Relates to replacement of individual life insurance policies or annuity contracts

Summary of provisions

This bill amends §§ 2123 and 4226 of the insurance law so as to continue to establish that insurers and producers are prohibited from making misleading or incomplete representations of any policy or contract for the purpose of inducing a customer to lapse, forfeit or surrender a policy or contract. This bill further provides that the superintendent of insurance/financial services shall establish rules for the replacement of life insurance policies and annuity contracts and that those rules shall be, to the greatest extent practicable and in the public interest, consistent with the replacement regulation adopted by the NAIC, as amended from time to time. This bill would also amend both sections to remove the current requirement that the replacement rules must contain a requirement that policies or contracts being contemplated for replacement in New York can only be completed after a complex, cost comparison of the replaced policy or contract to the replacing policy or contract.

Justification

The bill makes amendments to sections 2123 & 4226 of the insurance law to provide that the regulation governing replacements of life insurance products in this state should be consistent with the NAIC Life Insurance and Annuities Replacements Model Regulation and to remove the requirement that there must be a detailed cost comparison of products before you can replace one life insurance policy or annuity with another one. These amendments leave in place the current provision of law that prohibits insurers and producers from using a misleading or incomplete representation to induce a customer to lapse, forfeit or surrender a policy or contract.

The New York Insurance Department has used the existing provisions of law as the basis for the implementation of the very complicated Regulation 60 governing replacements of life insurance policies and annuity contracts. Since its implementation in 1998, Regulation 60 has not proven to work very well because, in some instances, it requires the comparison of products that are not at all similar (such as a life policy to a deposit-type annuity contract, or vice versa) and, in every instance, results in a lengthy delay (sometimes up to a month) in completion of the transaction. This delay is due to the fact that the producer selling the new policy or contract and the customer seeking to buy it must wait for the necessary information related to the product being replaced, so that the producer can do the requisite comparison. Pursuant to the current regulation, the information related to the policy or contract to be replaced is supposed to be provided by the company whose policy or contract is being contemplated

for replacement-something that they are not overly motivated, but are compelled by the regulation, to do.

This delay has not always served the customer well. In some instances, they have been unable to timely complete a transaction on an interest-sensitive product and have, as a result, received a final product with less favorable terms. During the recent economic down-turn, consumers who were seeking to replace a variable annuity product with a fixed one were forced to wait a month to consummate that replacement, resulting in an even steeper decrease in the value of their variable annuity before the transaction could be completed. In other, less common instances, they may have had a change in their health status or even passed away while waiting to purchase a policy or contract with better terms than the policy or contract they were seeking to replace. Often-times, these delays are totally unnecessary because the customer is fully aware of the details of their transaction and are anxious to complete their transaction.

New York is the only state in the nation that requires this level of detailed comparison of one product to another. The vast majority of the states have implemented a version of the NAIC Model on Replacements, which requires insurers to provide simple disclosure of factors that you should consider when replacing one life or annuity product with another. This simple disclosure model has proven to be sufficient to deter inappropriate replacements in other states. if this bill were to be enacted, New York could amend their regulation on replacements so that it is consistent with the NAIC Model disclosure requirement and the practice in most other states. New York law would continue to prohibit misrepresentations by producers or insurers for the purpose of inducing the surrender of a policy or contract, as well as providing for a sixty-day free look period after the replacement of a policy or contract with a new one so that customers having buyer's remorse could reverse their transaction. New York would also continue to require life insurers and producers to conduct a review and determination as to the suitability of every annuity transaction, including replacement transaction, before an annuity purchase is made (Regulation 187). All of these requirements would ensure the proper balance so that New York consumers are being protected from inappropriate sales, yet are still able to complete a desired transaction in a timely fashion.

Legislative history

S.5024 of 2011-12

Fiscal implications

None.

Effective date

This act will take effect on the 180th day after it shall have become a law.