Suitability and Best Interest in Life Insurance and Annuity Transactions (“Regulation 187”)

New York State amended Regulation 187 to establish what is referred to as the “Best Interest Rule. The amendments are effective August 1, 2019 for annuity transactions and February 1, 2020 for life insurance transactions. The amendments extend the standard of care insurance companies, agents, and brokers must now exercise when making recommendations to prospective clients for all life insurance and annuity purchases.

Competent and Trustworthy: The Reg 187 amendments establish a standard that requires insurance companies, agents, and brokers to act in a competent and trustworthy manner. The regulation attempts to ensure proper conduct from insurers and producers but does not guarantee an outcome. In short, if a producer can prove that he/she complied with the requirements of Reg 187, the producer will be able to avoid negative consequences from a consumer complaint about an insurance purchase.

Applications: The new Best Interest Rule applies to all life insurance related transactions to individual consumers in New York. This means both new business and in force transactions fall under the rule. Reg 187 also covers replacements. To the extent that the transaction involves a replacement and the Disclosure Statement required under Insurance Regulation 60 contains all necessary information required by Regulation 187, the Disclosure Statement could be used to also satisfy Regulation 187.

The rule does not apply to:

  • ERISA qualified plan transactions
  • Business owned insurance transactions
  • Bank owned insurance transactions
  • Structured settlement payments

The Best Interest Rule: Producers and/or insurance companies must make recommendations that are in New York consumers’ best interest. Regulation 187 requires producers to act in the best interest of the “consumer”. The term “consumer” is defined as “the owner or prospective purchaser of a policy”. Where the owner and insured are different, the producer is required to act in the best interest of the owner. Consideration of the needs of any potential beneficiaries should occur as part of the analysis to the extent that the needs of the potential beneficiaries are relevant to furthering the needs or goals of the owner. The regulation identifies a recommendation as statements or acts that a consumer would reasonably interpret to be advice that results in a consumer either entering or refraining from entering an insurance purchase. Reg 187 defines compliance in the following way:

A producer or insurance company makes a recommendation that is in the best interest of the consumer when the producer or company weighs all of the information regarding suitability and makes a recommendation that reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would make under similar circumstances.

The focus of the best interest standard is on the producer’s process and his or her analysis from the initial gathering of suitability information and initial consideration of the products available for sale by the producer to the selection of those particular products that would be suitable for the particular consumer and finally the recommendation to the consumer from among the suitable products. Producers will need to keep complete files about their discussions with New York consumers and clearly document the reasoning for recommendations. Maintaining these files will be critical, so producers will need to take care to keep them safe as time goes on and situations change.

Generic Information: >u>The Best Interest Rule does not apply to generic information. The regulation specifically mentions such generic information as online calculators. So, if a consumer uses an online calculator to estimate his/her life insurance needs, Reg 187 does not consider the calculator nor its creator’s actions as a recommendation. However, if a producer uses such a calculator as part of a presentation to a consumer as justification to make a purchase or not make a purchase, the producer has given a recommendation under Reg 187 guidelines. Product wholesaling, product support (i.e., the provision of non-client specific product training and information) and the provision of generic educational, administrative or marketing information does not meet the definition of a recommendation and would not subject the requirements of Regulation 187.

Required Information to Formulate a Best Interest Recommendation: The new Best Interest rule clearly identifies the information producers and/or insurance companies must collect to guide recommendations. This information includes:

  • Age
  • Income
  • Financial resources used to fund the policy
  • Financial objectives
  • Intended use of the policy
  • Time horizon
  • Existing assets (both insurance and non-insurance)
  • Liquidity needs
  • Liquid net worth
  • Risk tolerance
  • Willingness to accept non-guaranteed elements of contract
  • Tax status
  • Any other information reasonably viewed as relevant to the suitability of the insurance transaction

The regulation states that the above list encompasses the information that is reasonably appropriate. It does not, however, necessarily require a producer or insurance company to collect all this information. Producers may also weigh other factors that are relevant to the best interests of the consumer including the benefits provided by the policy, the price of the policy, the financial strength of the insurer and any other relevant factors that might differentiate products or insurers.

Where health information is known by the applicant and the producer at the time of the producer’s analysis of the consumer’s suitability information, it is entirely appropriate to consider how that impacts the ability of the applicant to obtain the amounts and types of coverage desired, how this impacts the recommendation the producer would otherwise make, and from which company that consumer is likely to receive the best underwriting offer. These factors could conflict with one another and producers are expected to consider and disclose to the consumer these trade-offs as part of a comprehensive best interest analysis.

Prohibition on Claiming Comprehensive Financial Plan: Reg 187 specifically prohibits insurance producers from claiming that the sale of a life insurance contract is part of a comprehensive financial plan, unless the producer is licensed or holds proper certification to provide such comprehensive financial planning. Regulation 187 also prohibits a producer from using the term “financial planner” or “financial adviser/advisor” unless that producer (1) “is properly licensed or certified” and (2) “actually provides securities or other non-insurance financial services”.

Limit Recommendations: The Best Interest Rule requires that producers show consumers options from an array of companies. This standard dramatically changes the career model of the career captive producer whose job is to market and sell the insurance products manufactured by his/her company. Reg 187 provides an option to limit recommendations for such producers. Where a producer is captive or affiliated with a particular insurer, it is permissible for the producer to limit the range of products offered to consumers based on this affiliation, provided that the producer discloses to the consumer in writing prior to a recommendation (1) the nature of the agreement with the insurer and (2) the circumstances in which the producer will and will not limit recommendations to just the affiliated insurer.

No Opt Out Permitted: Reg 187 does not allow a producer to opt out for any other reason than being a career captive. If a consumer refuses to provide information deemed necessary to make an informed best interest recommendation, the regulation does permit the producer to move forward with a sale. However, Reg 187 specifically prohibits a producer or insurance company from influencing a consumer to refuse providing information to avoid the Best Interest protocol.

Use of Illustrations in a Life Insurance or Annuity Sale: Compliant illustrations for annuity and life insurance products are an important part of educating consumers on how products operate and provide important and required product disclosures. Comparisons of product illustrations and information provided by a product illustration may be considered as part of producer’s best interest analysis. However, a recommendation cannot be solely based on illustrated or projected values, particularly when the product contains non-guaranteed elements. The recommendation must be based on a comprehensive analysis of the consumer’s needs and objectives and how the product features and benefits will meet those needs and objectives.

Adequate Product Knowledge: Reg 187 specifically prohibits a producer from making a recommendation about life insurance and annuity products he or she lacks adequate knowledge. While the regulation does not define adequate product knowledge, it may present an issue for insurers who have a term-only approach to life insurance planning. It may also be a problem for investment salespeople who recommend against products like whole life insurance purely because they think the stock market will achieve higher returns.

Insurer’s Responsibility for Compliance With New York Best Interest Rule: Reg 187 mandates that all life insurers establish an audit system of supervision reasonably designed to achieve producer and company compliance with the Best Interest Rule. It specifically requires insurers to collect and organize information that shows:

  • How the collection of suitability information takes place
  • The documentation and disclosure of recommendations
  • The review of complaints submitted regarding recommendations inconsistent with the Best Interest Rule, and
  • A process for monitoring compliance

Compensation: Insurance companies can offer varying compensation on insurance products, but such compensation cannot influence a producer to favor one product over another, especially if it causes a conflict with the consumer’s best interest. For example, sales contests and other temporary incentives based on the sale of a particular product would not be consistent with the requirements. Reg 187 includes language that holds the insurance company culpable when violations occur.

Adequately Trained: Under Reg 187 insurance companies are responsible for ensuring that its producers are adequately trained on the applicable requirements of the regulation. The insurer may set training requirements related to completion of a specific level of training or a specific course or courses. Training can be made available to producers either directly or through provider organizations. To comply with this requirement, insurers can mandate that producers complete required training before they submit any new applications and can require producers to provide a certification with the submitted applications confirming that they have completed the training.

Retroactive Application: Regulation 187 does not apply retroactively to recommendations made prior to the effective date of the regulation. Regulation 187 only applies to new recommendations made after the effective date. This would include new recommendations with respect to in-force life insurance policies or annuity contracts.

Conclusion: While New York State is the first state to raise the standard of care for producers making annuity and life insurance recommendations, it will not be alone for long. It is very likely that other states and organizations will follow suit. In fact, the SEC has already adopted a package of best-interest rules and regulations governing broker conduct. The National Association of Insurance Commissioners (NAIC) is also drafting a model regulation that creates standards like those of Regulation 187 and Massachusetts, New Jersey, and Nevada are in various stages of implementing their own “best interest” rules.

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