Insurance Filings Modernization Initiative 4/21 Interim Report Posted

The New York State Insurance Department posted an [interim report] of the Insurance Filings Modernization Initiative on April 21. The specific recommendations this report discusses that are particularly relevant to life insurers are: the updated [product outlines]; the use of SERFF for post-approval reviews; significant contact with the industry (See our www.currincompliance.com for information on the upcoming Life and Health Compliance Association meeting at which representatives of both the Life Bureau and Health Bureaus will be speaking); and the use of sanctions against companies that do not use the certified process appropriately.

This last item is one that virtually all companies that use the certified process fear. However, it was one of the recommendations of the Life Committee, because the only way to keep the process working well is to make sure that the requirements for certified filings are clear and then to enforce those requirements consistently. One of the constant tensions with the process is that companies want two things that are naturally in conflict with one another. Fast approvals and assistance with their own filings when there are deficiencies rather than having the filing closed. Clearly, the more time spent providing assistance, the less time there is for processing approvals.

Updated guidance on standards and mandates is essential for giving companies the information necessary to make high quality filings. The report references updates to the outlines that are in progress and those are clearly needed for companies to use the certified process confidently. My personal opinion on the usefulness of the outlines, is that prompt updates to reflect current Department positions is more important for users of the certified process than is a full debate over the positions themselves. Personally, I would like to see the outlines posted quickly and updated often, followed by a different process - a post-posting process - to discuss and debate the merits of any controversial positions taken in them.

As indicated above, this interim report reminds us that one conclusion of the Life Committee was that when companies have a pattern of using the certified process inappropriately. they should be precluded from using it. This interim report states: “the Department temporarily suspended an insurer from using an expedited filing process because the insurer used the expedited process to submit a filing despite a directive not to do so.”

I expect there will be more such suspensions in the future.

NY Spending and Government Efficiency (SAGE) Commission Named

On April 19, 2011, Governor Cuomo issued a [press release] naming members of the SAGE Commission. The press release states that “SAGE is the first major redesign of state government since Governor Alfred E. Smith in 1927.” This commission is charged with conducting “a comprehensive review of state government including its structures, operations and processes, with the ultimate goal of saving taxpayers’ money, increasing accountability and improving the delivery of government services.”

While final recommendations are not due until June 1, 2012, the release indicates that progress reports will be delivered on an ongoing basis and that “the state has already begun the process of consolidating a number of state agencies including … Merging Banking and Insurance Departments to create the new Department of Financial Regulation.” Jim Corcoran, Superintendent of Insurance from 1983 to 1990 is a member of the SAGE commission. He appears to be the sole member of the commission that has a background in insurance.

Gov. Cuomo Proposes Department of Financial Regulation

Governor Cuomo said in his State of the State that many people asked where the SEC was and where other federal regulators were when the financial meltdown occurred. But he said the question should also be asked where was the NY Banking Department and where was the Insurance Department. He indicated that the division that exists in our state regulatory agencies is not consistent with how business is done anymore. To be an effective regulator, he proposes a Department of Financial Regulation.

Insurance Regulation to be Discussed in NY State of the State Shortly

I am listening to WAMC online to hear Governor Cuomo’s State of the State address at 1:30. In his introduction, Alan Chartock said that the Governor is going to at least mention combining the Insurance and Banking departments. I got an update from that National Underwriter saying that this is on the table. I’ll be tweeting during the speech and will let you know what I hear. You can follow me at ccurrin on Twitter. What might a combined department look like? How will that change the regulation of insurance? It looks like we are likely to find out as NY looks to streamline and cut expenses.

NY Releases Insurance Filings Modernization Initiative Final Report

Yesterday, December 2, 2010, the NYSID issued the [Final Report] of the Insurance Filings Modernization Initiative. The press release accompanying the report indicates that the Department is actively implementing the recommendations that are set out in the report. An update on progress is promised in six months. As a member of the working group that participated in the initiative, it is rewarding to know that the work has resulted in some concrete changes to processes.

The report has nine universal recommendations. These reflect the common areas that were identified after the committees completed their work in specific areas of Department jurisdiction. The nine universal recommendations are paraphrased here:

1) Overhaul and improve the Department website to improve its usefulness for those making filings with the NYSID;

2) Update the existing product outlines and develop new ones to improve regulated entity understanding of the applicable rules;

3) Increase the use of new and updated checklists;

4) Develop and implement a comprehensive triage system for filings;

5) Expand the use of SERFF;

6) Encourage pre-filing meetings with Department personnel, especially on significant or complex issues;

7) Provide meaningful feedback to company management about filing issues;

8) Conduct supervisory symposia between Department and company personnel to discuss and learn about significant filing requirements and issues; and

9) Make all feasible efforts to maintain adequate funding for the Department’s regulatory functions, with appropriate technology and personnel.

As you can see from the full report, a lot of hard work was put into this initiative. I can tell you from my participation in the Life Committee there was a lot of very good discussion of issues that aren’t often discussed in such depth. I thank the Department for the opportunity to participate.

NY Posts Guidance on Max Reserve Valuation and Non-Forfeiture Interest Rates

On Friday, September 10, 2010, the NY Insurance Department posted a [“Clarification on Fixed Annuity Reserves Interest Rates”]. The posting indicates that there has been some concern over the maximum valuation interest rate for FPDAs and it refers to section [4217(c)(4)(D)(iii)]. The notice indicates that this provision prohibits the use of an additional .05 weighting factor when annuities guarantee interest rates on future considerations more than 12 months beyond the valuation date.

The notice includes three PDF documents: General Information, Table A through Table H Rates and an Appendix of Moody’s Averages.

NY Circular Letter on Bonus Recapture

[Circular Letter 8 (2010)] dated June 29, 2010 and posted yesterday on the NY Insurance Department website, clarifies that as a result of amendments to §4223(c)(1), made at the time provisions relating to indexed annuities were added, recapture of bonuses on fixed annuities or fixed accounts of variable annuities, are not permitted. Note that this is based on statutory language, added in 2008, to the effect that the death benefit for contracts with cash surrender benefits may not be less than the actual accumulation amount. This is not a position being established by circular letter. Some companies may have already been advised of this statutory prohibition by post-approval review.

One thing that I really appreciate about this Circular Letter is that it is quite explicit about what is expected of insurers.  Contracts/ Certificates issued prior to October 5, 2008 were not subject to the prohibition and no action need be taken. “However, in accordance with Insurance Law §3103, any contract or certificate issued on or after October 5, 2008 shall be enforceable as if it conformed to the law. Accordingly, to prevent any confusion, every insurer must endorse any annuity contract or certificate issued on or after October 5, 2008 to remove any death benefit bonus recapture provisions or in the case of a fixed and variable annuity contract or certificate be endorsed to provide that the recapture will not be applied to the fixed account portion of the contract.” Further, the Circular Letter explicitly states that an insurer does not have to endorse contracts/certificates on which the recapture period has already expired.

The Department indicates that companies must make restitution for any recaptures from contracts issued after October 5, 2008 and that if that is done the Department does not intent to take further action against a company.

From my perspective, this very clear explanation of what is expected in each of these scenarios is almost as important as the substantive announcement of the statutory rule. However, there is one “elephant in the room” issue left unresolved. That is how this relates to variable annuity contracts that have guaranteed living benefit riders that have yet to be analyzed by the Department for the §4240(d) exemption.

Because a determination that a guaranteed living benefit exceeds the §4240(d) 3% limit, and would therefore be subject to §4223, the nonforfeiture law, that determination would also mean that this rule on recapture of bonuses would apply to the variable annuity or variable portion of a combined product. Of course, in the face of such a finding, this bonus recapture is likely to be the easiest of many issues to resolve. But, it once again highlights the need for resolution, once and for all, of §4240(d)’s application to variable annuities with guarantee features.

Again, I applaud the Life Bureau for the clarity of this Circular Letter and hope we continue to see guidance of this type in the future. The effort made to analyze and set forth all the scenarios, and the steps required of companies in each, will make it much easier for insurers doing business in New York to be sure they are in compliance with regulatory mandates.

NYSID to Hold Hearing on Reform

In a [press release] issued today, Insurance Superintendent James J. Wrynn announced that the Department will hold a public hearing on June 28 to hear comments on rate and form filings, regulatory filings and licensing applications. Superintendent Wrynn is quoted as saying that the Department looks forward to hearing from anyone who “has ideas on how to make what is already a superb Department even more efficient and effective.” A list with examples of possible discussion topics is included in the press release, although it is not broken down to provide guidance with respect to which topics might apply to which bureaus.

Oral testimony will be limited to 5 minutes and written comments can be submitted to the Department at an e-mail address provided in the press release.