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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on July 31, 2006, representing the position of the New York State Insurance Department.

RE: Suitability Standards for Annuity Contracts

Question Presented:

Has New York enacted an Insurance Law or promulgated regulations containing provisions regarding suitability standards for the sale of annuity contracts, following the issuance of the report required under New York Ins. Law § 308(d)(1)?

Conclusion:

No, New York has not enacted an Insurance Law or promulgated new regulations thereunder containing a suitability standard for the sale of annuity contracts following the issuance of the report required under New York Ins. Law § 308(d)(1). However, agents are required to act in a competent and trustworthy manner when recommending or selling annuity products. See N.Y. Insurance Law § 2103 and § 2110.

Facts:

No specific facts were provided.

Analysis:

N.Y. Insurance Law § 308(d) (McKinney’s 2006) provides in pertinent part:

On or before December first, nineteen hundred ninety-eight the superintendent shall report to the governor, the speaker of the assembly and the majority leader of the senate on: (1) the advisability of the adoption of a law designed to protect consumers from unfair or deceptive marketing practices which prohibits an agent or representative of a company from recommending to an applicant or a prospective applicant the purchase or replacement of any individual life insurance policy, annuity contract or funding agreement without reasonable grounds to believe that the recommendation is not unsuitable for the applicant based, at the time of the recommendation or sale, on the applicant's: overall financial position; need for new or additional insurance; the stated goal of the applicant in making a purchase; and the value, benefits and costs of any existing insurance policy, contract or funding agreement held by the applicant, if any (emphasis added). In making such report, the superintendent shall take into consideration recent market conduct problems and the use of a suitability standard in securities regulation, and shall consult with representatives of consumers, agents and insurers.

The Superintendent submitted the Report on Suitability of December 1, 1998 (Report) to the legislature, and recommended against enacting rules and regulations for suitability standards for annuity contracts. The Superintendent stated that it would often be difficult to define one’s financial situation because of the many aspects involved. The Superintendent further noted that annuity contracts have become very complex and many clients may not be able to understand them. A pertinent part of the report reads as follows:

However, neither the licensure process nor a suitability requirement will protect consumers from the agents who are not trustworthy, who fail to keep current or maintain up-to-date knowledge of the business, or who fail to place the interest of their clients first. (See Report, page 2).

The Superintendent also mentioned that professional societies, such as the American Society of Financial Services Professionals, have strict standards requiring their members to "make a conscientious effort to ascertain and to understand all the relevant circumstances surrounding the client." American Society of Financial Services Professionals Code of Ethics, Guide 1.1. The Insurance Marketplace Standards Association (IMSA) provides a similar ethical clause to the one quoted. The report included references to statutory obligations of the insurance agent, such as N.Y. Ins. Law § 2123 and N.Y. Comp. Codes R. & Regs. tit. 11 pt. 51 (Regulation 60), which prohibit licensees from making any misrepresentations or misleading statements or providing incomplete information. (See Report pages 4, 5).

Although New York provides rules, such as N.Y. Ins. Law § 3209 (McKinney’s 2006) and N.Y. Comp. Codes R. & Regs. tit. 11 pt. 53 (Regulation 74), as to what information must be provided to the purchaser of an annuity or life insurance policy, there is no specific requirement for the seller to consider the purchaser’s financial position, need for the annuity or any other consideration. However, it should be noted that the aforementioned rules dictate and demand appropriate and ethical behavior by agents and brokers.

The Superintendent’s Report further stated:

Section 2103(f) of the Insurance Law requires that every applicant (and sub-licensee) pass a written examination for the kinds of insurance for which a license is sought in order to determine competency. Prior to taking the examination for a life insurance agent’s license, the applicant must complete forty hours of classroom work. The course work provides a fairly comprehensive overview of the types of policies, policy riders, required provisions, permissible exclusions, tax related issues, underwriting and a number of New York specific requirements, including various unfair marketing practices, replacement and disclosure requirements. The training emphasizes the necessity for a needs analysis to determine prospective applicant’s insurance needs (emphasis added). (See Report, page 3).

N.Y. Ins. Law § 2110 (McKinney’s 2006) prescribes the methods of revoking or suspending one’s license to be an insurance producer, consultant or adjuster. Selected parts of the statute pertaining to the appropriate behavior for agents and brokers include the following:

(a) The superintendent may refuse to renew, revoke, or may suspend for a period the superintendent determines the license of any insurance producer, insurance consultant or adjuster, if, after notice and hearing, the superintendent determines that the licensee or any sub-licensee has:

(1) violated any insurance laws, or violated any regulation, subpoena or order of the superintendent of insurance or of another state's insurance commissioner, or has violated any law in the course of his dealings in such capacity;

(2) provided materially incorrect, materially misleading, materially incomplete or materially untrue information in the license application;

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(4)(A) used fraudulent, coercive or dishonest practices;

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(6) intentionally misrepresented the terms of an actual or proposed insurance contract or application for insurance;

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(8) admitted or been found to have committed any insurance unfair trade practice or fraud;

In accordance with N.Y. Insurance Law §§ 2103 and 2110, a licensee may not act in an untrustworthy or incompetent manner in selling any insurance or annuity products. Under § 2110 the Department may take appropriate disciplinary action, including the revocation or suspension of a license, if a licensee has engaged in such behavior.

The National Association of Insurance Commissioners (NAIC) recently adopted a suitability in annuity transactions model regulation. The Department is reviewing the model regulation.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.