DFS-44-14-00003-P Replacement of Life Insurance Policies and Annuity Contracts

11/5/14 N.Y. St. Reg. DFS-44-14-00003-P

NEW YORK STATE REGISTER

VOLUME XXXVI, ISSUE 44

November 05, 2014

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-44-14-00003-P

Replacement of Life Insurance Policies and Annuity Contracts

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

Proposed Action:

Amendment of Part 51 (Regulation 60) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 2123, 2403 and 4226

Subject:

Replacement of life insurance policies and annuity contracts.

Purpose:

To allow immediate binding of coverage; reduce wait time to obtain new coverage; minimize need for revised disclosure statements.

Substance of proposed rule (Full text is posted at the following State website:http://www.dfs.ny.gov):

Sections 51.1 through 51.8, and Appendices 10A, 10B, 10C and 11, are amended for technical purposes and clarification.

Section 51.3(a) is amended to provide for additional conditional exemptions, including where an application for new coverage is made to an authorized insurer that is part of the holding company system of the existing insurer, and when new coverage is being issued pursuant to a plan approved by the Superintendent for the insurer to meet its obligations under Insurance Law section 3220(a)(6).

Section 51.4 is amended by separating the section into new subdivisions (a) and (b). New paragraph (2) of subdivision (b) permits the use of alternate procedures when the insurer solicits the application by mail or other methods without agent or broker involvement and, at the customer’s request, there is subsequent limited agent or broker involvement to provide customer assistance or administrative support, provided that the “Disclosure Statement” is signed by the agent or broker and presented to the policyholder or contractholder.

Section 51.5(c)(2) is amended by separating the notification and document submission requirements in subdivision (c)(2) into new paragraphs (2) and (3) of subdivision (c).

Section 51.5(c)(3) is renumbered as 51.5(c)(4) and is amended by removing the agent or broker’s duty to present a completed Disclosure Statement to an applicant no later than when the applicant signed the application.

Section 51.5(c)(4) is renumbered as 51.5(c)(5) and is amended by removing the agent or broker’s duty to have an applicant acknowledge that the completed Disclosure Statement was received and read.

Section 51.5(c)(5) is renumbered as 51.5(c)(6) and is amended by removing the agent or broker’s duty to submit the completed Disclosure Statement with the application to the replacing insurer.

A new section 51.5(c)(7) is added to require each agent or broker to submit to the replacing insurer, prior to the policy or contract delivery, an accurate and complete Disclosure Statement signed by the agent or broker.

Sections 51.6(a)(3), 51.6(b)(8) (as renumbered), and 51.6(c)(1) are amended by replacing the record retention language with a reference to the relevant regulation.

Section 51.6(b)(2) is amended by removing the replacing insurer’s duty to require, with or as a part of each application, proof of receipt by the applicant of the completed Disclosure Statement.

Section 51.6(b)(3) is renumbered as section 51.6(b)(4). A new section 51.6(b)(3) is added to require the replacing insurer to require the agent or broker, prior to policy or contract delivery, to provide an accurate and complete Disclosure Statement signed by the agent or broker.

Section 51.6(b)(4) is renumbered as section 51.6(b)(6) and is amended to require replacing insurer to furnish to replaced insurer, within ten days of policy or contract delivery, the completed Disclosure Statement and a list of sales material used in the sale with an offer to provide such material within ten days of a request for the material.

Sections 51.6(b)(7) is withdrawn. Section 51.6(b)(5) is renumbered as section 51.6(b)(7) and is amended to require a replacing insurer to submit annual electronic reports, by February 1 of each year, to the Superintendent indicating which insurers have failed to provide the information required under section 51.6(c)(2).

A new section 51.6(b)(5) is added to require a replacing insurer to deliver the completed Disclosure Statement to the policyholder or contract holder no later than the time of policy or contract delivery. Where the insurer requires the Disclosure Statement to be signed by the applicant, a copy of the applicant-signed Disclosure Statement shall be provided to the applicant at the time the applicant signed the Disclosure Statement.

Section 51.6(b)(6) is renumbered as section 51.6(b)(8).

Section 51.6(b)(9) is withdrawn. Section 51.6(b)(8) is renumbered as section 51.6(b)(9).

A new section 51.6(b)(10) is added to require a replacing insurer to send a revised Disclosure Statement with the policy or contract for delivery to the owner if an initial Disclosure Statement was provided to the applicant prior to the issuance of the policy or contract and the policy or contract is issued other than as applied for, except when it’s resulted from changes in the amount of expected initial or additional premiums or changes in amounts of exchanges pursuant to Internal Revenue Code section 1035 rollovers or transfers that do not impact the key benefits and features of policy or contract as applied for.

Appendices 10A, 10B, 10C and 11 are repealed and new Appendices 10A, 10B, 10C and 11 are added. New Appendices 10A and 10B (“Disclosure Statement”) (1) add three bulleted items regarding the time in which a Disclosure Statement must be provided, the right to a refund within 60 days, and contacting the company, agent or broker with questions; (2) contain revised language concerning the sales material; (3) no longer contain the acknowledgement that the applicant had received and read the Disclosure Statement before signing the application; and (4) denote that the applicant acknowledgement may be included or omitted at the insurer’s option.

New Appendix 10C (“Important Notice”) now includes a provision, in bold, that the Disclosure Statement is required to be provided to the applicant no later than upon policy or contract delivery.

New Appendix 11 (“Definition of Replacement”) (1) no longer includes the requirement that the Disclosure Statement shall be provided at the same time as the Important Notice Regarding Replacement; and (2) now includes a statement that the applicant shall receive a completed Disclosure Statement no later than the time the new policy or contract is delivered.

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

Michael Maffei, New York State Department of Financial Services, One State Street, New York, NY 10004, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory authority: The Superintendent’s authority to promulgate the Third Amendment to Insurance Regulation 60 (11 NYCRR 51) derives from § § 202 and 302 of the Financial Services Law (“FSL”) and § 301, 2123, 2403 and 4226 of the Insurance Law.

FSL § 202 establishes the office of the Superintendent and designates the Superintendent as the head of the Department of Financial Services (“Department”).

FSL § 302 and Insurance Law § 301 authorize the Superintendent to effectuate any power accorded to the Superintendent by the Financial Services Law, the Insurance Law, or any other law of this state and to prescribe regulations interpreting the Insurance Law, among other things.

Insurance Law § 2123(a)(1), in pertinent part, prohibits an insurance broker or an insurance agent or representative of an insurer from making misrepresentations, misleading statements and incomplete comparisons with respect to any policy or contract of life, accident or health insurance or any annuity contract.

Insurance Law § 2123(a)(3) requires any replacement of a life insurance policy or annuity contract by an insurance agent, representative of an insurer, or an insurance broker to conform to standards promulgated by regulation by the Superintendent (i.e., Insurance Regulation 60).

Insurance Law § 2403 prohibits any person from engaging in this state in any trade practice constituting a defined violation or a determined violation as defined in Insurance Law Article 24.

Insurance Law § 4226 prohibits an authorized life, or accident and health insurer from making misrepresentations, misleading statements, and incomplete comparisons.

Insurance Law § 4226(a)(6) requires any replacement of life insurance policies or annuity contracts by an insurer to conform to the standards promulgated by regulation by the Superintendent (i.e., Insurance Regulation 60).

2. Legislative objectives: Insurance Law § § 2123(a)(3) and 4226(a)(6) (the “statutes”) were added by Chapter 616 of the Laws of 1997, providing consumer protections to ensure that purchasers of life insurance or annuities receive timely and accurate information on the costs and benefits of the insurance policy or annuity contract proposed to be purchased. The statutes require that any replacement of a life insurance policy or annuity contract conforms to standards promulgated by regulation by the Superintendent. Insurance Regulation 60 provides such standards.

The statutes specify that the regulation must, among other things, set forth the proper disclosure and notification procedures to replace a policy or contract and provide a 60-day free look period, during which time the policy or contract owner may return the new policies or contracts and reinstate the replaced policies or contracts. This rulemaking conforms to the statutes’ specifications, and the disclosure requirements under this regulation will enable consumers to make better informed decisions. The 60-day “cooling off” period required under the statutes and regulation give consumers more time to consider their decision.

This amendment is consistent with the public policy objectives the Legislature sought to advance by enacting the statutes, because it ensures that consumers will still retain significant protections, i.e., receiving the Important Notice at the time of application, which generally explains why replacement may not be in a consumer’s best interests; receiving the Disclosure Statement no later than the time of policy delivery so that a consumer may review a side-by-side comparison of the replaced and replacing coverages; and having a 60-day free-look period (rather than the 10-day free look period required in non-replacement situations) to return the replacement policy for a full refund and restore the replaced policy, to the best extent possible.

3. Needs and benefits: There are two primary elements to the disclosure requirements under Insurance Regulation 60: (1) the Important Notice, which is a general notice advising consumers to consider the effects of replacing coverage and the possible disadvantages of such replacement; and (2) the Disclosure Statement, which includes a transaction-specific comparison of the proposed and existing insurance and a signed agent statement identifying the advantages and disadvantages of the replacement. The Important Notice is similar to the notice required under the National Association of Insurance Commissioners model rule. The Disclosure Statement is a New York innovation, and insurance producers (insurance agents and brokers) and insurers have considered it to be a controversial compliance issue ever since the rule was revised in the late 1990s. However, the Disclosure Statement as revised under the proposal has garnered industry’s support.

Currently, the completed Disclosure Statement must be provided to the applicant no later than the time that the application is signed. The process to obtain information from the replaced insurer for the completion of the Disclosure Statement can take several weeks. Because an insurance producer may not bind coverage without a signed application, insurance producers and insurers have argued that the delay prohibits them from moving forward with underwriting or binding coverage for applicants who want to move forward with the replacement. These delays may place consumers at risk of having lesser coverage, or no coverage¹, during the waiting period.

In the past, the trade association, Life Insurance Council of New York (“LlCONY”), has supported a bill that would ultimately eliminate the requirement for a Disclosure Statement altogether. Earlier this year, the National Association of Insurance and Financial Advisors – New York State (“NAIFA”) asked the Department to revise Regulation 60 to expedite the commencement of underwriting and allow an insurance producer to bind coverage (i.e., conditional receipt) even when a replacement is involved, while still maintaining the Disclosure Statement requirement. This amendment changes the time in which a completed Disclosure Statement must be presented or delivered to an applicant from “no later than at the time the applicant signs the application” to “prior to the delivery of the replacement policy,” achieving NAIFA’s stated goals and gaining the life insurance industry’s support while still retaining the current regulation’s significant consumer protections. In addition, this amendment will benefit insureds, insurance producers and insurers by:

• allowing an insurance producer to bind coverage for a consumer more quickly, subject to an insurer’s underwriting requirements, because the insurance producer will be able to accept the consumer’s application immediately without waiting for a completed Disclosure Statement;

• enabling the underwriting process to proceed immediately, thereby expediting the policy issuance process. Applicants who are determined to replace their existing coverage are, reportedly, often times aggravated or upset that they must wait several weeks to apply for new coverage. Some applicants seek a quick exit from their current policies to avoid market losses (such as with variable annuities), but must wait several weeks before a new application can be completed;

• facilitating more insurance purchased over the internet. The current process of having to wait several weeks for a response from the replaced insurer effectively inhibits internet sales when replacements are involved;

• reducing the number of “revised” Disclosure Statements that are currently necessary to account for changes that occurred between the time the application was taken and the date that the policy is ultimately issued. The issuance of multiple Disclosure Statements can be confusing to policyholders, and this amendment is expected to dramatically reduce the number of instances where “revised” Disclosure Statements are necessary;

• preserving the Disclosure Statement as a valuable tool for consumers to compare policies at the time of policy issuance and to review later on if they have questions about the new coverage; and

• making it easier for insurance producers and insurers to comply with the regulation. Moving the Disclosure Statement to the back-end of the process will streamline the process and eliminate many of the technical issues insurers encountered in the past.

4. Costs: Insurers licensed to do business in New York State that choose to change their replacement process will likely incur costs to modify existing computer software; develop and implement revised Regulation 60 procedures; and train insurance producers with respect to the revised Regulation 60 requirements. Such costs are difficult to estimate because of several factors, including an insurer’s current procedures in monitoring Insurance Regulation 60 compliance and whether an insurer writes replacement business. The new streamlined process created by this amendment eliminates the need to produce sales material unless requested, and should result in fewer revised Disclosure Statements, which may create cost savings. The changes may also generate additional income from more internet sales of life insurance and annuity contracts. Moreover, an insurer may continue its current practice of presenting or delivering a completed Disclosure Statement no later than at the time an applicant signs an application, and thus not incur additional costs. However, because this proposal amends Appendices 10A, 10B, 10C, and 11, all life insurers that write replacement business are likely to incur some minimal costs related to replacing their exhibits.

The Department anticipates minimum additional costs to be incurred by affected insurance producers, associated primarily with the time they will spend in required training of each insurer’s revised replacement procedures.

This amendment is expected to result in the need for the Department staff to review revised Regulation 60 procedures. The cost of such additional work required will be absorbed through the Department’s normal budget and would not be on-going. There are no costs to other state government agencies or local governments.

5. Local government mandates: The amendments impose no new programs, services, duties or responsibilities on any county, city, town, village, school district, fire district or other special district.

6. Paperwork: This amendment changes the time in which a completed Disclosure Statement must be presented or delivered to an applicant from “no later than at the time the applicant signs the application” to “prior to the delivery of the replacement policy.” Also, a replacing insurer will now only need to furnish to a replaced insurer a list of the sales material used in the replacement sale, with an offer to provide copies of the sales material within a prescribed time.

Regulation 60 requires insurers to file their replacement procedures with the Department. Insurers will have to file their revised procedures with the Department if they choose to revise their procedures.

7. Duplication: The amendment does not duplicate any existing laws or regulations.

8. Alternatives: The Department circulated drafts of this proposal to NAIFA and LlCONY, which represent affected insurers and insurance producers. The Department received comments from both associations. After careful consideration of industry comments, the Department revised the proposal, where feasible. The proposal was also presented to the Center for Economic Justice (“CEJ”), a non-profit organization that works to increase the availability, affordability and accessibility of economic goods and services for low-income and minority consumers. CEJ indicated that it has no objections to the proposed amendment.

NAIFA suggested decreasing the amount of time that the replaced insurer has to respond with information to the replacing agent or insurer from 20 days to seven days. However, this approach has previously been discussed with industry and vigorously opposed by life insurers due to systems constraints and other concerns.

NAIFA fully supports this amendment because it deals effectively with their request to speed up the application process and enables agents to bind coverage more quickly. LlCONY and life insurers also support the amendment.

9. Federal standards: There are no federal standards in this subject area.

10. Compliance schedule: The amendment will become effective 90 days after publication in the State Register, which will enable insurers to address systems changes that will need to be made.

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¹ A replacement can occur even when there is no coverage in instances where an existing policy was recently terminated (i.e., prior to the application for new coverage).

Regulatory Flexibility Analysis

1. Effect of the rule: This rulemaking will not affect any local governments. The amendment will affect regulated life insurers, none of which comes within the definition of “small business” as set forth in State Administrative Procedure Act § 102(8), because they are not independently owned and operated and they employ fewer than one hundred individuals. The amendment also will affect insurance producers, the vast majority of which are small businesses, because they are independently owned and operated and employ one hundred or fewer individuals. There are approximately 139,240 insurance agents and 12,651 insurance brokers licensed under the life insurance line of authority in New York that will be affected by this rulemaking. The Department does not have a record of the exact number of small businesses included in these groups.

2. Compliance requirements: The amendment removes an insurance producer’s duty to submit to a replacing insurer a completed Disclosure Statement with an application for an insurance policy or annuity contract and requires each insurance producer to submit to the replacing insurer, prior to the policy or contract delivery, an accurate and complete Disclosure Statement signed by the insurance producer.

3. Professional services: The amendment does not require any small businesses that are affected by this rulemaking to use any professional services beyond those currently used to comply with this rule.

4. Compliance costs: The amendment will not impose any compliance costs on local governments. The Department anticipates minimum additional costs to be incurred by affected insurance producers, associated primarily with the time the insurance producers will spend in required training of each insurer’s revised replacement procedures.

5. Economic and technological feasibility: Although there will be minimal additional costs associated with the amendment, compliance is economically feasible for small businesses.

6. Minimizing adverse impact: This rule applies equally to all insurers and insurance producers, regardless of their size. The rule does not impose any adverse or disparate impact on small businesses. This rule does not affect local governments.

7. Small business and local government participation: The Department circulated drafts of this proposal to the National Association of Insurance and Financial Advisors – New York State, a trade association representing affected insurance producers, many of which are small businesses, and the Life Insurance Council of New York, an insurers’ trade association. The Department received comments from both associations. After careful consideration of industry comments, the Department revised the proposal, where feasible. This notice is intended to provide small businesses with an additional opportunity to participate in the rule-making process.

Rural Area Flexibility Analysis

1. Types and estimated number of rural areas: Insurers and insurance producers covered by this amendment do business in every county in this state, including rural areas as defined in State Administrative Procedure Act (“SAPA”) section 102(10).

2. Reporting, recordkeeping and other compliance requirements; and professional services: This amendment changes the time in which a completed Disclosure Statement must be presented or delivered to an applicant from “no later than at the time the applicant signs the application” to “prior to the delivery of the replacement policy.” Also, a replacing insurer now only needs to furnish to a replaced insurer a list of the sales material used in the replacement sale, with an offer to provide copies of the sales material within a prescribed time.

Insurance Regulation 60 requires insurers to file their replacement procedures with the Department. Because this amendment necessitates revision of insurers’ replacement procedures, insurers will have to file their revised procedures with the Department.

It is unlikely that any insurer or insurance producer in a rural area will need professional services to comply with this rule beyond the professional services already being used.

3. Costs: Insurers licensed to do business in New York State that choose to change their replacement process will likely incur costs to modify existing computer software; develop and implement revised Regulation 60 procedures; and train insurance producers with respect to the revised Regulation 60 requirements. Such costs are difficult to estimate because of several factors, including an insurer’s current procedures in monitoring Insurance Regulation 60 compliance and whether an insurer writes replacement business. The new streamlined process created by this amendment eliminates the need to produce sales material unless requested, and should result in fewer revised Disclosure Statements, which may create cost savings. The changes may also generate additional income from more internet sales of life insurance and annuity contracts. Moreover, an insurer may continue its current practice of presenting or delivering a completed Disclosure Statement no later than at the time an applicant signs an application, and thus not incur additional costs. However, because this proposal amends Appendices 10A, 10B, 10C, and 11, all life insurers that write replacement business are likely to incur some minimal costs related to revising or replacing their exhibits.

The Department anticipates minimum additional costs to be incurred by affected insurance producers, associated primarily with the time they will spend in required training of each insurer’s revised replacement procedures.

This amendment is expected to result in the need for the Department staff to review revised Regulation 60 procedures. The cost of such additional work required will be absorbed through the Department’s normal budget and would not be on-going. There are no costs to other state government agencies or local governments.

4. Minimizing adverse impact: This amendment uniformly affects insurers and insurance producers that are located in both rural and non-rural areas of New York State. The rulemaking should not have any adverse impact on rural areas.

5. Rural area participation: The Department circulated drafts of this proposal to the trade associations, the National Association of Insurance and Financial Advisors–New York State and the Life Insurance Council of New York, that represent affected insurers and insurance producers, some of which are located in rural areas. The Department received comments from both associations. After careful consideration of industry comments, the Department revised the proposal, where feasible. Also, public and private interests in rural areas will have an additional opportunity to participate in the rulemaking process once the proposed rule is published in the State Register and posted on the Department’s website.

Job Impact Statement

The Department of Financial Services finds that this amendment should have no impact on jobs and employment opportunities, including self-employment opportunities in New York State. This amendment changes the time in which a completed Disclosure Statement must be presented or delivered to an applicant from “no later than at the time the applicant signs the application” to “prior to the delivery of the replacement policy.”