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.

Regulators, Generally

It was great to see so many friends, clients and readers in Dallas last week at the AICP conference. In the third of the three sessions at which I was a presenter, we talked about Federal Oversight of Insurance. The format was very informal and, I think, informative. My co-presenter was Tom Hampton, former banking and insurance commissioner from DC. Our approach was to each offer our respective perspective on each slide so there was plenty of back and forth discussion. There were other current and former state regulators as well as Eric Nordman of the NAIC in the audience so we had some very interesting exchanges. We talked quite a bit about the posted [job description] for the new Director of the Federal Insurance Office.

In that context, it was very interesting to read the article in the October 2nd issue of The Economist magazine on my way home. An article titled “Finance’s other bosses” caught my eye. I was amused by the statement that “So it is right that the comings and goings of bank bosses attract lots of attention. That process can look pretty messy - witness the botched succession process at HSBC and the bloodletting at UniCredit. Until, that is, you compare it with finance’s other big personnel issue: who runs the regulators.” Shortly thereafter, it notes: “The hiring process for the head of the new Federal Insurance Office has only just kicked off.”

But the article goes on to raise the question: “Does it really matter who is in charge of the regulators? The grunt work of supervision depends on more junior staff, who will always struggle to keep tabs on smarter, better-paid types in the firms they regulate.” I am not sure “smarter” is always true, but “better-paid” certainly is!

The magazine answers the question a bit hesitantly: Yes it matters (and it advocates regulators “with spine” over “invertebrates”) but not as much as one might think. The conclusion is:

“Damaging uncertainty about the scope of new agencies cannot begin to dissipate until people are appointed to run them.  America’s Financial Stability Oversight Council, whose first meeting was due to be held [last] week, has some very basic questions to answer about what constitutes a systemically important firm, for example. Legitimacy matters, too. The shift towards a more pre-emptive form of regulation, in which a build-up of systemic risk is addressed before trouble hits [requires] a sense of public accountability.” The article further argues that the speed of appointments should pick up so that we know who the regulators will be under this new paradigm of regulation.

That conclusion is consistent with the sentiments of those at the AICP conference session:  much will be unknown about federal oversight of insurance until we know who is selected to lead the FIO. The current job posting is open until October 20, 2010 so it is unlikely the Director will be in office for much, if any, of 2010. Given all the responsibilities and reports mandated by Dodd-Frank, that will make for a busy 2011.

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.

Looking Forward to the AICP Annual Conference in Dallas

Over the weekend I was busy working on my presentations for the AICP Annual Conference in Dallas (Oct. 3-6) and I as that part of the preparation gets completed, I begin to look forward with more enthusiasm to the actual sessions—when we get to talk together about our experiences since last year’s conference.

My first session is Innovations in Life Product Development. This has proven to be the toughest preparation for me this year. My co-presenters, Tom Carswell, from the GA DOI and Ralph Spaulding, formerly of the NY Insurance Department, have also found it a bit of a challenge. While there has been so much going on in the industry, it feels as though life insurance product development has taken a bit of a back seat. Not that there isn’t product development, but there just doesn’t seem to be nearly as much as we have become accustomed to in recent years. However, the life industry does seem to be looking at specific markets differently and I think that will make for an interesting discussion. There may be fewer new products coming to market, but they are being used in new and different ways.

My second session is Advertising 101 and there is plenty to talk about here! I am looking forward to working with my co-presenter Beth O’Quin, from the Louisiana DOI, to create an interactive session where we actually talk about advertising compliance both from the industry perspective and the regulators. Bring your questions—this should be a great session.

My final session is in the very last block of the conference and to me it seems fitting since it is Federal Oversight of Financial Services, and is that which looms over us all. I have made no secret of the fact that I am quite skeptical of federal regulation and nothing in Dodd-Frank convinces me that I’ve been wrong about that. But come to the session and let’s talk about it! My co-presenter Tom Hampton, from Sonnenschein, Nath & Rosenthal LLP, is based in DC and he has a different perspective than I do. I’m hoping for a lively discussion to close out the conference.

I am looking forward to Dallas and hope to see you there.

IMSA Suitability Summit: SEC Reps identify 10 Hot Topics

Last week I attended the IMSA/AARP Suitability Summit, held in Washington, DC.  In attendance were a well-represented group of regulators, both state and federal, trade associations, consumer representatives, industry representatives, and IMSA Qualified Independent Assessors.

The discussion was open and, I think, helpful to all who were there.

The two SEC representatives, John Fahey and John Walsh, Branch Chief and Chief Counsel, respectively, while providing the usual disclaimer that the views were theirs and not the Commission’s, presented 10 Hot Topics:

1) Annuity Suitability: They identified two components of this concern: inadequate policies and procedures at the selling firm and when policies and procedures are adequate, a failure to implement or follow those policies.

2) Supervision: Here the quality of training was a particular concern.

3) Trend towards more vanilla products.   They raised the question of what impact this will have on exchanges.  More bells and whistles have often been the rationale for exchanges and if the newer products have fewer, will there be fewer exchanges too?

4) Sales to Seniors: Here they specifically identified the need for the use of exception reports and supervisory action when there is a disproportionate number of sales to seniors.

5) Free Lunch Seminars:  Because these appear to be very successful sales tools, it is important to continue to monitor these for abuses.

6) Life Settlements: Generally, the applicability of securities laws was identified and specifically, excessive commissions was noted as a concern.

7) Exchanges/Replacements: The speakers noted that those looking to take advantage do not stay within the clear regulatory silos of fixed and variable products or insurance and securities, so regulators must also be able to work together and move outside those silos. For example, the SEC is moving towards the position that if one part of the exchange transaction involves a security, the Commission can act to enforce their rules.

8) Insured Principal Products: Here the focus of sales of the product is safety.  The SEC is interested in the portfolio insurance as the basis for the safety and guarantees.

9) Benefit of the Bargain: The question here is whether the conditions required for the guarantees to be effective are adequately disclosed.

10 Product and Sales Guidelines: Are these strictly defined and enforced?

This last topic seems to bring us full circle back to the initial topic of suitability because it looks at things like whether a product limiting issuance to individuals above a specified income is actually sold, when files are reviewed, to individuals with lower incomes than that required amount.  This discussion was not limited to annuities though, which is probably why it was its own topic rather than being included as part of the first in this list.

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.

NY Illustration Annual Certifications

Happy New Year!

With the new year upon us, many insurers are working on annual filings. Some companies may have done their annual illustration filings for 1/1/2010, but if your company uses a later date in the year for NY, be sure to consult the [guidance] issued by the NYSID last fall on this topic.

Of particular note is the section titled How Should Policy Forms be Listed? This will come as a surprise to many, I believe. The Department states: “Many certifications only contain lists of policy forms that are currently being issued; however, the certification also pertains to illustrations for existing policies on forms no longer being issued.” They emphasize that the list must include all forms for which in-force illustrations subject to the regulation could have been made. The guidance says that the list should distinguish between forms currently being issued and those no longer issued. Note also that all riders “involved” in illustrations must be listed in the annual certification as well as the base policy form.

While guidance setting out best practices and recommendations for clean submissions are always appreciated, this seems to be a new interpretation of this long-standing requirement. Nonetheless, the guidance does indicate that this is one of the Department’s “expectations” and it seems likely that those companies submitting lists formatted in ways that have been accepted previously may find they are not accepted this time around.

For those submitting via SERFF, the filing guidance is quite helpful: TOI “Life Insurance & Annuity Products” Sub-TOI “General” and filing type “Life Annual Illustration Certification.”