On November 30, 2016, the New York State Department of Financial Services (Department or DFS) published Regulation 210 in the New York State Register. This is our third posting in a series on this proposed regulation. Be sure to check back for additional analysis or email Cailie Currin directly.
In Part I of our discussion of this regulation, we looked at the new policy form content requirements established with this proposal. Part II, examined the non-policy form filing requirements. This Part III gets at the title content: how this proposal regulates non-guaranteed elements in life insurance and annuity products.
If you do business in NY, you have probably bumped into §4232- hopefully on your own terms. Some have become acquainted with this section in less than positive ways. Annuities subject to the individual non-forfeiture law (§4223) are covered by §4232(a): “No such additional amounts shall be guaranteed or credited except upon: (i) reasonable assumptions as to investment income, mortality and expenses; (ii) a basis equitable to all contract holders of a given class; and (iii) written criteria approved by the board of directors or a committee thereof.”
Life insurance policies subject to the individual non-forfeiture law (§4221) are covered by §4232(b)(2): “No such additional amounts shall be guaranteed or credited except upon reasonable assumptions as to investment income, mortality, persistency, and expenses.” There are some additional requirements including (b)(4) that “Any such additional amounts shall be credited on a basis equitable to all policyholders of a given class and shall be based on written criteria approved by the board of directors of the company or a committee thereof.”
It is from here that Regulation 210 picks up the ball and runs – all out!
There are a few important definitions from §48.1 of the regulation, and I will highlight a couple here:
(a) Adverse change in the current scale of non-guaranteed elements. This is defined to mean “any change in the current scale of non-guaranteed elements that increases or may increase a charge or reduces or may reduce a benefit to the policy owner, other than a change in a credited rated based entirely on changes in the insurer’s expected investment income.” (Emphasis added) Anytime I see an absolute term, like “entirely” it makes me nervous and this is no exception.
Perhaps this is meant to provide comfort that when credited rates change based on changes in the expected investment income, they are not subject to these rules, but if they have to be entirely based on those changes, it isn’t clear that it provides much actual relief. Anything absolute often ends up being of little value.
(b) Board-approved criteria. This definition, in §48.1(d), is important because the insurance law has been silent as to what the mandated criteria should contain and the law has allowed significant latitude to boards to decide for themselves the appropriateness of the criteria. This new definition brings regulation into the boardroom in a new way and states that the criteria must include “reasonableness standards, financial objectives, equity objectives, marketing objectives, good faith standards and fair dealing standards.”
(c) Class of policies. Section 48.1(e) states that this means “all policies with similar expectations as to anticipated experience factors that are grouped together for the purpose of determining non-guaranteed elements.” and
(d) Pricing cell, which means “a collection of policies for which the same anticipated experience factors are used to determine the same current scale of non-guaranteed elements.” Section 48.1(m).
There will be more on Class of policies and Pricing Cell in Part IV of this series on Reg 210, but they are important to understand as we go deeper into the written criteria here. Section 48.2(a)(1) states that “[a]n insurer shall establish board-approved criteria for determining non-guaranteed charges or benefits” and then the rest of that section sets forth the process for doing so, beginning by assigning policies into classes for the determination of non-guaranteed elements.
Section 48.2(b) then focuses on changes or “readjustments” to non-guaranteed elements on existing policies. Paragraphs (b)(1), (b)(2) and (b)(3) all address specific types of products and for the most part, with respect to the experience factors that can be considered, but provides more prescription as to timing (“At the time of revision of a scale …the difference from the point in time of revision and application of the revised scale in effect at issue shall be reasonably based”). There is then application of the “reasonableness standards” that must now be described in the written criteria.
Most significantly however, is §48.2(b)(4), which states “An insurer shall not increase profit margins at any policy duration.” This introduces regulation of profit to life insurance and annuities in a brand-new way.
I understand the concern of the DFS on this point. If non-guaranteed elements are re-adjusted in ways that are averse to policyholders in order to make a product more profitable, either across the board or at a particular duration or duration(s), there does seem to be a “fairness” issue – perhaps bait and switch, perhaps something less specific. That concern, however, does not seem to provide justification for inserting the DFS into the regulation of profit margins absent statutory authority to do so. And this regulation, if adopted, would allow the DFS to look at profit in a number of different ways because of the opportunities to look at the written criteria themselves for the first time as well as the readjustment to the non-guaranteed elements.
Section 48.2(f) goes beyond the short, but expansive list of required elements that are in §48.1(d). It states that the “board-approved criteria shall:
(1) Require anticipated experience factors consistent with any experience that is credible and relevant;
(2) Require the examination, as needed, of anticipated experience factors at specified times and under specified conditions but no less frequently than required by law to determine of the factors are reasonable;
(3) Include a statement of the maximum period, not to exceed five years, between reviews of anticipated experience factors and non-guaranteed elements for reasonableness; and
(4) Require the review of the anticipated experience factors and non-guaranteed elements for existing policies whenever the non-guaranteed elements on new issued policies are changed.”
Section 48.2(g) includes two optional additions to the written criteria and then the section concludes with a final set of mandates in §48.2(h): “Board-approved criteria for non-guaranteed elements related to anticipated experience factors that do not vary directly with the level of existing business, including overhead expenses, shall be reasonable and shall be consistent with the actual insurer allocation of expenses. Board-approved criteria shall place reasonable limits on the policy owner’s exposure to higher unit expense costs from discontinued sales or a volume of sales significantly less than anticipated.”
Remember that this proposed regulation states that its violation is “deemed to be an unfair method of competition or an unfair or deceptive act…” Section 48.2(a)(2)(viii) states that the assignment of policies into classes of policies for the purpose of determining non-guaranteed elements shall, among other things, “be consistent with the language of the policy and the advertising or other material provided by the insurer to the policy owner.” That makes sense. If the concern is that the policy owner knows what s/he is buying, what can change, when it can change, and under what circumstances it can change, then the advertising and other consumer protection regulations should be applied to make sure that the purchase is an educated one. If the concern is one of fairness, that seems a reasonable approach to take. This regulation, by reaching into and micro-managing how boards make very specific decisions and particularly by diving deep into the regulation of company profits, does not seem quite so consistent with “reasonableness standards.”