Insurance regulators in New York state are getting ready to implement a new regulation that could affect how life insurers implement some types of premium increases and parameter changes involving in-force life insurance policies and annuities.

New York regulators began working on the regulation in 2008, in part in response to reports about problems with “vanishing premium” life insurance products, or interest-sensitive life insurance policies set up in such a way that the effects of interest earnings on policy cash value were supposed to eliminate the need for the holders to make premium payments. A sharp, prolonged drop in interest rates threw off the original calculations and forced the holders to begin paying premiums to keep policies in force.

(Related: Interest Rate Fears Hit World’s Life Product Menus)

The new regulation is set to take effect March 19, 2018. If the regulation takes effect on time, and works as regulators expect, it could end up affecting how insurers make some types of changes in crediting rates and indexed account parameters, as well as how they make changes in life insurance premiums.

The regulation works mainly by requiring the insurers to send new notices to the state Department of Financial Services (DFS), and by setting new standards for notices for consumers.

The department has posted a copy of the new regulation here.

Maria Vullo, New York state’s financial services superintendent, said in a statement about the new regulation that the state DFS hopes the regulation will protect state residents against unfair cost increases.

“With this department, DFS will have the ability to review increases by life insurers and ensure any increases comply with law, and consumers will be provided advance notice of any adverse changes to their premiums,” Vullo says.

Although the regulation would apply on in New York state, it could affect how regulators in other states write and apply their own regulations.

For a look at seven things to know about the regulation, based on a DFS summary of the regulation and a DFS analysis of comments on a draft version of the regulation, read on.

Calendar (Image: Thinkstock)

(Image: Thinkstock)

1. The regulation changes state and consumer notice rules.

An insurer making many types of “adverse” premium and parameter changes must note state regulators 120 days before making the change, and it must notify consumers, with a special notice, at least 60 days before making the change.

2. The regulation affects changes in “non-guaranteed elements” in a life insurance policy or annuity contract that are based on expectations about future performance other than investment performance.

Regulators say an insurer will have to comply with the new rules if, for example, it cuts crediting rates because of concerns about the future effects of variables such as low contract sales or high lapse rates.

An insurer would not have to use the new rules to make changes in crediting rates or indexed account parameters that are due entirely to changes in expected investment income or hedging costs, according to the DFS analysis of comments on the draft version of the regulation.

“Changes due to, for example, changes in interest rates should be straightforward and need not be reviewed,” officials say in the comment analysis.

3. The regulation affects group annuities, and fixed accounts inside variable annuity contracts.

DFS official say excluding certain types of arrangements from the new requirements could lead to unfair treatment of the participants in those arrangements.

4. Some commenters questions whether DFS has the statutory authority to make the changes it’s making.

Insurers and insurance distributors have made many successful efforts to fight off implementation of federal and state regulations in the courts, and they may have started making their legal case against implementation of the New York regulation.

One commenter told DFS that, once DFS conducts a review and proposes changes, the changes should be voluntary, because anything else would exceed current DFS authority.

DFS officials contend that state law requires non-guaranteed elements in a life insurance policy or annuity contract to be based on reasonable assumptions, and that officials have the authority to ask for changes in non-guaranteed elements affected by changes in assumptions. 

— Read States Settle With Insurer on ThinkAdvisor.


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