The New York State Department of Financial Services (DFS) recently issued guidance on actions it will take to ensure compliance with suitability review requirements concerning annuity sales and replacements. See December 8, 2016 Press Release at http://www.dfs.ny.gov/about/press/pr1612081.htm
The December 8, 2016 guidance (Insurance Circular No. 7 (2016)) can be found at:http://www.dfs.ny.gov/insurance/circltr/2016/cl2016_07.htm
This guidance follows recent investigations by DFS which revealed that insurers, producers and distributors were violating N.Y. Ins. Reg. 187 (11 NYCRR 224) and 60 (11 NYCRR 51) by recommending replacement of existing deferred annuities with immediate annuities, without providing a comparative analysis with regard to lost benefits and income benefits.
DFS indicated that it will conduct further industry-wide review and that it is taking action with regard to improper replacements. The following are suggestions on how life insurers, producers and distributors might respond to the new DFS guidance in this area:
How can New York insurers and producers improve compliance?
- Examine with your compliance team that you have the adequate regulatory requirements for suitability review in place.
- Review N.Y. Ins. Section 2123(a)(3) and 4226(a)(6) (with regard to incomplete comparisons) as well as the above cited regulations 187 (11 NYCRR 224) and 60 (11 NYCRR 51).
- Are there “reasonable grounds” to support that the recommendation is suitable?
- With regard to “suitability information” see 11 NYCRR 224.3(e):
- Consumer age
- Annual income
- Financial situation and needs (including resources for funding the annuity)
- Financial experience
- Financial objectives
- Intended use of the annuity
- Financial time horizon
- Existing assets (including investments and life insurance holdings)
- Liquidity needs
- Liquid net worth
- Risk tolerance
- Tax status
- Satisfy the four standards required by 11 NYCRR 224.4(a):
2) Evaluate whether the annuity is beneficial to the consumer. The consumer must benefit from the features of the annuity contract;
4) Consider the whole. With regard to suitability in a replacement transaction consider:
b. Whether the consumer would benefit from the annuity contract enhancements and improvements; and
- Ensure that the producers are adequately trained and knowledgeable with regard to the product. 11 NYCRR 224.4(g) and (h).
- Establish and maintain a supervisory system designed to achieve compliance with the above.11 NYCRR 224.4(f)
- Explain the reasoning behind a replacement using the form Disclosure Statement found at Appendix 10B to Regulation 60.11 NYCRR 51.5(c)(7).
- Have agent or broker complete and sign the Disclosure Statement prior to delivery of the contract.
- Examine the sales material to determine accuracy and compliance with the law.
- Deliver completed Disclosure Statement to the contract-holder no later than delivery of the contract. 11 NYCRR 51.6(e).