Reg 187 Battle Lines…Written

PIANY and Big I Join in Opposition, as DFS Promulgates Reg 187

Article 78 proceeding started, as agents see harmful “vague standard” and worse.

Not sure how the seemingly nonexistent balance of power in Albany will affect an insurance agents petition to stymie proposed Regulation 78 initiated by the PIANY and the Big I together, but the consent of an insurer segment won’t help much.

It looks to us as if DFS Supt. Maria Vullo may well have the last word on the controversial Regulation. Following the press releases and arguments of the PIANY and Big I of New York, she issued a statement that expresses the solidarity of the life insurance industry with the Reg.  “The Department of Financial Services (DFS) is pleased to have the support of New York’s nation-leading life insurance industry for our Regulation 187, which sets a best interest standard for the recommendation of life insurance and annuity products.  The industry agrees with DFS that it is prudent, fair and reasonable – and just simply the right thing to do – to act only in the consumer’s best interests and obtain necessary financial and risk information from their clients in order to recommend a specific policy based on that data.  Given the vital role that insurance products play in providing financial security to New Yorkers, it is essential that providers not be influenced by a producer’s financial incentives, adhere to a higher standard of care and only recommend insurance and annuity products that are in the consumer’s best interests.”

It appears that the agents’ have an uphill battle – not unusual for them; it’s the kind they have won in the legislature historically, but then there are the courts.

To fight back against what they call “overreach” by the Department the two groups, which represent the vast majority of independent agents and brokers in New York, filed a legal challenge to the recently adopted amendment to Regulation 187 that imposes, they hold,  “a vague standard of best interest on the sale of life insurance and annuities”. The suit seeks to have the amendment voided in full.

This new standard, they reason, would significantly alter the agent/broker-customer relationship. The agents argue that the amended regulation would require agents and brokers to obtain detailed financial and risk information about their customers, and then recommend a specific policy based on that data—similar to the way financial investment products are offered. This would overturn decades of well-established case law that holds agents and brokers have no duty to recommend, and consequently significantly increase the risk of E&O lawsuits.

They make a strong point, i.e. that the new standard is subjective and “fails to instruct agents/brokers whose best interest they must consider; be it the policyholder, beneficiary, or owner of a policy—interests which are rarely, if ever, perfectly aligned.”  The new standard will leave the insurance-buying public with reduced access to affordable coverage, they hold, although that may be hyperbolic to prove the point that the desirability of doing business in the State will discourage agents and their clients.

For now, the associations hold, the troublesome amendment affects only life insurance and annuities, but serves to augur serious concerns that the Department could later expand the “best interest” standard to all insurance transactions.

“Life insurance is not a uniform, one-size-fits-all product and coverage recommendations should not be regulated. Restricting how an agent communicates with his or her client does a disservice to that client, and will potentially lead to less access for consumers” said PIANY President Jamie Ferris, CIC, AAI, CPIA. Mr. Ferris further remarked, “In a highly competitive business environment, independent producers’ best marketing strength is their concern for their clients. Restricting open, honest discussion, driving out business, ultimately weakening the market will harm New York state’s insurance-buying public.”

The lawsuit identifies six separate legal grounds which challenge the amended regulation. Among the key contentions are: the DFS overstepped its authority; violated the State Administrative Procedures Act; created an unconstitutionally vague regulation; and acted in an arbitrary and capricious manner. During the amendment’s public comment period, both Big I NY and PIANY attempted to work in good faith with the DFS to create a balanced approach that would serve customers’ interests while protecting consumer access to the market.

“The DFS is failing one of its most important responsibilities: to ensure New York’s public has access to a healthy insurance market, with multiple products and options for customers’ coverage needs. This amendment will drive business out of the state and leave the insurance-buying public with reduced access to affordable coverage choices,” said Big I NY Board Chairman Louis Atti, CPCU. “That’s in nobody’s best interest.”

Earlier this year, writing on behalf of the Big I,  lobbyist Jill Muratori addressed these and other concerns to Deputy Superintendent Regalbuto. She writes: “Ultimately, we believe the proposal will make buying life insurance more complicated for consumers and lead to fewer consumers buying these important policies.”

Here are objections listed:

The Department has created an exemption from the entire regulation for policies purchased in response to a direct solicitation where no producer is involved, and no recommendations made.

This exemption raises concerns, most notably that it will be much easier for a company to sell life insurance and annuities directly, without producer involvement.

For example, if a product is sold directly with no insurance producer involvement the insurer does not need to consider any suitability information at all.  If the same product is sold by a producer, the producer must go through the laundry list of suitability questions. This doesn’t make sense if the product the consumer is purchasing is the same. The Department has established an exemption that will ultimately harm consumers by depriving them of receiving advice and recommendations they may want.

The Department has made some changes to the types of suitability information that must be considered by producers when selling term life insurance. We appreciate that the Department has tailored this provision for term life sales, but it has not been narrowed enough. The first three items of information are all that is required for most term life sales. Most consumers do not want and don’t need to get into a detailed conversation about their financial objectives or existing assets. Term life insurance is an important product that is already subject to numerous regulatory requirements that make it difficult to sell. These suitability requirements will only add to the difficulty of selling beneficial life insurance to consumers.

The proposal establishes a new “best interest” standard for producers selling life and annuity products.  While insurance producers are committed to providing the best possible products and services to their customers, Big I New York is still concerned that the language used in the proposal goes beyond imposing a “best interest” standard and is more akin to a fiduciary standard, which is not an appropriate standard for insurance agents selling simple life insurance products on behalf of their principal, the life insurance company. While the DFS did make a small change in the definition of “best interest,” the standard remains mainly the same and remains problematic.

We appreciate that the DFS made changes to the provision which previously stated that every producer in the transaction, regardless of whether the producer has direct contact with the consumer, is subject to the entire regulation. The changes now require a producer to have participated in the transaction. However, we remain concerned about how every producer will that may be involved in a recommendation will be able to comply with all parts of the regulation. For example, it will be the producer that has contact with the customer that discusses suitability information with the customer. How does the producer who doesn’t have contact with the customer comply with the regulation’s suitability requirements? Is it sufficient that the producer with no contact with the customer ensure that the producer that has the contact has complied with the suitability analysis?

The Department has split the definition of “transaction” into “sales transactions” and “in-force transactions.” In-force transactions do not generate a sales commission, yet the Department still applies a best interest standard to these transactions. This doesn’t make sense if the Department’s primary goal for instituting a best interest standard is to avoid conflicted advice by producers. There is no conflict present when a producer is simply carrying out a transaction requested by the customer and no compensation is involved.

The proposal includes new requirements on an insurer when it offers a fee-based version and a commission-based version of a policy, to provide to the consumer a comparison, in a form acceptable to the superintendent, showing the differences between the products. This requirement raises a question. What happens if only the fee-based version of a policy or only the commission-based version of a policy is available for sale by a producer because the insurer has restricted the version that the producer may sell? Is the insurer required to provide the comparison form when the producer working with the consumer is only permitted to sell one version?

Ms. Muratori concludes: “While we appreciate the fact that the DFS strives to protect consumers who purchase insurance, we ultimately believe this regulation seeks to solve a problem that does not exist, and which will result in fewer life and annuity sales in New York, and fewer policies sold where the consumer has access to advice and recommendations from an insurance professional.”

The case will be heard by a judge in the Third Judicial Department of the Supreme Court.[IA]