INS-39-08-00009-P Insurance Sales Practices on Military Installations or Involving Military Personnel

9/24/08 N.Y. St. Reg. INS-39-08-00009-P

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 39

September 24, 2008

RULE MAKING ACTIVITIES

INSURANCE DEPARTMENT

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. INS-39-08-00009-P

Insurance Sales Practices on Military Installations or Involving Military Personnel

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

Proposed Action:

Addition of Part 223 (Regulation 186) to Title 11 NYCRR.

Statutory authority:

Insurance Law, sections 201, 301, 308, 309, 2103, 2104, 2107, 2109, 2110, 2123, 3201, and 4226, and arts. 24 and 45

Subject:

Insurance sales practices on military installations or involving military personnel.

Purpose:

To declare certain sales practices occurring on military installations or involving military personnel as unfair trade practices.

Substance of proposed rule (Full text is posted at the following State website:www.ins.state.ny.us):

Section 223.1 sets forth the main purposes of the regulation, including setting forth standards to protect active duty service members of the United States Armed Forces from dishonest and predatory insurance sales practices by prohibiting certain identified sales practices.

Section 223.2 is the applicability section. It indicates that this regulation shall apply only to the solicitation or sale of an insurance policy, as defined in section 223.3, by an insurer or insurance producer to an active duty service member of the United States Armed Forces.

Section 223.3 is the definitions section.

Section 223.4 is the exemptions section.

Section 223.5 describes various sales practices that are prohibited when they take place on a military installation.

Section 223.6 describes various sales practices that are prohibited regardless of location.

Section 223.7 indicates that violations of this Part will be deemed "determined violations" for purposes of Article 24 of the Insurance Law.

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

Andrew Mais, New York State Insurance Department, 25 Beaver Street, New York, NY 10004, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Peter A. Dumar, Esq. Associate Insurance Attorney, New York State Insurance Department, 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: The superintendent's authority for promulgation of this rule derives from sections 201, 301, 308, 309, 2103, 2104, 2107, 2109, 2110, 2123, 3201, and 4226, and Articles 24 and 45 of the Insurance Law.

These statutory provisions give the superintendent authority over the sale and marketing of insurance products, including the sale of insurance products on military installations and to military personnel.

Sections 201 and 301 authorize the superintendent to prescribe regulations interpreting the provisions of the Insurance Law as well as effectuating any power granted to the superintendent under the Insurance Law, to prescribe forms or otherwise make regulations.

Section 308 and 309 authorize the superintendent to inquire with relation to the transactions or condition of any authorized insurer or its officers, including the authority to require special reports.

Article 21 establishes the requirements, including standards of competency and trustworthiness, for obtaining and renewing certain licenses, including agents, brokers, adjusters, consultants, and intermediaries. It also provides for the investigation and disciplining of the licensees.

Sections 2103, 2104, 2107 and 2109 provide the superintendent with licensing authority over insurance agents, brokers and consultants.

Section 2110 gives the superintendent authority to revoke or suspend licenses of insurance producers, consultants or adjusters.

Section 2123 prohibits licensees from making misrepresentations, misleading statements and incomplete comparisons.

Section 3201 governs the use and approval of policy forms in New York State.

Article 24 of the Insurance Law regulates trade practices in the insurance industry by prohibiting practices that constitute unfair methods of competition or unfair or deceptive acts or practices.

Section 4226 prohibits insurers from making misrepresentations, misleading statements and incomplete comparisons.

Article 45 deals with fraternal benefit societies, providing the requirements for the incorporation, licensing and operation of domestic, foreign, and alien fraternal benefit societies; requirements for issuance of insurance; and the grounds for revocation or suspension of a license.

2. Legislative objectives: Congress determined that sales abuses were occurring on military installations or involving military personnel. Congress passed, and President Bush signed on September 29, 2006, the Military Personnel Financial Services Protection Act, Pub. L. No. 109-290 (2006) (the "Federal Act"). In order to effectuate the Federal Act, the Insurance Department is promulgating this regulation to declare certain sales practices occurring on military installations or involving military personnel as false, misleading, deceptive or unfair.

3. Needs and benefits: Responding to 30 years of documented abuse regarding the sale of life insurance to members of the military, Congress found it imperative that members of the United States Armed Forces be shielded from "abusive and misleading sales practices" and protected from certain life insurance products that are "improperly marketed as investment products, providing minimal death benefits in exchange for excessive premiums that are front-loaded in the first few years, making them entirely inappropriate for most military personnel."

To address these concerns, Congress required that the "States collectively work with the Secretary of Defense to ensure implementation of appropriate standards to protect members of the Armed Forces from dishonest and predatory insurance sales practices while on a military installation," and directed that each state report to Congress by September 29, 2007, on the progress made regarding its adoption of the standards collectively developed. To ensure that service members are offered only "first rate financial products", Congress also called on the National Association of Insurance Commissioners (the "NAIC"), in coordination with the Secretary of Defense to report on "ways of improving the quality of and sale of life insurance products. . . by creating standards for products specifically designed to meet the particular needs of members of the Armed Forces, regardless of the sales location."

The Military Sales Practices Model Regulation (the "Model Regulation") was developed by the NAIC to meet these dual Congressional mandates. It makes actionable certain acts and practices that until now have not been declared to be false, misleading, deceptive or unfair under state trade practices statutes. Many of the practices identified incorporate Department of Defense (the "DoD") solicitation rules. For example, the Model Regulation, by tracking DoD regulations, makes it a deceptive trade practice to solicit in barracks, day rooms and other restricted areas.

The Model Regulation also addresses Congressional concerns regarding suitability and product standards. In this regard, the Model Regulation makes it a deceptive or unfair trade practice to recommend the purchase of any life insurance product that includes a "side fund" to junior enlisted service members in pay grades E- 4 and below, unless the insurer has reasonable grounds for believing that the life insurance portion of the product, standing alone, is suitable.

In order to comport with New York law, the Model Regulation's exclusion provision was revised to remove the reference to prearranged funeral contracts. In light of the restrictions found in Insurance Law Section 3208, prepaid funeral agreements do not fall within the applicability of the regulation and as such do not need to be excluded. The Model Regulation was also revised to remove the prohibition against the use of war exclusions in life insurance policies. Insurance Law sections 3203(c) and 4510(b)(1) specifically authorize such exclusions. The definition of a formal banking relationship was slightly modified from the Model Regulation, in order to encompass a greater range of depository institutions.

In recognition of Congress' concerns and in furtherance of its goals, the Insurance Department is adopting the Model Regulation, with minimal modifications necessary to comport with existing New York law, as Part 223 to Title 11 NYCRR (Regulation No. 186).

4. Costs: The cost for insurers, fraternal benefit societies and insurance producers to comply with the regulation should be nominal. While some changes in sales practices may necessitate training for field personnel, the acts prohibited by the regulation comport with those prohibited directly by Insurance Law Article 24. The regulation clarifies the prohibitions without imposing significant new obligations.

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

6. Paperwork: The regulation does not impose any reporting requirements on the affected insurers and fraternal benefit societies. They may have to make changes to some existing policy forms with respect to disclosure requirements.

The regulation does not impose any reporting requirements on insurance producers. While the documentation required with respect to the sale of life insurance to military personnel may need to be revised, there is no indication that it will increase to any significant degree.

7. Duplication: The DoD has exerted authority over some aspects of insurance sales on military installations. The regulation, having been developed in consultation between the NAIC and the DoD, is meant to complement DoD practices without being duplicative, overlapping or conflicting. Insurers, fraternal benefit societies and insurance producers are already subject to regulation regarding insurance sales generally. The regulation complements, but does not replace those existing requirements.

8. Alternatives: The Insurance Department considered not implementing the Model Regulation and proceeding under the Department's more general enforcement authority under Article 24. However, because of the abuses documented by Congress, the Department determined that a regulation would be the best way to address the situation.

9. Federal standards: As noted above, this proposed regulation was developed in response to the Federal Act. Congress required that the "States collectively work with the Secretary of Defense to ensure implementation of appropriate standards to protect members of the Armed Forces from dishonest and predatory insurance sales practices while on a military installation.." Congress also called on the National Association of Insurance Commissioners to report to the Secretary of Defense on "ways of improving the quality of and sale of life insurance products. . . by creating standards for products specifically designed to meet the particular needs of members of the Armed Forces, regardless of the sales location."

10. Compliance schedule: This rulemaking will be effective upon publication in the State Register after adoption. The insurers, fraternal benefit societies and insurance producers who engage in sales covered by the regulation may have to adjust some of their sales practices and retrain some of the field personnel, but the time to implement such changes is not expected to be significant.

Regulatory Flexibility Analysis

1. Small businesses: The Insurance Department finds that this rule will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping or other compliance requirements on small businesses.

This rule is directed at all insurers and fraternal benefit societies authorized to do business in New York State, none of which fall within the definition of "small business" set forth in section 102(8) of the State Administrative Procedure Act. The Insurance Department has reviewed filed Reports on Examination and Annual Statements of authorized insurers and fraternal benefit societies and believes that none of them fall within the definition of "small business", because there are none that are independently-owned and operated and have less than one hundred employees.

Further, this rule is directed to licensed insurance producers within New York State. It was developed in consultation between the Department, the National Association of Insurance Commissioners and the United States Department of Defense. With respect to insurance producers, it is intended to implement the federal mandate, by establishing specific rules and regulating sales practices life insurance sold to military personnel in New York.

The rule does not impose any additional reporting requirements on insurance producers. While the documentation required with respect to the sale of life insurance to military personnel may need to be revised, and may necessitate some additional training for insurance producers, it is not expected to have significant impact.

2. Local governments: The Insurance Department finds that this rule will not impose any adverse compliance requirements or adverse impacts on local governments. The basis for this finding is that this rule is directed at insurers, fraternal benefit societies and insurance producers, none of which are local governments.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas: Insurers, fraternal benefit societies and insurance producers to whom the rule applies do business in every county in the state, including rural areas as defined under State Administrative Procedure Act Section 102(13).

2. Reporting, recordkeeping and other compliance requirements, and professional services: Insurers and fraternal benefit societies may need to modify their policy form filings with the Insurance Department and may need to revise their sales practices, including training for field personnel.

3. Costs: The costs to insurers, fraternal benefit societies and insurance producers as a result of the regulation will be limited to the costs associated with the need to modify filings with the Department and to revise sales practices, including training for field personnel.

4. Minimizing adverse impact: The rule applies to the insurance market throughout New York, not only to rural areas. The same requirements that will apply to regulated entities located in rural areas will apply to regulated entities outside those areas. The regulation was developed in response to the Federal Military Personnel Financial Services Protection Act. Congress required that the "States collectively work with the Secretary of Defense to ensure implementation of appropriate standards to protect members of the Armed Forces from dishonest and predatory insurance sales practices while on a military installation.." The regulation was, in fact, originally developed at the national level under the auspices of the National Association of Insurance Commissioners ("NAIC").

In developing this regulation, the Department did outreach through the NAIC. The NAIC, with Department participation, received input from various consumers groups, industry groups and other interested parties. The rule does not impose any additional reporting requirements on regulated parties. While the documentation required with respect to the sale of life insurance to military personnel may need to be revised, and may necessitate some additional training for insurance producers, it is not expected to have significant impact.

5. Rural area participation: The regulation was developed at the national level under the auspices of the National Association of Insurance Commissioners. No concerns specific to rural areas were identified.

Job Impact Statement

Nature of Impact:

The Insurance Department finds that this rule will have little or no impact on jobs and employment opportunities. This regulation sets standards for sales practices on military installations or involving military personnel. It is unlikely that the standards will affect the total amount of life insurance written to members of the military in New York. It will help ensure that insurance producers do not sell certain types of life insurance not suitable to military personnel, or engage in certain acts and practices, that are false, misleading, or deceptive. The regulation is unlikely to have an impact on jobs or employment opportunities.

Categories and number affected:

No categories of jobs or number of jobs will be affected.

Regions of adverse impact:

This rule applies to all insurers, fraternal benefit societies, and insurance producers authorized to do business in New York State. There would be no region in New York that would experience an adverse impact on jobs and employment opportunities.

Minimizing adverse impact:

No measures would need to be taken by the Department to minimize adverse impacts.

Self-employment opportunities:

This rule would not have a measurable impact on self-employment opportunities.