PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:
Proposed Action:
Amendment of Part 54 (Regulation 77) of Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202, 301 and 302; and Insurance Law, sections 301, 3201 and 4240
Subject:
Variable life insurance.
Purpose:
To amend 11 NYCRR Part 54 to authorize and provide exceptional treatment for private placement variable life insurance.
Text of proposed rule:
A new subdivision (y) is added to section 54.1 to read as follows:
(y) Private placement variable life insurance policy means any variable life insurance policy that: (i) is exempt from registration under the Federal Securities Act of 1933; (ii) includes one or more separate accounts that are exempt from registration as an investment company under the Investment Company Act of 1940; and (iii) is only available to an accredited investor, as defined in 17 CFR § 230.501(a)(2011),* or to a qualified purchaser, as defined in 15 U.S.C. § 80a-2(a)(51)(2010).** Copies of such documents are available for public inspection at the offices of the Department of Financial Services at One Commerce Plaza, Albany, New York 12257 and 25 Beaver Street, New York, New York 10004.
* 17 Code of Federal Regulations § 230.501(a) (revised on April 1, 2011), published by U.S. Government Printing Office, Washington, D.C. 20401.
** 15 United States Code Sec. 80a-2(a)(51) (revised on February 1, 2010), published by Office of the Law Revision Counsel, U.S. House of Representatives, Washington, D.C. 20515.
Subdivision (b) of section 54.3 is amended to read as follows:
(b) [The] Except as set forth in subsection (g) below, the assets of such separate accounts shall be valued at least as often as variable benefits are determined, but in any event at least monthly.
New subdivision (g) is added to section 54.3 to read as follows:
(g) The assets of a separate account established to provide life insurance under private placement variable life insurance policies shall be valued at least as often as variable benefits are determined, but no less frequently than annually. The determination of the value of the assets of a separate account, to the extent necessary, may be based upon reasonable approximations.
Paragraph (6) of subdivision (b) of section 54.6 is amended to read as follows:
(6) A provision designating the separate account to be used and stating that the assets of such separate account shall be valued at least as often as any policy benefits vary, but [at least] no less frequently than annually for a private placement variable life insurance policy and monthly for any other variable life insurance policy.
The opening clause of paragraph (7) of subdivision (b) of section 54.6 is amended to read as follows:
(7) [A] Except in the case of a private placement variable life insurance policy, a provision that at any time during the first 18 policy months, so long as the policy is in force on a premium-paying basis, the owner may exchange the policy without evidence of insurability for a policy of general account life insurance on the life of the insured for the same amount of insurance as the initial face amount of the variable life insurance policy, and on a plan of insurance specified in the policy, subject to the following requirements:
New paragraphs (15) and (16) of subdivision (b) are added to section 54.6 to read as follows:
(15) For a private placement variable life insurance policy, a provision stating that the payment of variable death benefits shall be made no later than 30 days from the date the request for payment and all necessary documentation are received.
(16) For a private placement variable life insurance policy, a provision stating that the payment of cash surrender values, policy loans, partial withdrawals or partial surrenders shall be made as expeditiously as possible but in no event later than 15 months from the date the request for payment is received.
The opening paragraph of section 54.7 is amended to read as follows:
The policy value and cash surrender value [of each variable life insurance policy] shall be determined no less frequently than annually for a private placement variable life insurance policy and at least monthly for any other variable life insurance policy. A summary of the method of computation of cash surrender values and other nonforfeiture benefits shall be described in the policy; a complete statement of the method of computation shall be filed with the superintendent. Such method shall be in accordance with actuarial procedures that recognize the variable nature of the policy. The method of computation must be such that it complies with subdivision (a) or (b) of this section:
Section 54.7(b)(2)(i)(c) is amended to read as follows:
(c) A deferred acquisition and other charge may be charged against the policy value in any policy year 2 through [15]20, such that the total of all such charges imposed to date plus the surrender charge for that year does not exceed the maximum initial surrender charge. The deferred acquisition and other charge in any one year may not exceed the maximum allowable surrender charge for that year. Similar deferred acquisition and other charges may be imposed with respect to an increase in face amount.
Paragraph (3) of subdivision (b) of section 54.7 is amended to read as follows:
(3) Any surrender charge in paragraph (2) of this subdivision must be such that [at the end of] during any policy year it does not exceed the maximum initial surrender charge that would be allowed multiplied by the ratio of [ax + t;15-t| to ax;15|] a life annuity due for age x+t for 20-t years to a life annuity due for age x for 20 years based on the mortality table and interest rate used in calculating the net level whole life annual premiums. Furthermore, any such surrender charge may not exceed the maximum initial surrender charge less the sum of all deferred acquisition and other charges made to date against the policy value. For these annuity values, x is the age at [which] the effective date of the surrender charge [is created] and t is the [duration] number of years completed since [of] the effective date of the surrender charge.
Section 54.7(b)(5)(iii) is amended to read as follows:
(iii) [At least once each year, the] The [insured] policyholder [has] shall have the option to transfer all separate account funds to the general account and apply [his] the policy's cash surrender value to purchase a guaranteed fixed paid-up benefit at least once every five years for a private placement variable life insurance policy and at least once each year for any other variable life insurance policy.
The opening paragraph of section 54.9 is amended to read as follows:
An insurer delivering or issuing for delivery in this State any variable life insurance policies shall deliver to the applicant for the policy, and obtain a written acknowledgment of receipt from such applicant coincident with or prior to the execution of the application, a private placement offering memorandum in the case of a private placement variable life insurance policy or a prospectus included in a registration statement relating to the [policies which satisfies] policy in the case of any other variable life insurance policy. The prospectus must satisfy the requirements of the federal securities [Act of 1933 and which was] laws, have been declared effective by the Securities and Exchange Commission, and [which] include[s] the following information:
Subdivision (d) of section 54.10 is re-lettered subdivision (e) and a new subdivision (d) is added to read as follows:
(d) A prominent statement, in the case of a private placement variable life policy, that due to the illiquid nature of the investment options, the payment of the death benefit, the cash surrender value, policy loans, partial withdrawals or partial surrenders, as applicable, may be delayed. The statement shall advise the applicant to refer to the policy for further details on any delay of payments.
(e) A notice that the following are available upon request: Illustrations of benefits, including death benefits, policy values and cash surrender values. Such illustrations shall be in a form and content acceptable to the superintendent.
Text of proposed rule and any required statements and analyses may be obtained from:
David Neustadt, New York State Department of Financial Services, One State Street, New York, NY 10004, (212) 709-1690, email: david.neustadt@dfs.ny.gov
Data, views or arguments may be submitted to:
Deborah Kahn, New York State Department of Financial Services, One Commerce Plaza, Albany, NY 12257, (518) 474-7668, email: deborah.kahn@dfs.ny.gov
Public comment will be received until:
45 days after publication of this notice.
Regulatory Impact Statement
1. Statutory authority: The Superintendent's authority for the promulgation of Insurance Regulation 77 (11 NYCRR 54) derives from sections 202, 301 and 302 of the Financial Services Law ("FSL") and sections 301, 3201 and 4240 of the Insurance Law.
Section 202 of the Financial Services Law establishes the office of the Superintendent and designates the Superintendent to be the head of the Department of Financial Services.
Section 301 of the Financial Services Law establishes the powers of the Superintendent generally.
Section 302 of the Financial Services Law and Section 301 of the Insurance Law, in material part, authorize the Superintendent to effectuate any power accorded to him by the Insurance Law, the Banking Law, the Financial Services Law, or any other law of this state and to prescribe regulations interpreting the Insurance Law.
Section 3201 of the Insurance Law prohibits a policy form from being delivered or issued for delivery in this state unless it has been filed with and approved by the Superintendent as conforming to the requirements of the Insurance Law and not inconsistent with law.
Section 4240 authorizes the Superintendent to promulgate regulations relating to separate accounts.
2. Legislative objectives: In 1962, the Legislature added Insurance Law § 4240 to authorize domestic life insurers to establish separate accounts and write separate account agreements. The section provides the basis for the issuance of variable life insurance policies and variable annuities, wherein the policyholder may allocate portions of the account value of the policy or premiums paid into the policy to investment options within the separate account that are selected by the policyholder. Pursuant to Insurance Law § 4240, the income, gains and losses from the assets allocated to a separate account are required to be credited to, or charged against, the separate account and segregated from the assets, income, gains or losses of the company's general account and other separate accounts. Accordingly, the policyholder bears the risk of the gains and losses of the investments selected under the policy. Insurance Law § 4240(d)(7) authorizes the Superintendent to regulate the issuance and sale of separate account agreements, provides that the Superintendent may promulgate regulations relating to the separate accounts that may be appropriate to carry out the provisions of Insurance Law § 4240 and, insofar as applicable to Insurance Law § 4240, other provisions of the Insurance Law.
In accordance with the statute, the Superintendent promulgated New York Comp. Codes R. & Reg., tit. 11, Part 54 ("Insurance Regulation 77") which, in relevant part, requires that the assets of a separate account be valued monthly. The regulation also sets forth requirements in relation to death benefits, cash surrender values, policy loans, partial withdrawals and partial surrenders. Generally, the assets of a separate account are publicly traded on a stock exchange and can be valued or liquid on any day that the stock market is open.
3. Needs and benefits: The life insurance industry believes that in order to remain competitive with other financial institutions, it must offer variable life insurance policies containing private placement separate accounts, known as private placement life insurance policies, to consumers who meet the definition of "accredited investor" as set forth in 17 CFR § 230.501(a)(2011) or "qualified purchaser" as set forth in 15 USC § 80a-2(a)(51)(2010). Private placement investments are investments that: (1) are not publicly traded; (2) may only be sold to persons that meet the specified income or net worth criteria of an "accredited investor" or "qualified purchaser", as set forth in federal securities law, and; (3) are exempt from registration with the SEC under Section 4(2) of the Securities Act of 1933 and Rules 504, 505 or 506 of Regulation D there under, and Section 3(c) of the Investment Company Act of 1940. Insurance Regulation 77 as promulgated in 1985 did not provide for the use of private placement investments in variable life insurance policies. The investment options addressed under Insurance Regulation 77 are publicly traded on a stock exchange and allow for ready valuation and liquidity of the assets of a variable life insurance policy. Since private placement investments by their nature are not as liquid as investments traded on a stock exchange, private placement variable life insurance policies require longer time frames for valuation and liquidity purposes. This amendment to Insurance Regulation 77 would add the provisions necessary to accommodate the mechanics of private placement investments in a variable life insurance policy, and would allow consumers who meet the federal definition of "accredited investor" or "qualified purchaser" as incorporated by reference in the regulation, to purchase private placement variable life insurance policies. In accordance with this amendment, these policies would: (1) provide for valuation of the assets at least annually, (2) provide for the payment of variable death benefits no later than 30 days from the date an insurer receives a request for payment and the necessary documentation and (3) provide for the payment of cash surrender values, policy loans, partial withdrawals or partial surrenders no later than 15 months from the date an insurer receives a the request for payment. Although consumers will receive a detailed private placement offering memorandum prior to purchase, this amendment to Insurance Regulation 77 requires insurer to inform consumers that due to the illiquid nature of the investment options, the payment of the death benefit, the cash surrender value, policy loans, partial withdrawals or partial surrenders, as applicable, may be delayed. The statement must also advise the applicant to refer to the policy for further details on any delay of payments.
4. Costs: There will be no costs to life insurers that do not choose to offer private placement variable life insurance. Life insurers that wish to offer these policies will be required to submit policy forms, but that cost will not exceed normal form filing expenses for similar products in New York. Costs to the Department of Financial Services will be minimal. All life insurance and annuity policy forms are required to be submitted to the Department for approval. The cost to the Department will be minimal as existing personnel are available to process the additional private placement variable life insurance policy forms submitted as a result of the proposed amendment. The Department does not expect to receive a significant volume of these filings. There are no costs to other state 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: Life insurers that wish to offer private placement variable life insurance policies will be required to submit new policy forms, but the paperwork will not exceed normal form filing paperwork for similar products in New York.
7. Duplication: The proposed amendment does not duplicate any existing state or federal law or regulation. The amendment is consistent with certain federal securities law requirements that restrict the purchase of private placement investments to certain classes of investors.
8. Alternatives: As part of the drafting process, the Department consulted with the Life Insurance Council of New York ("LICONY"). LICONY is a trade group representing a significant number of life insurers authorized to do business in New York. LICONY offered a number of comments, some of which have been included in the proposed amendment. LICONY initially sought an amendment that would provide for unlimited liquidity and valuation delays. The proposal limits liquidity delays and valuation periods as described above. The Department believes that to allow longer or indefinite liquidity or valuation delays would be excessive and would provide the potential for abuse.
The Department also conducted outreach by contacting several consumer groups, including the Consumer Federation of America and the Center for Economic Justice, for their input regarding these amendments. The Department also contacted the Independent Insurance Agents of New York for input. No comments were received from any of these parties.
9. Federal standards: There are federal requirements for private placement investments. This amendment authorizes the sale of private placement variable life insurance policies only to consumers who meet the definition of "accredited investor" as defined in 17 CFR § 230.501(a)(2011) or "qualified purchaser" as defined in 15 U.S.C. § 80a-2(a)(51)(2010).
10. Compliance schedule: The amendment will be effective upon publication in the State Register. Life insurers that choose to offer a private placement variable life insurance policy will be required to file the appropriate policy forms for review and approval by the Department. When a life insurer's policy form is approved, it will be able to market and sell the approved policy.
Regulatory Flexibility Analysis
1. Small businesses: The Department of Financial Services finds that this amendment will not impose any adverse economic impact or any reporting, recordkeeping or other compliance requirements on small businesses. The basis for this finding is that this rule is directed at life insurers authorized to do business in New York State, none of which fall within the definition of "small business" as found in section 102(8) of the State Administrative Procedure Act. The Department of Financial Services has reviewed filed Reports on Examination and Annual Statements of these authorized life insurers and believes that none of them fall within the definition of "small business" because there are none which are both independently owned and have less than one hundred employees.
2. Local governments: The amendment does not impose any adverse economic impact on local governments, including reporting, recordkeeping, or other compliance requirements.
Rural Area Flexibility Analysis
The Department of Financial Services finds that this amendment will not impose any adverse impact, any reporting, recordkeeping or other compliance requirements or any need for professional services on any public or private entities in rural areas. This amendment provides for an exception from regulatory standards otherwise applicable to variable life insurance marketed to the general public. The exception is only for variable life insurance policies intended for the private placement market. The amendment does not impose any reporting, recordkeeping, other compliance requirements or any need for professional services on insurers or other entities, including those that are located in rural areas.
Job Impact Statement
This rule will not adversely impact job or employment opportunities in New York. The rule amends the regulatory standards applicable to variable life insurance marketed to the general public with respect to those policies intended only for the private placement market.
The rule is likely to have no measurable impact on jobs and employment opportunities because life insurers' existing personnel should be able to amend policy forms to conform to the requirements of this Part. In addition, no region in New York should experience an adverse impact on jobs and employment opportunities. Finally, this rule would not have a measurable impact on self-employment opportunities.
