NAIC

VT Bulletin 198

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On Monday, January 8, 2018 Vermont joined Iowa and Tennessee and issued detailed guidance on providing advice for securities and insurance products. Insurance Bulletin 198 (and Securities Bulletin S-2018-01) is a joint bulletin that the Department of Financial Regulation felt was necessary in order to provide financial professionals additional guidance on what activities are and are not permissible when it comes to providing advice on securities and insurance products.

The Department had issued more general guidance back in 2011, however, they stated two specific reasons for providing more detailed information now.

First, the Department said, there has been “an increase in investigations and enforcement actions relating to unregistered investment advice.”

Second, the “continuing evolution of state and federal suitability laws that now require an extensive financial analysis of a consumer’s financial affairs and a discussion of broad financial trends prior to making a recommendation on an insurance product or an investment/securities product.”

One point I found interesting is that, in the past, we’ve thought of this guidance as related to “source of funds”; that is, a specific focus on where the funds are coming from, and who can provide what level advice on those funds. While that’s still something that is being addressed in this bulletin, the #2 reason the department cited is related but broader than just source of funds. It goes to the growing discussions and developing regulations around how financial services are provided to consumers and what standard of care is owed to those consumers of financial services.

With NY’s proposed changes to their suitability regulation (which includes a number of significant changes, one of which is including life insurance within the suitability standards) as well as the questions of what will become of the DOL rule and what will the SEC do, as well as the NAICs current work on incorporating “best interest” standards into the suitability model, it’s clear that there are lots of questions around how financial transactions should be handled and what the burdens of the financial professionals are to ensure consumers are getting the “best” products and services for their needs.

With this bulletin, VT is stepping into the arena to add a bit more clarity at least around who can provide what services, and what types of discussions are permissible depending on the licensing and/or registration the financial professional holds. While only two other states have issued nearly identical guidance, we think it’s prudent for financial professionals to follow these guidelines regardless of what states they live in.

Why? Because this language is the most detailed we’ve seen, except in TN and IA and by using it as a benchmark of how financial discussions should be had and what the limits of those discussions may be, it allows financial professionals to say that they are trying their best to provide advice that they’re qualified to give without stepping over any boundaries. It shows a commitment to using integrity with consumers, and that even for states outside of VT, IA, and TN, it may provide a “safe haven” of sorts to be able to show documentation of complying with these regulations.

Finding Hidden Treasure

If you are like me, you know that you can find a treasure-trove of information in filing pipelines. I like the public access version of SERFF to find most of what I am looking for because it is so simple to use. Typically, I research filings to see how any number of challenging, state-specific requirements were addressed and approved. This research can then assist our clients in better understanding and eventually overcoming possible filing challenges before filings are even submitted.

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Many states, including the Compact, make accessing these insightful filings pretty easy, while other states can be a bit more challenging. In CA, for example, a written request can be submitted for information, but did you know that the filings can also be accessed using SERFF? This can be done by going in-person to either the San Francisco or the Los Angeles office of the CDI. Access to SERFF is available using the computers provided by the Department for this purpose in their public viewing rooms.

Living in Southern California, I took advantage of this ability and made the short drive from Huntington Beach to Los Angeles just before Thanksgiving. I went on behalf of a client, and was able to easily locate and download several competitor filings to a thumb drive before I was back on the road. What a breeze! I had prepared for my visit in advance by jotting down the NAIC numbers for the companies of interest, as well as the product types and form numbers included in the filings. As with any SERFF search, having that information makes finding a filing quick work, especially since I knew what I was looking for. An appointment is required, but is easy to schedule with a phone call to the Department.

If you are unable to make the trip, I would be happy to go for you – I love a treasure hunt!

And if you prefer to get a copy of the filing the old fashioned way, this link will give you some additional information to do so.

WE ARE CURRIN COMPLIANCE HEROES

WE ARE CURRIN COMPLIANCE HEROES

Searching for Lost Policies

Lost Policies

I believe I spend way too much time searching for things: my wallet, my reading glasses, an overdue library book, my 14-year-old’s soccer knee pads, my 16-year-old’s mouth guard for lacrosse, and the like. But it appears that the NY Department of Financial Services (DFS) thinks life insurers doing business in the state should be devoting more time and more resources to searching for one thing: lost insurance policies.

Like many states, DFS is working on a project that will coordinate its Lost Policy Finder Service with the NAIC’s Life Insurance Policy Locator Service. While insurers currently volunteer to participate in NAIC’s service, an insurer’s participation in the NY service is not voluntary, it’s mandatory.

Under the current system, when a request comes into NY’s Lost Policy Finder, NY domestics are required to search their electronic records of all policies, no matter the state it was issued in. Insurers domiciled outside of NY are required to search only those policies, contracts and certificates issued in NY. Once the coordination with the NAIC is complete, there could be a significant increase in NY requests, because all requests going to the NAIC service will come to NY also.

James Regalbuto, NY’s deputy superintendent for life insurance, said at a recent LICONY forum that the NAIC has done more promotion of its locator service to the general public and it seems that more people know about the NAIC service than the NY service. Because participation by insurers in NY’s service is compulsory, he expects that more requests will result in the identification of a greater number of lost policies.

It’s not yet clear how often NAIC-received requests will be pushed out to insurers licensed in NY, but it will probably be done daily or weekly. Insurers have 30 days to respond if they maintain their own records, or 45 days if they contract with a third-party to maintain records. If an insurer participates in the NAIC service, it does not have to search again when NY sends the NAIC-received requests.

Regalbuto said the market conduct fines issued by DFS have been driven up lately because of companies’ non-compliance with §3240, NY’s Unclaimed Benefits statute, which includes law relating to the Lost Policy Finder.

There is still an outstanding question of how NY wants to handle all of the requests that have come into the NAIC over the past year or so, since the NAIC’s service was established, Regalbuto indicated in response to a specific question that he is not willing to ignore all of the previous requests, but has not yet decided how insurers will be required to address them.

Another upcoming change to coordinate with the NAIC service is that NY will no longer require a certified copy of the death certificate to accompany a request, as the NAIC does not require one. As I was writing this article, I decided to submit a policy locator request on the NAIC website for my father, who passed away in March last year. I would not have done so if I’d been required to submit a death certificate. 

A Renewed Focus on Annuity Suitability – At the State AND Federal Level

It has been five years since the NAIC’s updated Suitability in Annuity Transactions Model Regulation was adopted. Today the annuity suitability process is a key focus for state insurance regulators, because there remain questions as to just how effective the model regulation has been, and/or if carriers have implemented it in a satisfactory manner. To date, 35 states have adopted the model regulation, and among those states there are concerns about disparate standards and processes by carriers.

The Federal Insurance Office (FIO) noted in its 2015 annual report to Congress on the insurance industry, that “…the suitability standards for annuities sales are not uniform. The continuing absence of a uniform, national annuity suitability standard is increasingly problematic given the unprecedented number and increased longevity of consumers reaching retirement age and the rising complexity of annuity products. In the absence of national standards and uniform adoption and enforcement of this basic consumer protection regulation, federal involvement may be appropriate.

In addition to potential inconsistency in standards, some carriers have experienced additional regulatory scrutiny for inadequate oversight of the suitability process. For example, carriers will often delegate the suitability review of their fixed annuity products to a broker/dealer with whom they have a selling agreement. In some instances, the carriers have failed to ensure the broker/dealer has the fixed product expertise, or even the resources, to successfully manage the suitability process and comply with the model regulation. Some carriers also have not actively overseen the suitability process. Regulators have reminded carriers that, while it is acceptable to outsource a compliance function, the carrier is ultimately responsible for adhering to the suitability standards outlined in the model regulation and needs to actively oversee any outsourced functions.

So what does this mean for annuity carriers? With a renewed focus on suitability at both the state, and now the federal level, carriers should expect regulator questions and scrutiny on their process, particularly during market conduct exams. It will be important that carriers have developed a robust suitability program, are following it consistently, and can demonstrate a reasonable system of oversight and control over the process – whether it is performed in-house or delegated to a third party.

If a carrier elects to outsource the suitability review, it is important to choose a third party who has expertise in fixed annuity products, understands and consistently adheres to the company’s suitability standards, and adequately documents the process. In addition, carriers should perform regular oversight of the outsourced suitability function, just as they would any other outsourcing arrangement.

For information on the suitability review services that Currin Compliance Services, Inc. offers to insurance carriers and broker/dealers, please call (518) 692-2494.

For a copy of the Federal Insurance Office 2015 Annual Report on the Insurance Industry, click here.

Update to NAIC’s ORSA Pilot Observations

The NAIC “2014 ORSA Pilot Key Results and Recommendations to the Industry Webinar” was held on August 11, 2015. It was scheduled to last two hours and provided a lot of good detail the entire time (although I was grateful for the 5 minute break in the middle of the webinar). Reading the “Observations of the Group Solvency Issues (E) Working Group” was helpful. Getting additional context and commentary from the source was even better. Sherry “Cyranna” L. Flippo and Elisabetta Russo, both with NAIC, were the presenters and I thought they did a great job of providing practical guidance to the audience. Here are a few of the items I took from the webinar that went beyond the written feedback found in the “Observations of the Group Solvency Issues (E) Working Group”:

Overall Presentation

  • Some carriers had a risk universe of, say, 300 risks and included the top ten in the report. The rest were shown in an appendix. This is fine, but explain why the top ten were chosen.
  • If you include a top ten, show their risk assessment results or explain why the results were not included (perhaps the risk was operational and not quantifiable).

Executive Summary

  • Think of this as what you would present to your board of directors.
  • Include the strategy for the next year or three years or five years or whatever time period is covered by the business plan.
  • The executive summary is a good starting point for regulators to interview carrier management.

Section 1

  • Honest dialogue of the organization’s current state is important. Regulators recognize that building an effective ERM process takes time (don’t need to be perfect yet).
  • Is risk management limited to a department or is it really embedded within the organization?
  • Many reports highlighted committees, which is fine, but regulators want to know who to interview and who is the “risk-go-to person.”
  • Many reports talked about corporate values under Risk Culture & Governance instead of focusing on the items listed in the “Observations of the Group Solvency Issues (E) Working Group.”
  • Risk Identification and Prioritization is a key building block. Describe how you do this, who is involved, how risks are ranked, how risks are detected and controlled, how risks are determined (brainstorming, surveys, etc.), and how regulators will know if an area of risk was left out.
  • Risk Appetite, Tolerances, and Limits should be shown for each risk. If these cannot be established for a specific risk, explain why not.
  • Under Risk Appetite, Tolerances, and Limits, the expectation is that what you do makes sense and that you can explain it.
  • Under Risk Management and Controls, they are looking for the process for key and non-key risks. If policies are in place, organizations don’t need to attach them all, but should list them. Describe any monitoring systems in place for limits or exposures.
  • If an organization is still developing the risk control framework, that’s understandable, but explain what the plan is to develop it. Don’t forget to involve internal audit.
  • Show the effects of controls on risks and how the organization manages residual risk.
  • Under Risk Reporting and Communication, don’t just provide a list of reports. Describe who gets the reports and how they are used.

Section 2

  • Assessment of Risk Exposures should include all risks identified earlier in Section 1. If a risk is excluded, explain why.
  • Under Stress Tests, explain why the carrier selected the stresses that were tested.

Now is the time to evaluate and polish your organization’s ORSA summary report. If your ERM isn’t perfect, that’s okay, but it is clearly important to describe how progress is being made and the time frame(s) involved. So, take a deep breath and remember the words of the “Oracle of Omaha” ...

“Risk comes from not knowing what you’re doing.” - Warren Buffet