New York Delivers ‘Worst Fears’ With Tough Reg For Life Insurance

Industry officials delivered plenty of feedback to get New York to scale back its best interest rule for annuity and life insurance sales. That effort was answered this week when the final regulation was published largely unchanged.

"New York stepping out ahead of the NAIC has made our worst fears come true," said Kim O'Brien, CEO of AssessBEST, a compliance software company.

"It’s going to result in this very uneven, patchwork of regulation that is very difficult for regulators to enforce and difficult for consumers to understand," added O'Brien, who met with several state officials. [Disclosure: INN Publisher Paul Feldman is part owner of AssessBest]

New York'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.

The NAIC is months behind New York with its own best-interest regulation. During a June meeting in Kansas City, an NAIC working group rejected the inclusion of life insurance in its standard.

"Whether other states will follow the New York model, we don’t know, but it's concerning," O'Brien said. "The whole idea of the NAIC model is to establish uniformity across the 50 states."

'Leading The Way'

New York officials painted its rules as a necessary consumer protection in light of the federal government abdicating its responsibility.

"New York once again is leading the way so that consumers who purchase life insurance and annuity products are assured that their financial services providers are acting in their best interest when providing advice,” said Maria T. Vullo, superintendent of the New York Department of Financial Services.

The regulation emerged after the Trump administration pulled back from the Department of Labor fiduciary rule, Empire State officials have said. The DOL rule is gone for good after the Fifth Circuit Court of Appeals tossed it out March 15.

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.

Some Exemptions

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.

For all other sales, the proposal would require licensees to apply a standard very similar to the DOL’s best interest standard, as well as the ERISA prudent person rule.

As such, a recommendation is in the best interest of a consumer if it furthers the consumer’s needs and objectives, and is made “without regard to the financial or other interests of the producer, insurer or any other party.”

“Given the key role insurance products play in providing financial security to middle-class New Yorkers," Vullo said. "it is essential that a provider adhere to a high standard of care and only recommend insurance and annuity products that are in the consumer's best interests and not be influenced by a producer’s financial incentives."

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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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.