We have a rule of thumb at our offices: The number of new policy and contract riders we see is a true indication of new product developments being brought to market.

This can be a meaningful bellwether for those in the insurance and financial sector who work to stay competitive.

The use of riders with existing products has proliferated in recent years as insurers try to remain competitive but are reluctant to take on the time and expense of a complete product redesign and refiling to add new features.

In addition, even when completely redesigned and refiled products are brought to market, insurers often use riders for optional features or for features with short-term market appeal that may be withdrawn eventually from the market or modified.

The focus here is on riders for variable products, especially variable annuities. The insurers issuing these products have used riders to add many of the “alphabet soup” features to their products. They have found this to be useful in getting a feature to market more expeditiously than would be the case with a complete product retooling.

Moreover, VA insurers increasingly are finding that riders can be of help when a product feature turns out:

==To be more difficult (or perhaps impossible) to administrate in large numbers;

==To have improper pricing; or

==To have unforeseen consequences attached to it.

In such instances, the carrier can more easily withdraw or modify the feature, if offered in a rider, without having an adverse affect on the primary policy or contract.

But using riders to add features to registered VAs or variable life insurance presents special problems with respect to Securities and Exchange Commission filing requirements for such features. The nature of the feature will dictate the filing requirements that must be satisfied.

These filing requirements can range from merely preparing a supplement (usually referred to as a “sticker”) to the existing prospectus to making more formal filings. These more formal filings can be of a type that goes automatically effective the day filed (referred to as a “B” filing), or they can be a type that goes effective in 60 days (referred to as an “A” filing) and affords the SEC staff an opportunity to make a more detailed review.

The decision as to what type of filing is required is a judgment call by the insurer’s counsel and will depend on the materiality of the feature being added and how much disclosure is appropriate.

If the rider contains merely a minor, non-material modification to an existing feature, or something only administrative in nature, the use of a sticker is usually adequate. In such an event, the disclosure materials are filed with the SEC, and sales of the product as modified can continue without pause.

However, if the rider represents a new product feature that is too substantial to permit use of a sticker (often because the amount of disclosure is too voluminous to be appropriate for a sticker) and does not involve a death benefit or living benefit and there are no additional charges for the new product feature, then a B filing may be appropriate. Sales then can begin the day the filing is made.

On the other hand, if there are additional charges made for the feature added by the rider, or if the rider features a death benefit or living benefit, or if the feature makes a “material” modification to the original product, the SEC staff nearly always wants the opportunity to review the new charges and to determine if the features and charges are within permitted parameters for the product involved. This would require an “A” filing and the sales process would have to be delayed until after the 60-day period or until the SEC staff is convinced the new product features are permitted.

Deciding what filing process to use can have a profound impact on when the product will be available for market. This decision process often causes a tug of war between the lawyers and the marketing people.

The marketing people always want to get the product to market as soon as possible. They view the regulatory process as an unnecessary intrusion into the “real” business of product sales.

Meanwhile, the lawyers are worried about liability and relations with the SEC staff. Often, they tend to be very conservative about the type of filing to be used.

Unfortunately, this is an instance where it is not possible to determine if the decision is right or wrong until after the filing is made. We find the SEC staff generally tends to side with the more conservative lawyers on the issue–when in doubt, the staff wants to take a more detailed look at new product features.

The repercussions of a wrong decision on what type of filing to make can be great.

First of all, counsel for insurers have an ongoing relationship with the SEC staff. No lawyer wants the reputation of being a wild cowboy! Particularly not with the people who regulate the products the lawyer supports. Therefore, counsel for insurers have an incentive to take a conservative approach to decisions about which types of filings will be used with riders that incorporate new product features.

Moreover, a wrong decision as to the type of filing to use can result in the insurer losing its ability to make the more expeditious “B” filings–a fate no lawyer wants to have on his company’s record.

At the present time, we are not seeing many new product features being brought to market via the use of riders, at least not on variable products. We are not sure why this is the case, but it is probably a result of the poor performance of the stock market during the first 3 years of this decade.

Hopefully, as market conditions continue to improve, the number of riders filed will increase.

For now, we are seeing a greater number of new features being added to some of the more non-traditional fixed insurance and annuities, such as equity index products. This probably represents the growing popularity of these products in the current marketplace.

Norse N. Blazzard, JD, CLU, and Judith A. Hasenauer, JD, CLU, are attorneys in the Pompano Beach, Fla., office of Blazzard, Grodd & Hasenauer, P.C. Their e-mail address is: Norse.Blazzard@bghpc.com.

The repercussions of a wrong decision on what type of filing to make can be great

Weigh These Factors

Use a ‘Sticker’: Consider if the rider contains a minor, non-material modification to an existing variable product feature.

Use a ‘B Filing’: Consider using this more formal filing for a new variable product feature that is more substantial than a simple modification, does not involve a death benefit or living benefit, and does not levy additional charges

Use an ‘A Filing’: Consider using this type of formal filing if the rider charges for the new feature, includes a death benefit or living benefit, or makes a material modification to the original variable product.

Source: Norse N. Blazzard and Judith A. Hasenauer, Blazzard, Grodd & Hasenauer, P.C., Pompano Beach, Fla.