A new analysis by A.M. Best confirms what many insurers feared: New York's best-interest rules are going to increase the costs of doing business in the state.
New York finalized its best-interest standard in July for both annuity and life insurance sales. The state's best-interest regulation is considered one of the toughest in the country, one that New York officials are lobbying the National Association of Insurance Commissioners to endorse.
According to a Best’s 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.
Avoiding New York
Some insurers might opt to follow Allianz, which does not sell in New York. Others are facing the higher costs of compliance.
The New York rules come with an effective date of Aug. 1, 2019, for annuity contracts, and six months afterward for life insurance contracts.
The New York rules would:
- Require disclosure of all suitability considerations and product information that form the basis of any recommendation.
- Permit agents or brokers to make a recommendation only if they have a "reasonable basis to believe that the consumer can meet the financial obligations under the policy."
- Prohibit an agent or broker from telling a consumer that a recommendation is part of financial planning, investment advice or related services (unless the agent or broker is a certified professional in that area).
Additionally, the proposed regulation would require insurers to "establish and maintain procedures to prevent financial exploitation and abuse," disclose to customers all relevant policy information in order to evaluate a transaction, and provide to producers all relevant policy information in order to evaluate a replacement transaction.
The New York standard would continue to exempt policies/contracts used to fund qualified retirement plans, ERISA plans and employer-sponsored IRAs. The proposal also would not apply to sales of mutual funds or other securities, unless related to an annuity or life insurance product.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.
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