A. Insurance Regulation 187, 11 NYCRR 224 - Suitability in Annuity Transactions

In recommending the purchase or replacement of an annuity contract, 11 NYCRR 224.4(a) requires a producer or the insurer (where a producer is not involved) to have reasonable grounds for believing that the recommended annuity contract is suitable for the consumer on the basis of the facts disclosed by the consumer as to the consumer’s investments, other insurance policies or contracts, and other “suitability information.” This “suitability information” includes the consumer’s age, annual income, financial situation and needs (including the financial resources used for the funding of the annuity), financial experience, financial objectives, intended use of the annuity, financial time horizon, existing assets, including investment and life insurance holdings, liquidity needs, liquid net worth, risk tolerance, and tax status. 11 NYCRR 224.3(e).

A producer or insurer (where a producer is not involved) may only recommend the purchase or replacement of an annuity contract where there is a reasonable basis to believe that the following four standards are satisfied:

1. the consumer has been reasonably informed of various features of the annuity contract, such as the potential surrender period and surrender charge, availability of cash value, potential tax implications if the consumer sells, surrenders or annuitizes the annuity contract, death benefit, mortality and expense fees, investment advisory fees, potential charges for and features of riders, limitations on interest returns, guaranteed interest rates, insurance and investment components, and market risk;
2. the consumer would benefit from certain features of the annuity contract, such as tax-deferred growth, annuitization or death or living benefit;
3. the particular annuity contract as a whole, the underlying subaccounts to which funds are allocated at the time of purchase or replacement of the annuity contract, and riders and similar product enhancements, if any, are suitable (and in the case of a replacement, the transaction as a whole is suitable) for the particular consumer based on the consumer's suitability information (as defined in 11 NYCRR 224.3(e)); and
4. in the case of a replacement of an annuity contract, the replacement is suitable including taking into consideration whether:
   1. the consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits (such as death, living or other contractual benefits), be subject to tax implications if the consumer surrenders or borrows from the annuity contract, or be subject to increased fees, investment advisory fees or charges for riders and similar product enhancements;
   2. the consumer would benefit from annuity contract enhancements and improvements; and
   3. the consumer has had another annuity replacement, in particular, a replacement within the preceding 36 months.

11 NYCRR 224.4(a).

Moreover, 11 NYCRR 224.4(a) further provides that an insurer may not issue an annuity contract recommended to a consumer unless there is a reasonable basis to believe the annuity contract is suitable based on the consumer’s suitability information. In addition, 11 NYCRR 224.4(g) requires an insurer to ensure that every producer recommending the insurer’s annuity contracts is adequately trained to make the recommendation, and 11 NYCRR 224.4(h) provides that a producer may not make a recommendation to a consumer to purchase an annuity contract about which the producer has inadequate knowledge.

To ensure compliance with these rules, producers and insurers must contemporaneously document: (1) any recommendation subject to 11 NYCRR 224.4(a); (2) the consumer’s refusal to provide suitability information, if any; and (3) that an annuity purchase or replacement is not recommended if a consumer decides to enter into an annuity purchase or replacement that is not based on the producer’s or insurer’s recommendation. 11 NYCRR 224.4(e). Pursuant to 11 NYCRR 224.6, this documentation must be maintained by producers and insurers in accordance with the record retention requirements under 11 NYCRR 243.

Finally, 11 NYCRR 224.4(f) requires an insurer to establish and maintain a supervision system that is reasonably designed to achieve the producer’s and insurer’s compliance with these rules, including a system to ensure that a producer or insurer properly documents any recommendations made under the regulation. An insurer may contract with a third party to establish and maintain this system of supervision for producers pursuant to 11 NYCRR 224.4(f), but the insurer remains responsible for compliance with the regulation.

B. Insurance Regulation 60, 11 NYCRR 51 – Replacement of Life Insurance Policies and Annuity Contracts

In addition to satisfying the suitability requirements of 11 NYCRR 224, producers and insurers must also comply with Insurance Regulation 60 in connection with any internal or external replacement of a life insurance policy or annuity contract. The purpose of Insurance Regulation 60 is 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 or her 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.” 11 NYCRR 51.1(b).

Insurance Regulation 60 first requires producers to determine whether the issuance of an annuity contract constitutes a replacement of an existing annuity. In making this determination, producers are required to use the Definition of Replacement form prescribed in Appendix 11 to Insurance Regulation 60. This form must be completed and signed by the consumer. 11 NYCRR 51.1(b).

If the replacement of an existing annuity contract has occurred or is likely to occur, Insurance Regulation 60 requires that a producer explain the primary reason or reasons for recommending the new annuity contract, why the existing annuity contract cannot meet the applicant’s objectives, and the advantages of continuing the existing annuity contract without changes. 11 NYCRR 51.5(c)(7). These explanations must be provided to the consumer in a written “Disclosure Statement” on the form prescribed in Appendix 10B to Insurance Regulation 60 or other substantially equivalent form deemed acceptable by the Superintendent. 11 NYCRR 51.5(c)(7).

Insurance Regulation 60 also imposes requirements on insurers. In connection with the issuance of a replacement life insurance policy or an annuity, the insurer issuing the policy or annuity must (among other requirements):

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(3) prior to the delivery of the life insurance policy or annuity contract, require an accurate and complete “Disclosure Statement” signed by the insurance agent or broker … including the primary reason or reasons for recommending the new life insurance policy or annuity contract and why the existing life insurance policy or annuity contract cannot meet the applicant's objectives;

(4) examine the sales material, including any proposal, used in the sale of the life insurance policy or annuity contract, and the “Disclosure Statement” and ascertain that they are accurate and meet the requirements of the Insurance Law and regulations promulgated thereunder;

(5) deliver the completed “Disclosure Statement” to the policy or contract holder no later than the time of delivery of the policy or contract. The insurer may, at its discretion, require the “Disclosure Statement” to be signed by the applicant, a copy of which shall be provided to the applicant at the time the applicant signs the “Disclosure Statement.”

11 NYCRR 51.6(b). With respect to insurers that issued an annuity contract that is to be replaced, Insurance Regulation 60 requires that the insurer provide the information necessary to complete the Disclosure Statement within 20 days of receiving a request for the information from the insurer issuing the new annuity contract. 11 NYCRR 51.6(c)(2). Both the insurer that issued the life insurance policy or annuity contract that is being replaced and the insurer replacing the life insurance policy or annuity contract shall establish and implement procedures to ensure compliance and such insurers shall also designate a principal officer specifically responsible for the monitoring and enforcement of these procedures. 11 NYCRR 51.6(e).

A. Deferred-to-Immediate Annuity Contract Replacements

In accordance with Insurance Law § 4223(a)(1)(C), every accumulation-type deferred annuity issued to consumers in New York must set forth the guaranteed interest rate and annuity mortality table being utilized for the guaranteed income purchase rates under the contract, which enable contract holders to receive a guaranteed income stream from their existing annuity contacts. Many producers and insurers are routinely proposing to consumers replacements of existing deferred annuities with immediate income annuities without also providing the amount of guaranteed income available under the existing annuity contract. Given the significantly more favorable minimum interest rates and annuity mortality rates on many previously issued contracts, consumers are receiving thousands of dollars less in lifetime retirement income by replacing such contracts.

When determining whether the replacement of annuity contract is suitable, 224.4(a)(4) and 224.4(b) of Insurance Regulation 187 require a producer or an insurer (where no producer is involved) to consider whether a consumer will lose existing benefits, such as death, living, or other contractual benefits, and the producer or insurer must have a reasonable basis to believe that the annuity contract is suitable based upon the consumer’s suitability information. As a result, a producer or insurer should not replace an existing deferred annuity contract with an immediate annuity or deferred income annuity unless the producer or insurer considers the following comparisons: (1) the income options available under the existing deferred annuity contract and the proposed income annuity contract; and (2) the monthly (or other frequency) income available under the selected income option for both the existing deferred annuity contract and the proposed income annuity contract. In instances where the exact income option selected by the consumer is not available under the existing deferred annuity contract, or where there are additional income or withdrawal options that have been purchased (i.e., for variable annuities), the producer or insurer should make a good faith effort to highlight the closest available income options.

When a producer or insurer (where a producer is not involved) proposes a replacement of an existing annuity contract with a new annuity contract, the producer or insurer should explain to the consumer in the disclosure materials, and specifically in the Agent’s or Broker’s Statement or Remarks sections of the Disclosure Statement: (1) why the proposed immediate annuity contract is more suitable for the consumer than the existing annuity contract; and (2) why the existing annuity contract offers advantages over the proposed annuity contract. In providing an explanation of the advantages of replacing the existing annuity contract, the producer should document and illustrate the way or ways in which the new or replacement contract is superior to the option of annuitization or other income payout options that may exist under the current annuity contract. This documentation should include the same comparison that is used to assess the suitability of the replacement: (1) the income options available under the existing deferred annuity contract and the proposed income annuity contract; and (2) the monthly (or other frequency) income available under the selected income option for both the existing deferred annuity contract and the proposed income annuity contract.

An insurer should not deliver an annuity contract as a result of a replacement unless the appropriate income comparison information has been provided and the insurer has ascertained that it is accurate in accordance with 11 NYCRR 51.6(b) of Insurance Regulation 60. An insurer that issued the contract that is being replaced that refuses or otherwise fails to provide the information would be undermining Regulation 60’s intended purpose, the protection of policyholders and contract holders, and violating 11 NYCRR 51.7(b) of Insurance Regulation 60. In those instances where the insurer replacing the annuity contract requests and does not receive the information to provide the consumer with the necessary income comparisons, that insurer should document the request and process the replacement, if otherwise suitable, and report the replaced insurer’s refusal to provide the income comparison information to Sharon Ma, Supervising Insurance Examiner, at [email protected].

B. Betterment of Rate Calculations

Insurance Law § 4223(a)(1)(E) requires every annuity contract delivered or issued for delivery in New York to contain a statement that the annuity benefits, at the time of their commencement, will not be less than what would be provided by the application of an amount, as defined in § 4223(a)(1)(E), to purchase any single consideration immediate annuity contract offered by the insurer at that time to the same class of annuitants. Therefore, every insurer that delivers or issues for delivery annuity contracts in New York, regardless of whether it is in the context of a proposed replacement, should establish a procedure to ensure that consumers receive the highest amount of income available when requesting annuitization of an in-force deferred annuity contract. Insurers should perform a comparison of the: (1) income benefit derived from the guaranteed annuitization factors included in the existing annuity contract; and (2) income benefit derived from the insurer’s annuitization factors available for new sales. The insurer should use the factors that provide the consumer with the larger income benefit.