Plugged Into Insurance @ Hinman Straub – September 10, 2018

New York Market Conduct Issues

The New York Department of Financial Services (“DFS”) recently posted Consent Orders on its website addressing violations found in the context of market conduct examinations. New York insurers should evaluate their compliance with the issues raised in these Consent Orders as similar concerns are likely to be scrutinized by DFS in other ongoing or future examinations. Some of these issues are:

Third Party Administrative Agreements. An insurer is responsible for compliance with New York laws and regulations regardless of whether their business is being administered by a third party. Insurers should review these agreements to make sure that they address New York specific laws and regulations and develop mechanisms to ensure that the third party is following the New York mandated protocols and procedures. If, for example, the third party is assisting with the issuance of new business, the insurer’s agreement with the third party should address the third party’s compliance with the multitude of New York’s point of sale requirements.
Lapse Notices/Premium Notices. New York law sets forth certain time periods for sending lapse/premium notices and annual notices and also requires that certain disclosures be included on these notices. Failure to comply with this statute results in an otherwise terminated policy remaining in force for a year after it would have defaulted. New York insurers should review these notices for compliance with these laws.
Preliminary Information Statement and Policy Summary. New York law, and accompanying regulations, address what types of disclosures must be provided to the consumer at the time of application and delivery of a life insurance policy or annuity contract. Certain information must be included in these documents and they must be provided in accordance with the time frames set forth in the law and regulations. Insurers should review their processes and procedures regarding these disclosures in terms of whether they are using the proper document, whether the document contains all required elements and whether the document is being provided to the consumer in the proper sequence.
There are many laws and regulations that govern the advertisement of life insurance policies, annuity contracts and accident and health benefits in New York. Non-compliance with these various laws and regulations are a frequent source of market conduct violations. The recent consent orders reference noncompliance with disclosure of benefit ratios and accelerated death benefits as well as failure to retain the requisite advertising records and associated documentation at the New York home office of the domestic insurer. Insurers should review their advertising for compliance with these laws and regulations as well as ensure that the proper documentation is retained at the Home Office.
New York’s replacement regulation is complex and differs from that in other states. Insurers are frequently cited for non-compliance with the required elements of the Disclosure Statement, failure to properly date documents, and providing the documents in the improper sequence. Insurers are responsible for training their producers on these requirements and for filing written procedures with DFS. Insurers should review these procedures and new business protocols to ensure that the many aspects of this regulation are being properly implemented and administered.

For more information and assistance on this topic, please email Sandra McDermott or call 518.689.7224.

Insurance Regulation 187

The New York Department of Financial Services (“DFS”) recently finalized New York Insurance Regulation 187, Suitability and Best Interests in Life Insurance and Annuity Transactions. The regulation will go into effect as to annuity transactions on August 1, 2019 and as to life insurance transactions on February 1, 2020. The regulation applies to any transaction or recommendation with respect to new sales and in-force business and requires insurers to establish and audit a supervision system to ensure compliance with the regulation. Additionally, insurers must develop systems designed to prevent “financial exploitation and abuse” as defined in the regulation. Most notably, the regulation establishes a “best interest” standard to be applied to new sales and certain in-force transactions and dictates that only the interests of the consumer be considered in making any recommendation. Disclosure of differences in producer compensation among products as well as producer compensation generally is part of the “best interest” analysis.

The regulation also mandates disclosure to the consumer of all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for the recommendations and requires that certain information be documented to support the basis for making any recommendation. This regulation will require insurer’s to revise their existing annuity suitability procedures to address, at a minimum, the following new requirements; (i) mechanisms to ensure that the best interest standard is being met; (ii) procedures for in-force transactions; (iii) inclusion of life insurance sales and in-force life insurance business in the procedures; (iv) agent training and supervision; (v) audit procedures. To the extent that these procedures are administered by a third party, the insurer should review any existing third party administrative agreements to determine whether revisions are necessary in light of the new regulatory requirements.

For more information and assistance on this topic, please email Sandra McDermott or call 518.689.7224.

Ancillary Services

Life insurance companies licensed in New York (“insurers”) have offered various types of ancillary (also called non-insurance or value added) services or benefits with their group insurance products, most typically group life insurance and group disability insurance, for a number of years. These ancillary service offerings were typically made in a transparent manner. Nevertheless, the Department of Financial Services (DFS) has been raising objections to the offer of ancillary services by insurers as a part of the group insurance sale and/or solicitation. These objections have been raised during market conduct exams as well as directly with insurers via inquiries where the offer of ancillary services has come to the attention of the DFS, sometimes as a result of a complaint by a competitor insurer. The DFS has taken the position that the offer of the ancillary services is a violation of New York Insurance Law Section 4224(c) because the inducement is not specified in the policy.

Based on its interpretation of Section 4224(c), the DFS has been pursuing violations against a number of insurers in view of their offering of ancillary services as part of the group insurance sale or solicitation. These actions pending against insurers are at various stages, and the penalties being imposed are significant. While an insurer has the right to contest the DFS position via a formal hearing before the DFS as well as a court proceeding, we are not aware of any insurer which has chosen to pursue that route.

Important considerations regarding continued offering of ancillary services with group life insurance and group health insurance products in New York include:

Previously approved “Other Goods and Services” language probably does not satisfactorily address the potential improper inducement violation. The inducement must be fully described in the policy or rider;
The $25 valuable consideration exception in Section 4224(c) is exceeded and is therefore not applicable in the majority of circumstances reviewed by the DFS; and
An explanation must be provided to the DFS demonstrating the direct nexus between the proposed ancillary services and the life insurance or health insurance coverage with which they will be offered.

For more information and assistance on this topic, please email Fred Bodner or call 518.689.7296

Supplement No. 1 To Insurance Circular Letter No. 20 (2017) Insurance Producer Compensation For Accident And Health Insurance Policies And Contracts-Update

In response to the number of questions generated by the industry regarding Insurance Circular Letter No. 20 (2017) and accompanying Supplement No.1, DFS agreed to develop FAQs to provide further guidance. DFS is in the process of preparing the FAQs which we expect to be issued within the next month.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.

Cybersecurity Examinations Update

The Department of Financial Services’ (“DFS”) Cybersecurity Regulation (23 NYCRR 500) is now largely in play, and the DFS has begun examining insurers to ensure their compliance with its provisions. Upon notifying insurers of its intent to perform an examination, the DFS has been providing a detailed letter requesting a host of cybersecurity-related materials in advance of the exam. This letter calls particular attention to compliance in the following areas, requesting substantive data from insurers in each area:

Risk assessments and procedures for updating them;
Third party service provider agreements, management, and controls;
Data governance and classification;
Access controls, physical controls, systems security, and network security;
Involvement of the Company’s Board in the cybersecurity program; and
Cybersecurity training records.

As expected, the Department’s examiners have been vigilant in enforcing the Regulation’s provisions. Upon commencement of the on-site exam, our clients have received additional detailed requests for supplementary documentation, including grouping/ranking their third party service providers by significance and criticality, appropriate testing of incident response plans, and information on encryption protocols.

For more information and assistance on this topic, please email Ben Bodner or call 518.689.7215.

Volunteer Firefighters Enhanced Cancer Disability Benefits Coverage

Beginning January 1, 2019, every legally organized fire district, department or company in NYS will be required to provide and maintain, for each eligible volunteer firefighter, enhanced cancer disability benefit insurance.

Volunteer firefighter enhanced cancer disability benefit insurance is subject to the following DFS regulatory requirements:

Policies must comply with the minimum benefit standards set forth in 11 NYCRR 52.22;
Coverage may only be issued as a stand-alone policy;
No preexisting condition limitation or exclusion may be imposed; and
Benefits may only be denied if:
- The volunteer firefighter does not have five or more years of service as interior firefighter; or
- The volunteer firefighter did not successfully complete a physical examination, prior to the commencement of duties as an interior firefighter, which examination failed to reveal any evidence of cancer; or
- The volunteer firefighter has not passed five yearly fit tests; or
- The volunteer firefighter ceased to be an active volunteer firefighter for more than 60 months prior to the submission of the claim for benefits; or
- The volunteer firefighter is receiving or has already received benefits as a paid firefighter under General Municipal Law article 10; or
- The diagnosis of cancer is not for type covered by the policy; or
- The volunteer firefighter does not have a total disability as referenced in General Municipal Law section 205-cc(2)(c).

In order to be eligible for volunteer firefighter enhanced cancer disability benefit insurance , a volunteer firefighter must have:

Served for at least 5 years as an interior firefighter;
Passed at least 5 yearly certified mask fitting tests;
Received a physical exam which revealed no evidence of cancer prior to the commencement of volunteer services; and
Received a diagnosis of a disease caused by an uncontrolled division of abnormal cells in any part of the body or malignant growth or tumor affecting the lymphatic or hematologic systems or digestive, urinary, prostate, neurological, breast or reproductive system or melanoma.

Benefit eligibility continues for 60 months after formal cessation of status as an active volunteer firefighter.

In order to ensure approval of a product for this market, we recommend submission to DFS no later than October 15, 2018.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.