Insurers selling life and annuity contracts in New York state will likely face additional overhead costs and a learning curve for sales staff under a new regulation geared toward increased consumer awareness that is set to take effect in August 2019, according to a new A.M. Best report.
The New York Department of Financial Services plans to implement Regulation 187, which significantly expands existing suitability standards in an effort to ensure that annuity transactions are in the best interests of consumers and meet any respective financial objectives. These same standards are set to apply to life insurance policies sold within New York state in February 2020.
According to a Bests Briefing, titled, Regulation 187 May Impact Sales Practices and Products Sold in N.Y. insurers will most likely incur higher costs, as training will be needed for both producers and insurers sales support functions. Suitability requirements vary depending on the type of product involved in a transaction. Regulation 187 requires less stringent suitability categories for term life products having no cash value and limited optionality than it does for other life and annuity products. These suitability categories apply to any sales or in-force transactions. Sales transactions are considered as a policy purchase, replacement or conversion, or any modification of an in-force policy that leads to new sales compensation, according to the report.
The report also notes that in-force transactions may pose a challenge for insurers and producers, as the suitability criteria may not have been met at the original point of sale. Under the new regulation, producers and insurers must have a reasonable basis to believe consumers have been informed of both the favorable and unfavorable features of a policy. In addition to product features, the benefits of deferred tax growth need to be understood, as well as suitability of fund choices and rider options for products such as variable annuities or other products with such choices.
While New York is taking the lead on this suitability standards issue, the National Association of Insurance Commissioners (NAIC) is drafting a model regulation covering suitability in annuity transactions that could be used by other states. In its most recent form, the NAICs model regulation has similar definitions of suitability, insurer and producer responsibilities, and insurer supervision as Regulation 187. However, Regulation 187 goes much further by including life and annuity products, as well as in-force transactions.
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