Summary

On December 8, 2016, the New York State Department of Financial Services (the “Department”) issued a Circular Letter to provide guidance in response to the alleged failure of certain life insurance producers and life insurers to comply with disclosure and suitability requirements when replacing a deferred annuity contract with an immediate income annuity contract. That guidance will make compliance with New York’s suitability and replacement regulations substantially more difficult. 

The Department recognized that “incomplete comparison of income benefits during replacements and inadequate procedures related to the betterment of rate calculations have the potential to cost annuity contract holders substantial sums in lifetime income benefits.” Specifically, with respect to deferred-to-immediate annuity contract replacements, the Department observed that:

“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.”

Thus, the Department sought to “inform producers, insurers and the general public of the requirements, obligations and expectations set forth by New York statutes and regulations in the sale or replacement of annuity products, whose role in providing guaranteed sources of retirement income has become increasingly important.”
 
The applicable regulations are 11 NYCRR 224 (Insurance Regulation 187) and 11 NYCRR 51 (Insurance Regulation 60). 11 NYCRR 224 requires a producer or insurer to perform a suitability review to determine the appropriateness of the sale or replacement of any annuity contract. 11 NYCRR 51 requires specific disclosures when a consumer is advised to lapse, surrender, replace or make any other change to an existing life insurance policy or annuity contract in conjunction with the purchase of a new life insurance policy or annuity contract.
 
According to the Department, in complying with the rules in the two regulations, “producers and insurers should make every effort to ensure that consumers receive the greatest amount of income available to them under any existing or proposed annuity contract.” The Department noted the requirement under Insurance Law § 4223(a)(1)(C) that every accumulation-type deferred annuity issued 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. As Section 224.4(a)(4) of Insurance Regulation 187 requires the producer or insurer to consider if a consumer will lose existing benefits, when determining whether the replacement of an annuity contract is suitable, the Department advised that 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.

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, 11 NYCRR 51.5(c)(7) of Regulation 60 requires that the producer or insurer 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 Department advised that the producer should document and illustrate the 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.
 
Such documentation is to include the same comparison required under Section 224.4(a)(4) of Insurance Regulation 187, set forth above, that is used to assess the suitability of the replacement. Interestingly, the Replacement Regulation’s standard replacement disclosure form does not include a section for disclosure of the information described in the Circular Letter.  Accordingly, if an insurer performs many of these types of replacements, it should consider developing its own form and submitting it to the Department for approval.
 
The Department also cautioned insurers against delivering an annuity contract as a result of a replacement without receiving from the original issuing insurer the appropriate income comparison information and confirming it is accurate in accordance with 11 NYCRR 51.6(b) of Insurance Regulation 60. However, in the case where the insurer replacing the annuity contract requests from the original issuing insurer the information to provide to the consumer, but does not receive the requested information, the insurer should document the request and process the replacement, if otherwise suitable. Further, the insurer should report the replaced insurer’s refusal to provide the income comparison information to Sharon Ma, Supervising Insurance Examiner, at sharon.ma@dfs.ny.gov.
 
With respect to the betterment of rate calculations, the Department recognized the requirement under Insurance Law § 4223(a)(1)(E) that every annuity contract delivered or issued for delivery in New York 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 set forth 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. Accordingly, the Department recommended that 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, establish a procedure to ensure that consumers receive the highest amount of income available when requesting annuitization of an in-force deferred annuity contract. The Department advised insurers to 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 greater income benefit.
 
Finally, the Department cautioned that a producer or insurer found to be engaging in deceptive sales of unsuitable annuity contracts, or any violation of the Insurance Law or regulations promulgated thereunder, may be subject to disciplinary action by the Superintendent. Accordingly, insurers should be taking steps to make sure they are in compliance with Regulation 60 and 187.