New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on September 22, 2006, representing the position of the New York State Insurance Department.

RE: Insurance Law Section 4228

Questions Presented:

1. Does New York Insurance Law § 4228 apply to the compensation of insurance agents and brokers for out-of-state life insurance sales of a life insurance company doing business in New York State?

2. Where a life insurer provides an expense allowance to insurance agents and brokers pursuant to N.Y. Ins. Law § 4228(d)(5) and also reimburses or assumes expenses incurred by its life insurance agents or brokers in connection with the sale or servicing of the insurer’s policies or contracts, must the insurer include such reimbursed or assumed amounts in the calculation of the limit for expense allowance accounts specified by N.Y. Ins. Law § 4228(d)(5)?

Conclusions:

1. Yes. N.Y. Ins. Law § 4228 is applicable to the compensation of insurance agents and brokers for both in-state and out-of-state sales of individual life insurance policies or individual annuity contracts, except policies and contracts issued for delivery outside the United States and its possessions, of life insurance companies that are doing business in New York State and engaged in the direct sale of such insurance.

2. Yes. Where a life insurer provides an expense allowance to its agents and brokers pursuant to N.Y. Ins. Law § 4228(d)(5) and also reimburses or assumes expenses incurred by its life insurance agents or brokers in connection with the sales or servicing of the insurer’s policies or contracts, the insurer must include such reimbursed or assumed amounts in the calculation of the limit for expense allowance accounts specified by N.Y. Ins. Law § 4228(d)(5).

Facts:

The inquiry is of a general nature.

Analysis:

N.Y. Ins. Law § 4228(a) (McKinney Supp. 2006) provides, in relevant part, as follows:

(a) The provisions of this section shall apply to all domestic life insurance companies and to all foreign and alien life insurance companies doing business in this state, but not the alien branches of such companies or such companies' subsidiaries not licensed in this state to do an insurance business, except as provided in subsection (h) of this section, engaged in the direct sale of individual life insurance policies or individual annuity contracts, hereinafter referred to as "companies". Except as provided in subsection (h) of this section, the provisions hereof shall apply only to individual life insurance policies and riders and individual annuity contracts and riders and shall not apply to fraternal benefit societies nor to the following categories of insurance: (1) accident and health insurance having the meaning ascribed in section one thousand one hundred thirteen of this chapter, group life insurance having the meaning ascribed in section four thousand two hundred sixteen of this article, group annuity contracts having the meaning ascribed in section four thousand two hundred thirty-eight of this article, and credit insurance having the meaning ascribed in section four thousand two hundred sixteen and four thousand two hundred thirty-five of this article; (2) debit life insurance, except as otherwise expressly provided herein; or (3) policies and contracts issued for delivery outside the United States and its possessions. Neither these categories of insurance nor reinsurance either assumed or ceded will be included in any calculations or tests conducted for any purpose in connection with this section or any regulations or schedules promulgated hereunder.

The purpose of the statute is to protect the financial integrity of insurers doing business in New York. See L. 1997, ch. 616, § 1 and Opinion of General Counsel No. 95-87. To accomplish that purpose, the expense limitations specified by N.Y. Ins. Law § 4228 apply to both in-state and out-of-state sales of individual life insurance policies or individual annuity contracts, except policies and contracts issued for delivery outside the United States and its possessions, of life insurance companies that are doing business in New York State and engaged in the direct sale of such insurance. Otherwise, excessive expenses for out-of-state sales of individual life insurance policies or individual annuity contracts of an insurer could threaten the financial integrity of the entire company thereby adversely affecting New York consumers. Moreover, if the Legislature intended the statute to apply to only in-state sales, language to that effect could have been added to the statute.

Accordingly, the Department concludes that N.Y. Ins. Law § 4228 is applicable to both out-of-state and in-state sales of individual life insurance policies or individual annuity contracts, except policies and contracts issued for delivery outside the United States and its possessions, of life insurance companies that are doing business in New York State and engaged in the direct sale of such insurance.

N.Y. Ins. Law § 4228(d)(5) (McKinney Supp. 2006) provides, in relevant part, as follows:

(5) With respect to premiums and considerations recorded within a period of twelve consecutive months on business written by any agent or broker, no company shall pay or permit to be paid to an agent or broker expense allowance greater than the excess, if any, of the sum of:

(A) ninety-one percent of all qualifying first year premiums; and

(B) with respect to qualified annuity contracts, fourteen and one-half percent of periodic considerations incurred in the first contract year; and

(C) seven percent of any excess premiums, single considerations and periodic considerations, other than those addressed in subparagraph (B) of this paragraph, incurred in the first four contract years, over the sum of commissions paid pursuant to paragraphs one, two and four of this subsection, and the value of any goods and services provided to such agent or broker by the company. With respect to premiums and considerations recorded within a period of twelve consecutive months on business written under the supervision of any general agent, no company shall pay or permit to be paid to a general agent, on business not personally produced by such general agent, expense allowances greater than the excess, if any of the sum of

(D) ninety-nine percent of all qualifying first year premiums; and

(E) with respect to qualified annuity contracts, sixteen percent of periodic considerations incurred in the first contract year; and

(F) eight and one-half percent of any excess premiums, single considerations and periodic considerations, other than those addressed in subparagraph (E) of this paragraph, incurred in the first four contract years, over the sum of commissions paid pursuant to paragraphs one, two and four of this subsection, and any goods and services provided to such general agent by the company. The company may, in implementing this subsection, use reasonable estimation techniques in arriving at the amount of goods and services, including but not limited to the estimation of the average value of goods and services provided to a group of agents or brokers to whom similar goods and services are provided. (emphasis added).

The term "goods and services" is defined by N.Y. Ins. Law § 4228(b)(15) as follows:

"Goods and services" as used in this section shall refer to (A) reimbursements to an agent or broker for vouchered expenses made or incurred in connection with the production or servicing of policies or contracts on behalf of the company and (B) similar expenses assumed directly by the company. These expenses do not include those that the company incurs for the recruitment, training, supervision or management of such agent, nor the cost of security benefits provided to such agent, nor those expenses described in item (iv) of subparagraph (D) of paragraph two of subsection (c) of this section.

Thus, where a life insurer provides an expense allowance to its agents and brokers pursuant to N.Y. Ins. Law § 4228(d)(5) and also reimburses or assumes expenses incurred by its life insurance agents or brokers in connection with the sale or servicing of the insurer’s policies or contracts, the calculation of the limit for expense allowance accounts specified by N.Y. Ins. Law § 4228(d)(5) must take into account any and all such reimbursed or assumed expenses with the exception of any expenses excepted from the definition of the term "goods and services."

For further information you may contact Assistant Counsel Brenda Gibbs Albany Office.