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Regulation 210

Symposium agenda update

Our one-day Currin Insurance Compliance Symposium on November 3rd in Hartford, CT is fast approaching. There's still time to register but space is limited.

When we created the original agenda for our upcoming symposium on NY issues, Regulation 210 was proposed, but not yet finalized. Now that we have a final regulation, effective March 19, 2018, we are expanding the amount of time we will spend on this major change in NY. We hope you'll join us in Hartford for two full sessions (3 hours) talking about non-guaranteed elements in NY and the requirements of Regulation 210.

This is a fantastic opportunity to deepen your understanding of these new mandates and become a resource for your company as you move toward the effective date.

AGENDA

8:30-9:00: Gather, welcome and introductions

9:00-10:15: Non-Guaranteed Elements in NY before Regulation 210

10:15-10:30: BREAK

10:30-12:00: Regulation 210: a deep dive

12:00-1:30: LUNCH, informal discussions and networking

1:30-2:30: Hot topics and common objections on annuities

2:30-2:45: BREAK

2:45-3:45: Hot topics and common objections on life insurance

3:45-5:00: Individual 15 minute consultations with Cailie (scheduled in advance)

Regulation 210 final and effective March 19, 2018

With an announcement on its website on September 19, 2017, DFS posted the final Regulation 210. The headline of the release is: “DFS Issues Final Regulation to Protect New Yorkers from Unjustified Life Insurance Premium Increases.” From the website:

The final regulation provides DFS the ability to review increases prior to implementation and ensure compliance with law, by requiring life insurers to notify DFS at least 120 days prior to an adverse change in non-guaranteed elements of an in-force life insurance policy. Annuity issuers must now file annually with DFS to inform the Department of any adverse changes to annuity policies made in the prior year. New York Insurance Law prohibits life insurers from changing non-guaranteed elements in a discriminatory way for members of the same class of policyholders. Only certain enumerated factors, which do not include profit, can be considered when seeking to change non-guaranteed elements. 

Watch this space for more discussion of the final regulation and don’t miss the in-depth session we have scheduled at our November 3, 2017 symposium in Hartford, CT. March 19 will be here before we know it so implementation efforts must begin quickly. Make sure you are on the right track in November!

 
 

NY Proposed Regulation 210: Life Insurance and Annuity Non-Guaranteed Elements-Part III

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.”    

NY Proposed Regulation 210: Life Insurance and Annuity Non-Guaranteed Elements - Part II

As readers are probably aware, on November 17, 2016, the New York State Department of Financial Services (Department or DFS) announced that proposed Regulation 210 would be filed with the Department of State on November 30. This is our second posting in a series on this proposed regulation. Be sure to check back for additional analysis or email Cailie Currin directly for more information.

In Part I of our discussion of this regulation, we looked at the new policy form content requirements established with this proposal. In this Part II, we examine the non-policy form filing requirements. Some of these are new requirements triggered by a policy form filing and others are stand-alone filing mandates. 

  1. Section 48.4(a)(1) of proposed Regulation 210 requires that a policy form filing include the date the board approved written criteria for determining non-guaranteed elements. The proposal contemplates the possibility that the criteria may not yet have been approved at the time of the form filing, and if that is the case, the filing must state that the approval date will be provided to the superintendent prior to issuance of the first policy form. It is important to note that it is NOT sufficient to indicate that the criteria will be approved by the board prior to the issuance of the first policy form. Instead, the actual date of the approval must be submitted to the Department before the first issuance.
     
  2. Section 48.4(e) requires that these criteria be filed with the DFS within 30 days of their adoption. This filing must include the policy form numbers to which the criteria apply, the issues dates and form numbers of any in-force policies to which the criteria will apply and the criteria being replaced, if any. This mandate, as well as the one above, will likely require the form filing unit(s) to track board actions in a way that has not generally been their practice historically.
     
  3. Section 48.4(a)(2) requires a signed and dated actuarial memorandum to be filed with every policy form filing. While actuarial memoranda are typically filed with life products, this has not been a requirement for annuity filings for many years now, even those that are subject to the non-forfeiture law. However, even those products that have been accompanied by an actuarial memorandum have not generally provided the level of detail set forth in this paragraph. There must be a statement that the anticipated experience factors in the memo are reasonable assumptions and that those are “the basis for determining the scale of non-guaranteed elements.” The actuary signing the certification must indicate that s/he is familiar with the NY requirements regarding non-guaranteed elements. Note the definition of a qualified actuary in Section 48.1(n) and the ongoing compliance requirements with respect to an insurer that flow from this definition in section 48.4(b). Over time, as actuaries move from insurer to insurer, it is unclear how this obligation will be workable in practice.

    This proposal further requires “a tabulation by pricing cell and duration of the current scale of non-guaranteed elements and the anticipated experience factors on which they are based.” The tabulation must then include 13 specific elements. Then there must be “a description of the experience or other information used to determine the anticipated experience factors, including a description of the reasoning and analysis that led from the information to the anticipated experience factors.” Section 48.4 further requires a description of the processes and methods used to determine the non-guaranteed elements from the anticipated experience factors for a pricing cell (defined in Section 48.1(m) and which may cross products). Indexed products have specific requirements in relation to the non-guaranteed elements found in those products, such as participation rates and caps.

    The investment strategy must be included in the submitted actuarial memorandum and it must include information on how “trading gains and losses due to interest rate changes are allocated; and a description of the methods used to assess deductions from gross earned rates for default, investment expenses and risk items.”
     
  4. Section 48.4(c) requires that a notice be filed with the superintendent at least 120 days before implementation of a change in the current scale of non-guaranteed elements that may have an adverse effect on policy values. This filing requires all of those elements applicable to an initial actuarial memorandum, and more. At this point, additional tabulations are required, including “a tabulation of all changes in the anticipated experience factors and profit margins by pricing cell giving the prior anticipated experience factors and profit margins, the current anticipated experience factors and profit margins, and the changes in the anticipated experience factors and profit margins.” Additional narrative descriptions are also required with this filing.

    If a change in current scale of non-guaranteed elements applies only to new policies, under §48.4(d) the insurer must file these same materials at least 15 days prior to implementation. In addition to the actuarial requirements of 48.4(a), this filing must include “an explanation of the inapplicability of the changes to in-force policies.” 

    We note that there is no indication of what the Department intends to do with these filings. While that may suggest that the filing alone satisfies the obligation under the regulation, given the lack of any statutory guidance or standards as to what is permissible or impermissible, and the request for vast amounts of information and subjective analyses, it appears to be a risk for any company to view this as a file and use mandate absent an explicit revision to the draft regulation making that clear.
     
  5. Section 48.4(f) requires that the insurer “maintain in its records, for six years after the termination of the last policy subject to the board-approved criteria, the written documentation of non-guaranteed elements required” by this proposed regulation. This could be a very large record-keeping effort given all the filings that are required and all the “documentation” required by this regulation.

Combined with the policy form language discussed in our previous posting, this proposed regulation expands dramatically the scope of what is reviewed by the DFS with respect to products that contain non-guaranteed elements. This expansion is not limited to a review at the time of issue, but rather could last for many decades depending on the type of product. For that reason alone, companies may be well-advised to review this proposal carefully and provide thoughtful feedback to the DFS regarding the regulation’s mandates in relation to the public policy concern shared by DFS.  

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NY Proposed Regulation 210: Life Insurance and Annuity Non-Guaranteed Elements - Part I

As many readers are probably aware, on November 17, 2016, the New York State Department of Financial Services (DFS) announced that proposed Regulation 210 would be filed with the Department of State on November 30. This is our first posting in a series on this proposed regulation. Be sure to check back for additional analysis or contact Cailie Currin at ccurrin@currincompliance.com

According to the DFS press website announcement: “The proposed regulation, which provides DFS the opportunity to review increases prior to implementation, requires life insurers to notify DFS at least 120 days prior to an adverse change in non-guaranteed elements of an in-force life insurance or annuity policy. New York Insurance Law prohibits life insurers from changing non-guaranteed elements in a discriminatory way for members of the same class of policyholders. Only certain enumerated factors, which do not include profit, can be considered when seeking to change non-guaranteed elements.” As is clear from this statement there are many important issues addressed in this relatively short regulation. We will have additional discussion on other pieces of this regulation in coming posts. 

We start today with new policy form content requirements established with this proposal.

Section 48.3(b) has several new policy form content requirements.

If this regulation is finalized with this requirement intact, we recommend filing all policy forms that are subject to the regulation for full prior approval. We believe the risk of assuming what language DFS will deem sufficient to satisfy these new requirements will be high on a certified filing for some time. Until we know through experience what is acceptable and what is not, we recommend filing on a full prior approval basis.   

Under the regulation, as proposed, the policy form must:

  1. State the maximum period between reviews of the non-guaranteed elements.
     
  2. State all guaranteed elements, and there must be a statement of the method the insurer uses to calculate actual policy values.
     
  3. Unless the insurance law provides otherwise, each form must state that “when the policy provides for non-guaranteed elements during any period, any non-guaranteed elements will accrue and be applied for each year during the period”. (Emphasis added.)
     
  4. To the extent applicable, the specifications page must state that “additional amounts are not guaranteed and the insurer has the right to change the amount of interest credited to the policy; the amount of cost of insurance or other expense charges deducted under the policy that may require more premium to be paid than was illustrated; and that the cash values and policy benefits may be less than those illustrated.”

    Note that this language is almost identical to what appears in §3203(a)(16) of the insurance law. It expands the mandate, especially by including annuity contracts. Many of us have had the experience of DFS reviewers requiring the exact language of this section even when it does not appear to apply exactly, so it will be interesting to see how much latitude is given. Again, annuities may be the biggest challenge in this regard since they are not as often illustrated.
     
  5. State the experience factor that the company uses to determine any “readjustment in each non-guaranteed element.”

Looking back to the beginning of the proposed regulation, §48.0(b) states that a "contravention” of the regulation is considered to be an unfair method of competition or an unfair or deceptive act under Article 24 of the Insurance Law. This article is not generally applied to policy form language errors, making yet another argument for filing products subject to this proposed regulation for full prior approval rather than taking advantage of the certified process.

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