New York Regulation 187

Effective February 2020 for life insurance products, the New York Department of Financial Services (DFS) established a final standard that requires life companies to put procedures in place to assure “a transaction is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.” This regulation, the first of its kind, represents a dramatic change in minimum standards for both life insurance producers and companies. It has wide impact for both those sales in New York and beyond. The regulation which was finalized in 2018, was opposed by the American Council of Life Insurers (ACLI), the Advance Association of Life Underwriters (AALU), the National Association of Insurance and Financial Advisors (NAIFA) and the Life Insurance Council of New York (LICONY). 

All of these industry trade groups lobbied for changes in the rule and did win a delay in its implementation. NAIFA has also brought two court cases against NYDFS in an attempt to block the regulation. The industry trade groups also lobbied for and got a slightly less rigorous suitability standard for term insurance policies and a carve out for agents of captive and carrier companies from the original proposed regulation. Those agents with limited product sets or proprietary products will be deemed to act in the best interests of clients even with a limited product set, so long as they identify themselves as such in writing to potential clients prior to the transaction. The regulation will now take effect on August 1, 2019, for annuities and February 1, 2020, for life insurance policies. The regulation fundamentally changes how life insurance will be marketed and serviced in the state of New York. It is not yet known how this new model will impact regulation in other states. What we do know is that Regulation 187 will require that the agent:

  • Must understand the client’s goals and situa­tion before making a product recommendation: Producers and insurance companies are to document client goals and financial information before making recommendations of life or annuity contracts. This documentation includes thirteen specified points of information that must be gathered prior to a recommendation, including: financial resources for funding the policy, intended use of the policy, financial time horizon, and “tolerance of nonguaranteed elements in the policy, including variability in premium, death benefit, or fees.”
  • Address client/product-specific suitability: The producer must demonstrate and document how the specific recommendation, including “the underlying subaccounts and riders and similar product enhancements, if any, are “suitable” for the specific client in question based on their goals and information. In fact, the very definition of “suitable” in the regulation is far reaching: “Suitable means in furtherance of a consumer’s needs and objectives under the circumstances then prevailing, based upon the suitability information provided by the consumer and all products, services, and transactions available to the producer.”
  • Must provide in any presentation a fair and accurate representation of products: Producer must have a reasonable basis to believe that the policyholder has been informed of the various features and consequences of the product both “favorable and unfavorable such as the potential surrender period and surrender charge, any secondary guarantee period, equity index features, availability of cash value, potential tax implications if the consumer sells, modifies, surrenders, lapses or annuitizes the policy, death benefit, mortality and expense fees, cost of insurance charges, investment advisory fees, policy exclusions or restrictions, potential charges for and features of riders, limitations on interest returns, guaranteed interest rates, insurance and investment components, and market risk.”
  • Must give an accurate description of the producer’s role: The New York standard attempts to bring clarity to the role that life insurance producers play and how they are compensated. The regulation restricts what an insurance producer calls him or herself along with the description of their services. It states, “A producer shall not state or imply to the consumer that a recommendation to enter into a sales transaction is financial planning, comprehensive financial advice, investment management or related services unless the producer has a specific certification or professional designation in that area. A producer shall not use a title or designation of financial planner, financial advisor or similar title unless the producer is properly licensed or certified and actually provides securities or other noninsurance financial services.”
  • Be aware that companies are required to supervise: These new standards are backed by requirements for the issuing companies to put in place systems for supervision and audit to enforce the standards. Specifically, insurance companies are also prohibited from “effectuating a transaction unless it believes that the transaction was suitable based on the client’s suitability information.” The regulation backs up these standards; any producer or insurer who fails to follow the standards will be engaged in an activity “deemed to be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance.” Perhaps more important than sanction by the state, these new standards will give consumers increased leverage in gaining rescission in abusive transactions where the products recommended were clearly not in their best interests.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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