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.

DOMA, Defaults and Spousal Continuation in NY

At last week’s Speed-to-Market seminar, Peter Dumar of the New York State Insurance Department presented on Supplement 1 to Circular Letter 27 (2008) (CL27). CL27 addresses the annuity issues that arise in annuities due to NY’s recognition of same-sex marriages performed in other states. The Circular Letter itself is pretty straight-forward. Disclosure is required of the conflict between NY’s position on same-sex marriage and the implications of the federal Defense of Marriage Act (DOMA). In addition, CL27 says “every insurer should review its policy forms to determine if revisions are needed so that a same-sex spouse will not be defaulted to the spousal continuation option, and to ensure that the default option for a same-sex spouse is adequately disclosed.”

Reviewing all contracts as required by the Circular Letter is a significant burden, but it is understandable if what a company needs to look for are provisions that don’t work anymore due to NY’s recognition of same-sex marriage and DOMA’s prohibitions on spousal continuation in the context of a same-sex spouse.

But…recently our office has been seeing post-approval reviews come in that require companies to add a default option where the contracts previously had none. This did not make sense to us because CL27 only required a review to determine if there was a conflict. No statute or regulation specifically requires a default option upon death of the owner. If there is no default option there can be no conflict. Not having a default option seemed the best way to preserve the most options for the most people and do so with the fewest possible policy form filings.

I asked Mr. Dumar about this at the seminar and he explained that the requirement for a default is not based on CL27, but on the entire contract mandate. It is the Department’s position that the contract is not complete if it does not include a provision stating what will happen on the death of the owner if the beneficiary does not select an option for receipt of the applicable proceeds.

Therefore, all companies should be aware that if you have an annuity contract that does not have a default option stating what happens upon death of the owner of the contract, you will be required to add one on post-approval review. You will be required to make this change not only on a going-forward basis, but you will also be required to endorse your in-force contracts to add this default option.

If you make the default spousal continuation, you will also need the CL27 language.

In light of all of this, the option that makes to be the default from a filing perspective is likely to be a lump sum payment in 5 years. Then it is unnecessary to add the CL27 disclosures. In addition, in the event that DOMA is repealed, the rights of same-sex spouses to continue the contract when/if that becomes legal are preserved. However, the filing ease and long-term compliance simplicity of the lump sum will need to be weighed against the election paperwork burden on the opposite sex spouse if s/he wants to continue the contract and must make an affirmative election to do so. Because no actual payments can be made to a beneficiary who can’t be found and any beneficiary who can be found will want his/her money, defaults are really about paperwork. Who has to fill out the paperwork for what.

Ultimately now that a default is mandated, that will be the business decision to make: election paperwork vs. complicated continuation provisions and the possibility of future filings to maintain compliance in this rapidly changing are of the law.