Earlier this week, the New York Department of Financial Services (“DFS”) published Circular Letter No. 6 (2023) identifying activities by life insurance and annuities providers that it views as being unlawfully discriminatory per Sections 2606(a)(1) and 4224(a)(1) of the New York Insurance Law. Going forward DFS will review new life and annuity product filings for compliance with the circular letter while companies utilizing the Circular Letter No. 6 (2004) certified filing process are instructed to consult this new circular letter when certifying compliance. DFS further informs insurers that the department expects to examine portfolios of existing products for compliance “during regular and targeted market conduct examinations beginning in 2025.” The circular letter is effective immediately as is simultaneously published revised product guidance.

The target of the circular letter is life insurance and annuity products sold in the individual market as well as certain group markets, e.g., life products sold through banks, credit unions, or credit card issuers, that have features of both individual and group insurance but are “more in the nature of individual coverage.” The activity targeted by DFS is the creation of disparate classes and thus disparate pricing structures for otherwise similar products sold to consumers with “the same expectation of life and with identical needs, goals, or personal or financial circumstances.” DFS identified circumstances where insurers marketed arguably identical policies at different prices to consumers of the same class and of equal expectation of life and are thus unlawfully discriminatory. DFS highlighted unlawful classifications arising out of minimally differentiated policies, varying producer compensation structures, and functionally individual policies structured as group policies, as discussed more fully below.

DFS charged insurers with “misreading” previous guidance in the product outlines and an Office of General Counsel Opinion^[1] published in December 2000 (the “OGC Opinion”). The OGC Opinion responded to an inquiry asking whether a life insurer must use the same type of underwriting and the same terms and conditions pertaining to its life products throughout its individual life portfolio. The OGC Opinion states that life insurers are free to set their own appropriate underwriting standards “as long as such underwriting standards have a factual and rational basis, are grounded in generally accepted insurance and actuarial principles, and are not contrary to law. Use of different terms and conditions regarding different policies is not prohibited provided such terms and conditions are consistent with regard to a particular policy and not contrary to law.” DFS further cited a decades old circular letter from 1955 which opined that the predecessor statute to Section 4224 “imposes a responsibility on the insurer to justify any systems of groupings or rate classifications as well as the results flowing therefrom as being reasonable, equitable and non-discriminatory,”^[2] concluding that “all similarly-situated consumers must be treated alike when creating classes.” DFS further charges that insurers are misreading the published product guidance such that differences in producer compensation constitute appropriate actuarial justification for the purpose of creating class distinctions.

• Different Policies. DFS accuses insurers of using “ministerial changes” such as different form numbers, data pages, or variable materials, as “different policies” that then justify similarly situated consumers being put into separate classes and thus priced differently which is impermissible discrimination.
• Producer Compensation. DFS accuses insurers of offering different share classes of the same product or otherwise creating classes solely on marketing by specific producers or varying compensation by producers. In a nutshell, similarly situated consumers with the same expectations of life are paying different premiums for identical policies based on access to specific producers. DFS “believes that these practices have the potential to disproportionately disadvantage low-income consumers, consumers of color and consumers living upstate, who may not have access to the producers who offer the more favorable versions of a particular product.” DFS explicitly states that differing levels of compensation paid to producers is not “adequate actuarial justification to support treating similarly-situated life insurance and annuity consumers as separate classes solely due to differing levels of compensation paid to producers.” DFS further argues that such actions are anti-competitive as they disadvantage small agencies or solo producers who are unaware of identical policies available at different price points.
• Group Policies. DFS accuses some issuers to have inappropriately used group product structures “to sell what is essentially individual insurance,” singling out life and annuity products sold through banks, credit unions, trust companies, etc., in which the “consumer’s association or affiliation with the group policyholder is tenuous as compared to a traditional group, such as an employer or labor union.” DFS emphasizes that in these circumstances the cost of insurance is paid primarily, if not entirely, by the consumer, as would be the case in the individual market, and thus DFS will apply the same strictures on these group life policies and annuity contracts.

DFS divulged that it discussed with industry the possibility of consumer disclosure as a remedy but concluded that “the use of disclosure documents would not address unfair and unlawful discrimination between individuals of the same class and of equal expectation of life. Different versions would continue to be available only through certain producers and, since not all consumers have access to those producers, they ultimately would also not have access to those different versions of the products.”

In conclusion, DFS has identified practices by which insurers have misapplied language from past circular letters and product guidance to justify impermissible classifications among similarly situated consumers with the same expectation of life such that it constitutes unlawful discrimination. DFS has informed insurers that going forward such practices warrant greater scrutiny by the department during the form approval process and will be a focus during future market conduct examinations. Insurers utilizing the Circular No. 6 certified form filing process must certify to these specific concerns. Furthermore, both producers and insurers are now on notice that DFS considers separate premium structures based solely on producer compensation as unlawful and that such differences in producer compensation must be borne by the insurer and cannot be passed on to the consumer as higher premiums.

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