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

The Office of General Counsel issued the following informal opinion on June 29, 2001, representing the position of the New York State Insurance Department.

RE: Indeterminate Premium Policies and Universal Life Insurance Policies – Approval Process and Profit Margins

Questions Presented:

1) Must the profit factor of the premium formula for an indeterminate premium policy be permanently fixed at policy issuance?

2) Must an insurer’s profit objective for a universal life-type insurance policy be permanently fixed at policy issuance?

3) Must the Department require an insurer of indeterminate premium policies and universal life insurance policies to submit the Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983) detailed pricing information as part of the N.Y. Ins. Law § 3201 (McKinney 2000) policy form approval process?

Conclusions:

1) The Insurance Law does not require the profit factor of the premium formula for an indeterminate premium policy to be fixed at policy issuance. However, a change in the profit factor is not a basis upon which the rate of premium may be readjusted, pursuant to N.Y. Ins. Law § 4231(g)(1)(D) (McKinney 2000).

2) The Insurance Law does not require an insurer’s profit objective for a universal life-type insurance policy to be fixed at policy issuance. However, a change in the profit objective is not a basis upon which additional amounts may be credited to the policy, pursuant to N.Y. Ins. Law § 4232(b) (McKinney 2000).

3) The Department is not statutorily required, but is statutorily authorized, to require an insurer of indeterminate premium policies and universal life-type insurance policies to submit the Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983) detailed pricing information as part of the N.Y. Ins. Law § 3201 (McKinney 2000) policy form approval process based on the broad authority granted the Superintendent by § 3201(c)(2) and (6) (McKinney 2000).

However, the Superintendent should forego the Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983) analyses at the policy form prior approval stage and review such information as part of the N.Y. Ins. Law § 309 (or a § 308) examination process, which is the method anticipated under the Insurance Law.

Facts:

A memorandum was submitted to the Department contending that the Department unlawfully, through Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983), reviews and regulates the premiums and profit levels associated with indeterminate premium policies and universal life-type insurance policies.

Analysis:

Profit Margins

N.Y. Ins. Law § 4231(g)(1)(D) (McKinney 2000) establishes the standards for the prospective readjustment of premium rates in individual life insurance policies that are known in the insurance industry as "indeterminate premium policies". N.Y. Ins. Law § 4232(b) (McKinney 2000) establishes standards for the crediting of additional amounts in individual life insurance policies that are commonly referred to in the industry as "universal life-type insurance policies".

N.Y. Ins. Law § 4231(g)(1)(D) (McKinney 2000) states the following:

Any individual life policy issued or delivered in this state may provide for prospective readjustment of the rate of premium, but the readjustment may not cause the readjusted premium to exceed the maximum guaranteed premium rate stated in the policy. The readjustment shall be determined upon reasonable assumptions as to expenses, mortality, policy and contract claims, taxes, investment income and lapses. The readjustment shall be on a basis equitable to all policy and contract holders and shall be based on written criteria approved by the board of directors of the company or a committee thereof. The rate readjustment provision shall not be deemed to make the policy participating.

N.Y. Ins. Law § 4232(b)(1), (2) and (4) (McKinney 2000) state as follows:

(1) Any individual life insurance policy may provide that in addition to any minimum benefits guaranteed in the policy, additional amounts may be credited to the policy.

(2) No such additional amounts shall be guaranteed or credited except upon reasonable assumptions as to investment income, mortality, persistency, and expenses. The declaration of such additional amounts by an insurer must be made prospectively; no such additional amounts shall be credited retroactively to apply to any period prior to such declaration.

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(4) 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.

The Department does not approve life insurance rates or premiums (including the profit margins that are calculated into such rates). However, § 4231(g)(1)(D) and § 4232(b)(1), (2) and (4) establish the parameters upon which the premium rates may be readjusted or additional amounts may be credited after policy issuance. The parameters include the following: 1) the adjustment must be made prospectively (and not retrospectively or retroactively), 2) the adjustment must be made on an basis equitable to all policy holders, 3) the adjustment must be based on written criteria approved by the board of directors of the company or a committee thereof, and 4) the adjustments must be based upon reasonable assumptions as to certain delineated factors. Thus, an insurer that complies with all the aforementioned parameters may readjust the premium rate of an indeterminate premium policy or credit additional amounts on a universal life-type insurance policy.

N.Y. Ins. Law § 4231(g)(1)(D) and § 4232(b)(1), (2) and (4) do not require premium rates and additional amounts to be adjusted: they only require that if an adjustment is made, it must be based on the parameters stated in the statutes. Thus, where one or more of the delineated factors (for example, mortality) increases or decreases in cost, an insurer is not required to adjust the premium rate or additional amounts credited; the insurer may choose to have them remain unchanged.

N.Y. Ins. Law § 4231(g)(1)(D) and § 4232(b)(1), (2) and (4) also do not require the profit factor of the premium formula for an indeterminate premium policy, or the profit objective for a universal life insurance policy, to be fixed at policy issuance: there is no prohibition under the statutes. However, an adjustment in the profit margin (or profit objective) can never result in a premium rate readjustment or the crediting of additional amounts because such adjustments may only be based on the factors delineated in the statutes (i.e., expenses, mortality, etc.).

It should be noted that N.Y. Ins. Law § 4231(g)(1)(D) and § 4232(b)(1), (2) and (4) safeguard against "bait and switch" tactics because they limit an insurer’s exercise of discretion in readjusting rates and crediting additional amounts, such as by requiring the adjustment to be based on reasonable assumptions and requiring the approval of the company’s board of directors (or its committee). There are additional safeguards imposed by N.Y. Ins. Law § 4221(l) (McKinney 2000), the terms of which are discussed below.

Approval Process v. Examination Review

N.Y. Ins. Law § 3201 (c)(2) and (6) (McKinney 2000) state:

(2) The superintendent may disapprove any life insurance policy form, or any form of annuity contract or group annuity certificate, or any form of funding agreement for delivery or issuance for delivery in this state, if its issuance would be prejudicial to the interests of policyholders or members or it contains provisions which are unjust, unfair or inequitable.

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(6) The superintendent may disapprove any policy form issued by a domestic life insurer or fraternal benefit society for delivery outside the state if its issuance would be prejudicial to the interests of its policyholders or members.

Thus, the Superintendent is granted broad authority with respect to the approval of policy forms. This grant of broad authority permits, but does not require, the Department to require an insurer of indeterminate premium policies and universal life-type insurance policies to submit the Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983) detailed pricing information as part of the N.Y. Ins. Law § 3201 (McKinney 2000) policy form prior approval process.

However, the Department should forego such analyses at the policy form prior approval stage and review such information as part of the N.Y. Ins. Law § 309 (or a § 308) examination process as the method anticipated under the Insurance Law. N.Y. Ins. Law § 4221(l) (McKinney 2000), which applies to both indeterminate premium policies and universal life-type insurance policies, states:

(l) In the case of any plan of life insurance which provides for future premium determination, the amounts of which are to be determined by the insurance company based on then estimates of future experience, or in the case of any plan of life insurance which is of such a nature that minimum values cannot be determined by the methods described in subsection (a), (c), (d), (g), (h), (i) or (k) of this section, then:

(1) the superintendent must be satisfied that the benefits provided under the plan are substantially as favorable to policyholders and insureds as the minimum benefits otherwise required by subsection (a), (c), (d), (g), (h), (i) or (k) hereof;

(2) the superintendent must be satisfied that the benefits and the pattern of premiums of that plan are not such as to mislead prospective policyholders or insureds;

(3) the cash surrender values and paid-up nonforfeiture benefits provided by such plan must not be less than the minimum values and benefits required for the plan computed by a method consistent with the principles of this section, as determined by the superintendent.

While N.Y. Ins. Law § 4221(l) clearly requires that the Department review, among other things, policy benefits and the "pattern of premiums" of indeterminate premium policies and universal life-type insurance policies, this is not a prior-approval statute. Thus, N.Y. Ins. Law § 4221(l) intends the review to be conducted as part of the statutory examination process pursuant to N.Y. Ins. Law § 309 (or § 308, where warranted).

The N.Y. Ins. Law § 4221(l) provisions not only require Department review, but are themselves additional restrictions on the manner in which an insurer may conduct its affairs. Among other things, N.Y. Ins. Law § 4221(l) provides that the benefits and the pattern of premiums of indeterminate premium policies and universal life-type insurance policies must not be misleading to policyholders. Thus, § 4221(l) provides additional safeguards against an insurer attempting to employ "bait and switch" tactics.

It is worthy to note that when Circular Letter No. 18 (1980) and Circular Letter No. 4 (1983) were issued, indeterminate premium policies and universal life-type insurance policies were conceptually new forms of insurance. The circular letters were specifically designed to deal with the regulatory concerns that the Insurance Law did not adequately address. However, since that time, the Insurance Law has been amended to impose restrictions on insurers regarding the crediting of additional amounts and the readjustment of rates. In view of the historical purpose of the circular letters, actuarial review at the policy form prior approval stage appears to be unnecessary, and perhaps even onerous in light of the speed-to-market initiative, which would be severely hampered by imposing the circular letter requirements at the prior approval process stage.

For further information you contact First Deputy Superintendent Kevin M. Rampe at the New York City Office.