On Feb. 1, 2020, New York will apply Regulation 187 to all life insurance sales in the state. It remains to be seen whether carriers and producers are ready for it.
The biggest challenge is the lack of a suitability standard for life insurance, said Cailie Currin, CEO of Currin Compliance Services.
"There at least was already a general understanding of what suitability means on the annuity side and of what a good process looks like and that gave them a considerable head start when it came to applying this regulation," said Currin, speaking during a LIMRA webinar.
Regulation 187 was finalized in 2018 and took effect Aug. 1 of this year for annuities. It sets a best-interest standard for annuity and life insurance sales. It also mandates enhanced disclosure and documentation, required of the producer and insurance carrier, as well as training programs.
'So Much To Do'
Currin is not sure an added six months is enough time for everyone to establish processes for selling life insurance under the new rules.
"There’s so much to do and only a little bit more time and I think life companies are really feeling the pressure to get things done quickly," she said in response to a question from Joe Spada, chief compliance officer for Lincoln Financial Group.
A big complicating factor is that life insurance sales include many more post-issue options that generate compensation for the producer, said Currin, who started her 25-year career working for the then-NY State Department of Insurance. That means more work to have processes in place.
"An example of the kind of transaction that gets brought in would be a conversion from a term product to a whole life product, which would typically lead to new compensation," she explained. "So if there’s a recommendation involved with that process, there would be a sales transaction, which in turn triggers those highest obligations under Reg 187."
Producers might find the standards difficult to meet, Currin said, since Reg 187 is a mishmash of suitability and best-interest concepts. The best-interest duty of care is the "overriding duty" of the regulation, she said. Suitability forms a part of the requirements for satisfying that best-interest duty for sales transactions.
"In sales transactions, a producer can only meet the burden of acting in the best interest of consumers only if he or she recommends suitable products," Currin said. "But that alone is not enough. The producer has to use the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use."
Potential problems arise with this sentence: only the interests of the consumer shall be considered. Currin put "air quotes" around "considered" because it is difficult to define.
"Because even a fleeting thought can be 'considered,'" she noted. "So it means the producer’s interests can’t be considered at all."
The Same ... But Different
Currin introduced a very common sales scenario to explain just how diligent producers will have to be to avoid trouble under Reg 187.
In this scenario, a producer has two life insurance products and they are identical from the consumer’s perspective: no differences in the benefits, the charges, the favorable and unfavorable features. Both are suitable and the consumer considers them equal products.
"But from the producer’s perspective, the products are not identical," Currin said. "Perhaps the compensation differs in some way between the two. Maybe it’s the actual dollar amount that’s paid to the producer, but it could also be something like the method of payment or the speed of payment, or something that just is a smoother process form the producer’s perspective."
If the producer considers any of these compensation factors in his or her recommendation to the consumer, they fail to meet their obligation to act in the best interest of the consumer.
"Even though from the consumer’s perspective, they get the exact same product that they would have gotten had the other product been sold," Currin noted. "So what this means from a compliance perspective is that documentation from the consumer-driven basis for the recommendation is essential, especially in any case where there is a higher or a differently compensated product."
What Is A Recommendation?
It is important for producers to remember that a recommendation not to do something is also a recommendation that is covered by Reg 187. Also, the consumer has the right to reject the producer's recommendation, Currin said, and go with a different product.
"They’re entitled to do that," she said. "But the agent is going to want to have clear documentation that they recommended against it and the carrier would want to see that as well. What was it about that product that led the producer to question why or not it was suitable?"
Disclosures are huge in New York, and there are a lot of them. It can seem as though agents are just pushing off paperwork that the client can read later. Don't do that, Currin advised.
"One thing that would be a major red flag in terms of an agent meeting his or her duty to act in the best interest would be to just hand over a pile of these disclosure forms without spending the time to really walk through what is on each one of them," she added.
It is very important to talk the client through the product and cover all of the things that realistically could happen, Currin said. Consider that state regulators will be looking back retroactively and reconstructing the transaction via the documents that the agent provides.
"You want to be able to clearly note anything that is of particular importance," she said. "And there may not be anything that falls into that category. But if there is, if there’s some financial circumstance that might be important to know about, to remember when we’re looking back at this, you want to make a note of that."
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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