New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on December 13, 2000, representing the position of the New York State Insurance Department.

RE: New York Insurance Law Section 4224(a)(1) Regarding Unfair Discrimination among Members of the Same Class

Question Presented:

For purposes of compliance with N.Y. Ins. Law § 4224(a)(1) (McKinney 2000), is a life insurer required to utilize the same type of underwriting, and the same terms and conditions regarding its life insurance products, throughout its individual term life portfolio or its individual permanent life portfolio of products, except in specified separate markets currently recognized by the Insurance Department?

Conclusion:

No. A life insurer is free to set its own appropriate underwriting standards, including type of underwriting, i.e., regular (full) underwriting, simplified underwriting or guarantee issue, which may or may not include different underwriting for different products, without violating N.Y. Ins. Law §4224(a)(1) as long as such underwriting standards have a factual and rational basis, are grounded in generally accepted insurance and actuarial principles, and are not contrary to law. Use of different terms and conditions regarding different policies is not prohibited provided such terms and conditions are consistent with regard to a particular policy and not contrary to law.

Facts:

In your letter and accompanying analysis, you question the Department's current interpretation and application of N.Y. Ins. Law §4224(a)(1) (McKinney 2000) in the prior approval process under N.Y. Ins. Law § 3201 (McKinney 2000).

As a condition of approval of a policy form submitted under N.Y. Ins. Law §3201, the Department has imposed certain requirements regarding the type of underwriting, i.e., regular (full) underwriting, simplified underwriting, or guarantee issue, that must be used. Specifically, the Department has required that an insurer must use the same type of underwriting throughout its individual term life portfolio and the same type of underwriting throughout its individual permanent life portfolio of products, unless the product is approved for sale in one of six distinct markets currently recognized by the Department. Additionally, provided it submits full justification to the Department as part of its policy form approval submission, an insurer may use different underwriting within its individual term life portfolio (or within its individual permanent life portfolio) for single premium policies, limited payment policies (not to exceed seven years) and joint and last survivor policies. The basis for these requirements is N.Y. Ins. Law § 4224(a)(1) (McKinney 2000), which prohibits a life insurance company from unfairly discriminating between individuals of the same class and of equal expectation of life in terms and conditions of life insurance and annuity contracts.

This policy is memorialized in guidelines contained in the Product Outline on Individual Product Distinction and Market Distinction available on the Department's web site, and used as part of the prior approval process under N.Y. Ins. Law § 3201.

In your analysis, you assert that use of this Product Outline in the prior approval process is improper, not supported by statute, and unnecessary in order for the Department to properly implement N.Y. Ins. Law § 4224(a)(1) (McKinney 2000). You contend that § 4224(a)(1) is designed to address "after the fact" market conduct issues and those which may arise in the context of the Department's examination of a company. You further contend that prior approval of life insurance and annuity products, as required under N.Y. Ins. Law § 3201, is limited to a review of the provisions of the product being submitted for approval and does not authorize a review of differences among a company's products.

Analysis:

N.Y. Ins. Law § 3201 (McKinney 2000) requires that policy forms for life insurance and annuity contracts must be filed with, and approved by, the Superintendent "as conforming to the requirements of this chapter and not inconsistent with law" prior to issuance or delivery of the forms in this state. As a condition of approval of a policy form submitted for approval under N.Y. Ins. Law § 3201, the Department has imposed certain requirements regarding the type of underwriting, i.e., regular (full) underwriting, simplified underwriting, or guarantee issue, that must be used. Specifically, the Department has required that an insurer must use the same type of underwriting throughout its individual term life portfolio and the same type of underwriting throughout its individual permanent life portfolio of products unless the product is approved for sale in one of six distinct markets currently recognized by the Department. Additionally, provided it submits full justification to the Department as part of is policy form approval submission, an insurer may use different underwriting within its individual term life portfolio (or within its individual permanent life portfolio) for single premium policies, limited payment policies (not to exceed seven years) and joint and last survivor policies. This policy is based upon N.Y. Ins. Law § 4224(a)(1), which provides:

(a) No life insurance company doing business in this state and no savings and insurance bank shall:

(1) make or permit any unfair discrimination between individuals of the same class and of equal expectation of life, in the amount or payment or return of premiums, or rates charged for policies of life insurance or annuity contracts, or in the dividends or other benefits payable thereon, or in any of the terms and conditions thereof;

The language of N.Y. Ins. Law § 4224(a)(1) is clear that only unfair discrimination is prohibited. All types of discrimination are not prohibited. All risk classification necessarily involves discrimination, with each person paying according to the risk he or she represents. Classifying and pricing risks is the very essence of insurance. "The general rule in this state is that 'an insurer ... is free to select its risks and it makes inquiry of matters which it deems material to the risk' (Vander Veer v. Continental Cas. Co., 34 N.Y.2d 50, 52.)" Health Ins. Ass'n. v. Corcoran, 154 A.D.2d 61 at 67 (1990).

Thus, it is clear that an insurer may classify and select risks using appropriate underwriting standards, including type of underwriting to be used, without violating the prohibitions against unfair discrimination contained in N.Y. Ins. Law § 4224(a)(1). Appropriate classification of risks is sanctioned and encouraged throughout the Insurance Law. Health Ins. Ass'n. v. Corcoran, 154 A.D.2d 61 (1990). An insurer is free to impose any appropriate rules for classifying, selecting and pricing risks that it believes are required based on sound underwriting practices and in accordance with accepted insurance and actuarial principles, provided such rules are not contrary to law.

Further reading the statute, N.Y. Ins. Law § 4224(a)(1) (McKinney 2000) prohibits unfair discrimination between "... individuals of the same class and of equal expectation of life..." in amount of premiums charged, dividends or other benefits payable, or in any of the terms and conditions of policies of life insurance or annuity contracts. Thus, by its terms, the statute is designed to insure that equal terms are fixed in policies to policyholders of like classes. In effect, this would serve to prohibit such practices as hidden rebates or preferential treatment with respect to the cost of the policy or benefits allowed so that all policyholders that fall within the same class will pay alike and will be treated alike. This section is derived from Chapter 282 of the Laws of 1889, what was essentially an anti-rebating law that was intended to address harsh business practices at the time. The language is substantially similar to the language contained in statute today.

The Department's current requirements regarding the type of underwriting that an insurer must use for all products within its individual term life portfolio (or within its individual life permanent life portfolio) is premised on an extremely broad interpretation of "class" as encompassing all applicants for and insureds covered under all individual term life insurance policies (or those applicants for and insureds covered under all individual permanent life insurance policies) offered by a particular insurer. However, while the term "class" may be broadly construed in appropriate circumstances, "... [t]he plain meaning of 'same class' as used by Insurance Law is actuarially similar in terms of morbidity and mortality." Health Ins Ass’n. v. Corcoran, 140 Misc.2d 255 (1988) modified and aff'd Health Ins. Ass' n. v. Corcoran, 154 A.D.2d 61 (1990). Thus, an acceptable basis for distinction is significant actuarial risk differences between the classifications, using normal actuarial underwriting standards for risk classification.

The blanket characterization of all applicants for, and insureds under, all individual term life insurance policies (or all such applicants for and insureds under all individual permanent life insurance policies) offered by an insurer as a single "class" is overly broad. Other classifications in accordance with acceptable actuarial underwriting standards for risk classification may be appropriate. In Rhine v. New York Life Ins. Co., 248 A.D. 120, 289 N.Y.S. 117 (1936) aff’d. Rhine v. New York Life Ins. Co., 27 3 N.Y. 1, 6 N.E.2d 74 (1936), the court recognized different classes for policies with similar features, i.e., life insurance policies with disability benefits and life insurance policies without disability benefits, as appropriate for purposes of apportionment of dividends. Such classification was not unfairly discriminatory under Ins. Law § 89, a predecessor to current N. Y. Ins. Law § 4224(a)(1) containing substantially similar language, since ... [a]ll policyholders of [life insurance policies with] disability benefits have been treated alike in the apportionment of dividends, and all policyholders [of life insurance policies] without disability benefits have been treated alike in such apportionment." Rhine v. New York Life Ins. Co., 248 A.D. 120 at 137.

Thus, under N.Y. Ins. Law § 4224(a)(1), a "class" may appropriately be all applicants for, and insureds under, a particular policy. Further, as the statute prohibits unfair discrimination between individuals of the same class and of equal expectation of life in the amount of premiums charged for life insurance and annuity contracts or in the dividends or other benefits payable or "...in any of the terms and conditions thereof", use of different terms and conditions for different policies is not prohibited provided such terms and conditions are consistent with regard to a particular policy and not otherwise contrary to law.

The erroneous characterization of all applicants for and insureds under all individual term life insurance policies (or all individual permanent life insurance policies) offered by an insurer as constituting a single "class", and the consequent requirement that an insurer must use the same type of underwriting for classifying, selecting and pricing risks for all such policies sold in a recognized market, improperly prevent an insurer from selecting its risks and making inquiries of matters which it deems material to the risk. See Vander Veer v. Continental Cas. Co., 34 N.Y.2d 50, 356 N.Y.S.2d 13 (1974) and N.Y. Ins. Law §1113(b) (McKinney 2000).

Although it could be argued that, under the Department's current requirements, a company selects its own type of underwriting, this is only partially correct. By requiring that this same type of underwriting must be applied to every individual term life insurance product (or individual permanent life insurance product) being offered by the company, the Department is, in effect, requiring a specific type of underwriting in instances where the insurer might otherwise appropriately choose to use a different type of underwriting developed in accordance with accepted actuarial principles. For example, this requirement forces a company selling products in both the direct response and agent-sold markets to use the same underwriting for both even though simplified underwriting may be more appropriate for use in direct response sales, while not appropriate for use in the agent-sold market. This severely impairs a company's ability to competitively price and sell products in one of these markets. This, in turn, may result in an insurer choosing not to offer a product in New York, that it is currently offering in other states, thereby curtailing consumer choice by limiting the variety of competitively priced products available to New York consumers.

Further, there are no specific provisions contained in § 4224 that support the Department's imposition of a particular type of underwriting. In the absence of specific provisions to the contrary, as in this instance, it must be assumed that the legislature intended application of generally accepted actuarial principles in underwriting and classifying risks. "It is noteworthy that where ... the general rule giving insurers autonomy in assessing and accepting risks has been deviated from, the Legislature itself has made specific provision therefor by statute..." Health Ins. Ass'n. v. Corcoran, 154 A.D.2d 61, 67 (1990).

Therefore, imposition of the guidelines contained in the Product Outline on Individual Product Distinction and Market Distinction is not necessary or required in the prior approval process under N.Y. Ins. Law § 3201. A life insurer is free to set its own appropriate underwriting standards, including type of underwriting, i.e., regular (full) underwriting, simplified underwriting or guaranteed issue, which may or may not include different underwriting for different products, without violating N.Y. Ins. Law § 4224(a)(1) as long as such underwriting standards have a factual and rational basis, are grounded in -generally accepted insurance and actuarial principles, and are not contrary to law. It should be noted that the Insurance Law does specifically prohibit discrimination on various bases such as race, color, creed, national origin, disability, sex, marital status, treatment for a mental disability and being a victim of domestic violence. See N.Y. Ins. Law Article 26.

Additionally, a company's compliance with N.Y. Ins. Law § 4224(a)(1) will be subject to examination in the course of the Department's examinations of a company or in the investigation of any complaints or market conduct abuses brought to the Department's attention. An insurer should be prepared to support its underwriting standards in the event such are questioned during the course of a Department examination or investigation. The prohibition against unfair discrimination contained in § 4224(a)(1) will continue to be fully enforced by the Department and in accordance with this opinion. A violation of § 4224 is defined as an unfair method of competition or unfair and deceptive act or practice. N.Y. Ins. Law § 2402 (McKinney 2000).

We disagree with your assertion that, in the scope of his review under N.Y. Ins. Law § 3201, the Superintendent may not inquire further beyond the provisions of a particular product submitted for approval. Under proper circumstances, the superintendent may make such inquiry pursuant to his broad regulatory powers related to insurance policies and in furtherance of his regulatory responsibilities.

N.Y. Ins. Law § 3201 (McKinney 2000) requires that policy forms for life insurance and annuity contracts must be filed with, and approved b y, the Superintendent "as conforming to the requirements of this chapter and not inconsistent with law" prior to issuance or delivery of the forms in this state. Further, the Superintendent may disapprove any policy form for delivery or issuance in this state if he finds that it contains any provision which is likely to mislead the policy or contract holder or "if its issuance would be prejudicial to the interests of policyholders ... or it contains provisions which are unjust, unfair or inequitable." N.Y. Ins. Law § 3201(c)(1) and (2) (McKinney 2000). These statutes are drafted broadly and provide the Superintendent with necessarily broad powers in this area of consumer protection. The Superintendent has broad discretion in exercising his authority in furtherance of his regulatory responsibility.

However, such authority to make a more expansive inquiry in this context must be exercised judiciously and only in those rare circumstances where such further inquiry is clearly warranted.

For further information you may contact Kevin M. Rampe, Senior Deputy Superintendent & General Counsel at the New York City Office.