while ADEA requires coverage on employees to continue at higher ages, the current regulation restricts this coverage. The amendment to the regulation places no restriction on the renewal of group life insurance and limits individual term life insurance to the highest age of the nonforfeiture mortality table. This means for individual term life insurance based on the 1980 CSO Mortality table that the policy may not be renewed past age 100 and that for policies based on the 2001 CSO Mortality table the age limit is 120.

10. Compliance schedule:

The amendment has an effective date of January 1, 2008. An insurer can elect to be in compliance with new Subpart 42-2 for new issues of a policy form starting January 1, 2008, and must be in compliance for all new issues on or after January 1, 2009. Subpart 42-1 remains in effect for new policies issued by life insurance companies and certificates issued by fraternal benefit society until Subpart 42-2 become operative.

Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement

Changes made to the last published rule do not require changes to the last published Regulatory Flexibility Analysis for Small Businesses and Local Government, Rural Area Flexibility Analysis, or Job Impact Statement.

Assessment of Public Comment

The only comments received were from the Life Insurance Council of New York (LICONY). LICONY is a trade organization made up primarily of life insurance companies located in New York.

A summary of LICONY's comments and the Department's responses follow.

Comment 1

LICONY recommended moving the mandatory date for compliance with the amendment from January 1, 2008 to January 1, 2009. The earliest date for optional election of compliance would be changed to January 1, 2008. This change was requested in order to have the mandatory compliance date match the required date for use of the 2001 Commissioners Standard Ordinary (CSO) Mortality Table.

This change was made by revising section 42-2.2(c).

Comment 2

LICONY recommended a revision to the applicability section of Subpart 42-2. This proposal was not accepted. LICONY's proposal appeared to remove the concept of an operative date. It is through the concept of an operative date that insurers are allowed to elect to be in compliance with this Subpart as early as January 1, 2008 on a policy form by policy form basis, with mandatory compliance required by January 1, 2008 (now revised to January 1, 2009). The language proposed by LICONY also makes a distinction between policy forms approved in the past and policy forms yet to be approved. Such distinction is unnecessary, since the compliance requirements are not based on when the policy form was approved, but only when a policy was issued.

Comment 3

LICONY recommended that “and prior to January 1, 2008” be eliminated from section 42-2.2(c). LICONY indicated that the change is intended to allow companies to start using Subpart 42-2 as soon as it becomes effective. This again goes to the concept of the operative date. As currently drafted an insurer may, but is not required to, elect its own operative date, subject to the constraints that it be on or after the effective and before the mandatory date. The “and prior to January 1, 2008” merely reflects the mandatory date. With the removal of the mandatory date from this sentence, an insurer could file a written notice of election of an operative date that was after the mandatory date of January 1, 2008 (now revised to January 1, 2009). Therefore, LICONY's recommendation was not accepted.

Comment 4

LICONY requested a simplification of the applicability of Subpart 42-1. The proposal was not accepted because it could raise issues as to whether previously issued policies are subject to Regulation 149, which had not been promulgated at the time the polices were issued. Policy forms issued for the first year after the effective date of current regulation on a previously approved policy form were not required to comply with the new nonforfeiture requirements.

Comment 5

LICONY questioned the need to define the term “modal adjusted nonforfeiture premium”. This definition appears in section 42-2.9(c)(1)(ii)(a), and is necessary to maintain the meaning of that subpart. This suggestion was not accepted.

Comment 6

LICONY noted a problem with the use of the term “gross model adjusted premium” in section 42-2.9(d)(1)(i)(c). LICONY recommended that the wording of section 42-2.9(d)(1)(i)(c) be changed from ‘the gross model adjusted premium for the policy year; less’ to ‘the adjusted premium for the policy year; less’. While LICONY's recommendation was not adopted, the regulatory provision was reviewed and revised. The Department intended to allow the choice to the company of using the modal version of either the gross premium or the nonforfeiture premium. Section 42-2.9(d)(1)(i)(c) was redrafted to accomplish that purpose. The gross model adjusted premium was changed to the annual version of the adjusted nonforfeiture premium to make it consistent with the weighed average approach set forth in section 42-2.9(d)(2) and with the stated goal of trying to establish minimums that allow for all reasonable approaches. LICONY reviewed these changes and found them acceptable.

Comment 7

LICONY suggested that the wording of 42-2.9(d)(2)(i)(b) be revised by changing “the adjusted premium at the beginning of the policy year as calculated in accordance with Section 4221(c)(1) of the New York Insurance Law” to “the adjusted nonforfeiture premium for the policy year.” This change was adopted.

Comment 8

LICONY recommended that the phrase “gross modal premiums” be replaced with “the sum of all gross modal premiums for the policy year” in all instances where it appears in the regulation, in order to clarify this concept. The change was adopted in sections 42-2.9(d)(1)(i)(c) and 42-2.9(d)(2)(i)(b).

Comment 9

LICONY recommended that section 42-2.9(d)(1)(ii)(b) and 42-2.9(d)(2)(ii)(c) be reworded to read: “the lesser of one dollar per one thousand dollars of death benefit or ten percent of, as elected by the insurer for that policy, either the gross modal premiums or the adjusted premium due and paid for the period beyond the date of valuation.” The suggested change was adopted, but the choice of premium is tied to the election made for the refund of unearned premium under either sections 42-2.9(d)(1)(i)(c) or 42-2.9(d)(2)(i)(b).

Comment 10

LICONY pointed out that there was an error in the numbering within section 42-2.9(d). The error was corrected.