The Office of General Counsel issued the following opinion on July 31, 2003 representing the position of the New York State Insurance Department.
Re: Replacement of Annuity Contracts and Regulation 60.
How should applicable fees and charges for annuities be included in the illustration provided pursuant to the requirements of Regulation 60?
Such fees and charges should be illustrated in the "Remarks" portion of the Disclosure Statements established by the Superintendent as part of Regulation 60, N.Y. Comp. Codes R. & Regs. tit. 11, Appendices 10A & 10B (1998). Illustrations of investment income should be net of such fees and charges.
The inquirer stated that his company, ABC Co., is a domestic life insurance company that, inter alia, offers variable annuity contracts. Frequently, the applicant already owns a variable annuity. In accordance with Regulation 60, N.Y. Comp. Codes R & Regs. tit. 11, § 51.6(b)(3) (1998), ABC Co. is required, through its agent, to furnish the applicant with a Disclosure Statement. The insurer whose annuity is being replaced is obligated, N.Y. Comp. Codes R. & Regs. tit. 11, § 51.6(c)(2), to:
Within twenty days of receipt of a request from a licensee of the Department, for information necessary for completion of the "Disclosure Statement" with respect to the . . . annuity contract proposed to be replaced, together with proper authorization from the applicant, furnish the required information simultaneously to the agent or broker of record of the existing life insurance policy or annuity contract being replaced and the agent or broker and the insurer replacing the life insurance policy or annuity contract. This information shall include . . . the current status of the existing life insurance policy or annuity contract and the currently illustrated dividends/interest and other non-guaranteed costs and benefits.
It is ABC Co.s practice to illustrate the anticipated earnings on its contract on the basis of either gross earnings without consideration of applicable fees and charges or net of applicable fees and charges. The basis for the illustration depends on how the company being replaced has illustrated such earnings in its response to the company. In either event, ABC Co.s Disclosure statement indicates the basis that the company has utilized. The inquirer indicated that occasionally the insurer whose contract is being replaced does not indicate whether its illustrated income is gross or is net of applicable fees and charges. When this happens, and the company does not know from other sources how the data was constructed, the company will provide illustrations on both bases.
The inquirer further indicated that his company will continue to follow this procedure, unless the Department indicates that the procedure is unacceptable.
Regulation 60 was promulgated, N.Y. Comp. R. & Regs., tit. 11, §51.1(b) (1998):
To protect the interest of the public by establishing minimum standards of conduct to be observed in the replacement or proposed replacement of life insurance policies and annuity contracts; by making available full and clear information on which an applicant for life insurance or annuities can make a decision in his own best interest; by reducing the opportunity for misrepresentation and incomplete comparison in replacement situations (commonly referred to as twisting); and by precluding unfair methods of competition and unfair practices.
Under the circumstances surrounding the sale of sophisticated products, where the fees and charges may be a significant factor in a determination by a client to purchase a product, and possibly replace another product; the illustration of applicable fees and charges could be an essential element in the Regulation 60 disclosure. In addition, the Securities & Exchange Commission commented, when this Department was revising Regulation 60 in 1997, that it regarded the illustration of applicable fees and charges desirable so that the insured could ascertain that the applicable fees and charges were not excessive.
The Department is aware that the Disclosure Statements established by the Superintendent of Insurance, N.Y. Comp. R. & Regs., tit. 11, Appendices 10A and 10B, do not specifically provide space for information concerning any applicable charges and fees. The Disclosure Statements do, however, contain a space for remarks, which may be utilized by the agent to describe applicable charges and fees. Further, the Regulations Disclosure Forms contemplate that illustrations will be deemed incorporated therein, providing a space where the presence of such illustrations may be indicated.
While Regulation 60 and the Appendices thereto are silent as to how illustrations of income should be calculated, the Completion Instructions for Appendix 10-B, dealing with annuities, provides, inter alia,:
Note that the annual investment rates need to be reduced by management and other fund expenses and other contractual charges (other than surrender charge). Deduct surrender charge and/or market value adjustments, as appropriate.
ABC Co. should, when it requests information from the company whose annuity is being replaced, inform that insurer of the proper information to be furnished. The identity of insurers and agents that do not furnish the information that would enable the company to be in compliance with Regulation 60 may be sent to the Departments Consumer Services Bureau.
For further information you may contact Principal Attorney Alan Rachlin at the New York City office.