DFS-35-12-00002-P Smoker/Nonsmoker Mortality Tables and Underwriting Classifications

8/29/12 N.Y. St. Reg. DFS-35-12-00002-P

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 35

August 29, 2012

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-35-12-00002-P

Smoker/Nonsmoker Mortality Tables and Underwriting Classifications

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

Proposed Action:

Amendment of Part 57 (Regulation 113) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202 and 302; and Insurance Law, sections 301, 2403, 3201, 4217, 4221, 4224, 4511 and 4517

Subject:

Smoker/nonsmoker mortality tables and underwriting classifications.

Purpose:

To provide that juveniles will be treated as non-smokers unless an insurer has evidence to the contrary.

Text of proposed rule:

Part 57 is hereby re-titled from "Smoker/Nonsmoker Mortality Tables For Use In Determining Minimum Nonforfeiture Benefits And Minimum Reserve Liabilities" to "Smoker/Nonsmoker Mortality Tables and Underwriting Classifications."

Sections 57.1 to 57.4 are amended to read as follows:

§ 57.1 Purpose and applicability.

(a) The purpose of this Part is to establish standards and rules for classifying an insured as a smoker or a nonsmoker and for reclassifying an insured in accordance with section 57.5(d) of this Part and to permit the use of mortality tables that reflect differences in mortality between smokers and nonsmokers in determining minimum cash surrender values, minimum amounts and minimum periods of paid-up nonforfeiture benefits, and minimum reserve liabilities for plans of insurance with separate premium rates for smokers and nonsmokers. This Part, as amended, clarifies that if an insurer issues coverage to an insured not underwritten as a smoker at issue then the insurer may not subsequently treat the insured as a smoker for that coverage.

(b) This Part applies to every authorized life insurance company and authorized fraternal benefit society.

§ 57.2 Definitions.

As used in this Part:

(a) 1980 CSO Table with or without Ten-Year Select Mortality Factors means that mortality table, consisting of separate rates of mortality for male and female lives, developed by the Society of Actuaries Committee to Recommend New Mortality Tables for Valuation of Standard Individual Ordinary Life Insurance, incorporated in the 1980 NAIC Amendments to the Model Standard Nonforfeiture Law and Standard Valuation Law for Life Insurance, and referred to in those models as the Commissioners 1980 Standard Ordinary Mortality Table, with or without Ten-Year Select Mortality Factors. The same select factors will be used for both smoker and nonsmoker tables.

(b) 1980 CET Table means that mortality table consisting of separate rates of mortality for male and female lives, developed by the Society of Actuaries Committee to Recommend New Mortality Tables for Valuation of Standard Individual Ordinary Life Insurance, incorporated in the 1980 NAIC Amendments to the Model Standard Nonforfeiture Law and Standard Valuation Law for Life Insurance, and referred to in those models as the Commissioners 1980 Extended Term Insurance Table.

(c) 2001 CSO Mortality Table has the same meaning as set forth in section 100.3 of Part 100 of this Title (Insurance Regulation 179).

(d) [The phrase smoker] Smoker and nonsmoker mortality tables [refers to] means mortality tables with separate rates of mortality for smokers and nonsmokers [derived from the tables, defined in subdivisions (a) and (b) of this section, which were developed by the Society of Actuaries Task Force on Smoker/Nonsmoker Mortality, recommended by the NAIC Technical Staff Actuarial Group and approved by the NAIC in December 1983].

[(d)](e) [The phrase composite] Composite mortality tables [refers to] means mortality tables[, defined in subdivisions (a) and (b) of this section, as they were originally published with rates of mortality] that do not distinguish between smokers and nonsmokers.

(f) Smoker means a proposed insured or an insured who has been classified by an insurer, based on current or past behavior within a specified timeframe in accordance with its standard underwriting rules or procedures, as one who smokes, uses tobacco or uses nicotine.

(g) Nonsmoker means a proposed insured or an insured who is classified as a nonsmoker at the time of application for life insurance or who at any subsequent time is reclassified as a nonsmoker in accordance with the insurer's underwriting procedures.

(h) Insurer means an authorized life insurance company or authorized fraternal benefit society.

§ 57.3 Alternate tables.

(a) In determining minimum cash surrender values, minimum amounts and minimum periods of paid-up nonforfeiture benefits and minimum reserve liabilities, for any policy of insurance delivered or issued for delivery in this State after the operative date of Insurance Law section 4221(k) [of the Insurance Law (formerly section 208-a[7-d])] for that policy form, at the option of the [company] insurer and subject to the conditions stated in section 57.4 of this Part:

(1) the 1980 CSO Smoker and Nonsmoker Mortality Tables, with or without Ten-Year Select Mortality Factors, may be substituted for the 1980 CSO Table, with or without Ten-Year Select Mortality Factors; and

(2) the 1980 CET Smoker and Nonsmoker Mortality Tables may be substituted for the 1980 CET Table.

(b) The 1980 CSO and 1980 CET Smoker and Nonsmoker Mortality Tables in subdivision (a) of this section are sex-distinct tables. They may be gender-blended in accordance with the provisions of Part 47 of this Title (Insurance [Department] Regulation [Number] 112).

(c) The rates of mortality for the various smoker and nonsmoker mortality tables are shown in the Appendix to this Part (Appendix 21 of this Title).

§ 57.4 Conditions.

(a) For each plan of insurance with separate premium rates for smokers and nonsmokers, an insurer may:

(1) use composite mortality tables to determine minimum cash surrender values, minimum amounts and minimum periods of paid-up nonforfeiture benefits and minimum reserve liabilities.

(2) use smoker and nonsmoker mortality tables to determine the valuation net premiums and additional minimum reserves, if any, required by Insurance Law section 4218 [of the Insurance Law (formerly section 206)], and use composite mortality tables to determine minimum cash surrender values, and minimum amounts and minimum period of paid-up nonforfeiture benefits and basic minimum reserve liabilities; or

(3) use smoker and nonsmoker mortality tables to determine minimum cash surrender values, minimum amounts and minimum periods of paid-up nonforfeiture benefits and minimum reserve liabilities.

(b) Once an insurer has selected a method as described in paragraph (1), (2) or (3) of subdivision (a) of this section to apply [with respect] to a specific series of issues of a particular plan of insurance, [such] that method must be continued for [such] that block of business unless [and until] the superintendent [shall have approved] approves a request for a change in method.

(c) For policies with separate premium rates for smokers and nonsmokers, delivered or issued for delivery in this State prior to [the effective date of this Part] September 19, 1984, with nonforfeiture values based upon 1980 CSO and 1980 CET composite mortality tables, aggregate basic reserve liabilities (exclusive of any additional minimum reserves required by Insurance Law section 4218 [of the Insurance Law, formerly section 206]) must not be less than aggregate minimum basic reserves according to the same composite mortality tables. For such policies, the insurer may use 1980 CSO and 1980 CET smoker and nonsmoker mortality tables to determine the valuation net premiums and additional minimum reserves, if any, required by Insurance Law section 4218 [of the Insurance Law (formerly section 206)].

(d) The reserve actually held for each policy (including any additional minimum reserve required by Insurance Law section 4218 [of the Insurance Law, formerly section 206]) must not be less than the cash surrender value of such policy at the same duration.

(e) In accordance with section 57.5(e) of this Part, an insurer may use composite mortality tables when a policy is issued to any individual up to an age identified in the policy between ages 15 and 18, inclusive, and smoker/nonsmoker mortality tables when the policy is issued to any individual over that age.

New sections 57.5 and 57.6 are added to read as follows:

§ 57.5 Classification and reclassification.

(a) An insured may only be treated as a smoker for rating and benefit purposes if:

(1) the insurer has determined that the insured is a smoker in accordance with subdivision (b) of this section; and

(2) subject to underwriting in accordance with subdivision (b) of this section, the insurer treats any other insured who is not determined to be a smoker as a non-smoker for rating and benefit purposes.

(b) If, based on its underwriting procedures, an insurer determines, at the time of policy application or at the time of a request for an increase in insurance coverage where evidence of insurability is required under the terms of the policy with respect to the amount of the increase, that an insured is a smoker, the policy must specify when the rates or benefits of the policy will be based on the insured's classification as a smoker.

(c) A policy on an insured classified as a smoker must identify any amounts of coverage to which the smoker classification is being applied and, if applicable, any amounts of coverage to which the smoker classification does not apply.

(d) If the insurer has any procedures for the insured to seek a more favorable underwriting classification, then the insurer must describe those procedures in any policy issued after the effective date of this section. Amounts of coverage issued on an insured may not subsequently be reclassified to a less favorable underwriting classification. This subdivision does not apply to any increases in insurance coverage for which evidence of insurability is required.

(e) For any policy issued under the 2001 CSO Mortality Table at ages for which the table does not have distinct mortality rates for smokers and nonsmokers, an insurer may either:

(1) use the composite mortality table for all attained ages; or

(2) use the composite mortality table for attained ages up to an age identified in the policy between ages 15 and 18, inclusive, and thereafter use smoker and non-smoker tables in accordance with Part 100 of this Title (Insurance Regulation 179) and as provided in this section.

(f) This section applies to all policies issued on or after the effective date of this section.

§ 57.6 Determined violation.

A contravention of section 57.5 of this Part shall be deemed to be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in this State, and shall be deemed to be a trade practice constituting a determined violation, as defined in Insurance Law section 2402(c), in violation of Insurance Law section 2403.

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, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Dennis Lauzon, Assistant Chief Life Actuary, New York State Department of Financial Services, One Commerce Plaza, Albany, New York 12257, [phone], email: [e-mail]

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory authority: Financial Services Law ("FSL") sections 202 and 302; and Insurance Law ("Ins Law") sections 301, 2403, 3201, 4217, 4221, 4224, 4511 and 4517.

FSL section 202 describes the powers of the Superintendent of Financial Services generally.

FSL section 302 and Ins Law section 301, in material part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Financial Services Law and the Insurance Law, and to prescribe regulations interpreting them.

Ins Law section 2403 describes prohibited trade practices that constitute determined violations.

Ins Law section 3201 provides that no life insurance policy form may be 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.

Ins Law section 4217 governs the valuation of life insurance policies, including the calculation of reserves and use of mortality tables.

Ins Law section 4221 is the standard nonforfeiture law for life insurance and sets forth certain minimum requirements for life insurance policies.

Ins Law section 4224 prohibits unfair discrimination between individuals of the same class and equal expectation of life, and requires that any difference in treatment be based upon sound actuarial principles.

Ins Law sections 4511 and 4517 govern life insurance certificates issued by fraternal benefit societies, including their nonforfeiture benefits and valuation.

2. Legislative objectives: The proposed amendment to the rule comports with the public policy objective of Insurance Law section 4224 by ensuring that individuals of the same class and equal expectation of life are treated the same and that any difference is based on sound actuarial principles, is not unfair, and is clearly disclosed to insureds and potential insureds, thereby implicating Insurance Law sections 3201 (approval of filings), 4217 (use of mortality tables and reserves calculations), 4221 (minimum nonforfeiture requirements), and 4511 and 4517 (life insurance certificates issued by fraternal benefit societies). The rule, as amended, will ensure that an insured will not be classified as a smoker or tobacco user by an insurer unless the insured actually smokes or uses tobacco or nicotine products. Currently, some insurers re-classify certain insureds as smokers or tobacco users upon the attainment of a specified age without evidence of the insured's actual tobacco or nicotine usage. The amendment will also require insurers to provide notice of any procedures to seek reclassification of their risk classification.

3. Needs and benefits: This is one of several Parts that address the use of mortality tables by insurers. It focuses on the classification of individuals as smokers or nonsmokers and the use of smoking/nonsmoking tables. Some insureds are automatically reclassified as "smokers" under their life insurance policies upon attainment of a specified age or are unaware that the insurer has procedures for the insured to seek reclassification as a nonsmoker. This amendment creates a presumption that every insured qualifies for a non-smoker class unless the insurer, in responding to a request for insurance coverage, has identified the insured in accordance with its underwriting rules or procedures as one who smokes or uses tobacco or nicotine. The amendment prohibits changing coverage issued as "nonsmoker" to "smoker." The amendment requires the policy to describe any procedures for reclassification. Thus, when a juvenile becomes an adult, coverage will continue to be based on the class assigned at the time coverage was issued and the insurer may not reclassify the smoking status. In addition, some minor technical changes are being made to the rule, such as updating language for consistency purposes and reformatting the rule for clarity. These changes do not substantively alter the meaning of any affected provision.

4. Costs: The cost for life insurers and fraternal benefit societies to comply with the proposed amendment to the rule should be nominal. While some changes in classification may necessitate training for the insurer's personnel, the revised rule only affects classification without substantially affecting the underwriting process. There should be no additional costs imposed upon the Department or other state agencies or local governments as a result of this amendment.

5. Local government mandates: The proposed amendment to the rule imposes no new programs, services, duties or responsibilities on any county, town, village, school district, fire district or other special district.

6. Paperwork: The proposed amendment to the rule does not impose any additional reporting requirements on the affected life insurers or fraternal benefit societies.

7. Duplication: The proposed amendment to the rule is not duplicative of any other rule, and changes are made to coordinate with 11 NYCRR 100 (Insurance Regulation 179).

8. Alternatives: The only alternative to the proposed amendment to the rule is to maintain the status quo and allow insureds to be classified as smokers even though they may be non-smokers. This alternative does not meet the legislative objective and was therefore rejected.

9. Federal standards: There are no analogous federal standards.

10. Compliance schedule: This amendment will take effect 180 days after Notice of Adoption is published in the State Register, except for section 57.5 which will take effect 270 days after Notice of Adoption is published in the State Register, to allow enough time for insurers to adjust their classification procedures.

Regulatory Flexibility Analysis

The Department has determined that the rule will not impose any adverse economic impact or reporting, recordkeeping or other compliance requirements on small businesses or local governments. The basis for this finding is that this rule is directed at life insurance companies and fraternal benefit societies that are licensed to do a life insurance business in New York State, none of which is a local government or falls within the definition of “small business” as defined in section 102(8) of the State Administrative Procedure Act.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas: The proposed amendment applies equally to urban and rural areas throughout the State.

2. Reporting, recordkeeping and other compliance requirements, and professional services: The reporting, recordkeeping and compliance requirements for the proposed amendment are the same across the state. No special professional services will be required in a rural area to comply with the proposed rule.

3. Costs: The proposed amendment is not expected to result in any additional costs since it reflects a change in the substantive underwriting rule without affecting the underwriting process itself.

4. Minimizing adverse impact: The proposed amendment does not have any adverse impact on rural areas.

5. Rural area participation: Public participation in the preparation of this rule was afforded by the public comment period solicited when the proposed rule was published on the Department's website.

Job Impact Statement

The Department of Financial Services finds that this rule will have little or no impact on jobs and employment opportunities. The proposed rule provides that juveniles must be treated as non-smokers unless an insurer has evidence to the contrary. The rule does not change the underwriting process in any way that would require staffing changes.