Thus far, at least three states (New York, Wisconsin and Kentucky) have issued warnings about firms trying to replace AIG policies, without adequately disclosing to customers the associated costs and without adequately establishing a reasonable basis for the change. In addition, the National Association of Insurance Commissioners (“NAIC”) has also begun to address these issues. At this stage, the states have issued only warnings; however, regulators will likely begin to examine the conduct of firms and representatives and, if appropriate, bring enforcement actions. In the past, firms and individuals have been sanctioned in connection with replacements. It, therefore, may be appropriate for firms to review their policies, procedures and surveillance tools for replacements.

New York, Wisconsin and Kentucky

On September 22, 2008, Eric R. Dinallo, New York’s Superintendent of Insurance, put out a release warning AIG policyholders to “be careful if approached to replace policies.” Mr. Dinallo’s statement noted that AIG’s insurance companies were “financially sound” and had “substantially more in assets than they need to pay all valid present and projected claims.” He also warned firms and agents that he would be issuing notices, reminding them of their responsibilities under New York Insurance Law to fully inform consumers of the possible costs of switching life insurance, annuity and other policies. Mr. Dinallo stated that it is untrue and “against the law” to tell someone to replace a policy because an AIG insurance company is in trouble and may not be able to pay a claim. (Click here for the link to New York’s release and a frequently asked question and answer page)

Similarly, on that same day, Wisconsin Insurance Commissioner Sean Dilweg cautioned insurance consumers about replacing or liquidating annuities, particularly those underwritten by AIG. He noted that his office would be “monitoring the suitability of annuity sales for activity that would appear to take advantage of the recent turmoil in financial markets.” (Click here for the link to Wisconsin’s release) On September 19, 2008, Sharon P. Clark, Kentucky’s Insurance Commissioner, wrote a notice to agents warning them that the state’s defamation and “twisting” statutes could apply if agents attempt to improperly replace AIG policies.


During the NAIC’s Fall Meeting, on September 23, 2008, the NAIC’s Life Insurance and Annuities (A) Committee (the “A Committee”) also addressed the issue of replacing AIG policies. The A Committee is chaired by Mr. Dinallo, and Mr. Dilweg serves as the Vice Chair. The A Committee adopted the Wisconsin insurer bulletin and consumer alert related to replacement solicitations in light of the AIG events. The A Committee adopted this as an “off agenda” item at a regularly scheduled quarterly meeting. Mr. Dinallo encouraged the other regulators serving on the A Committee to consider issuing similar notices.

Enforcement Actions

It is important for firms to know that regulators have brought several enforcement actions in connection with replacements. For example, earlier this year, FINRA fined a firm $225,000 for making unsuitable sales of deferred variable annuities to 23 customers and for having inadequate systems and procedures governing annuity exchanges. In addition to the fine, FINRA ordered the firm to allow the customers to sell their variable annuities without penalty and to pay restitution to certain of the customers. (Click here for the link to FINRA’s press release).

Three years ago, NASD (now FINRA) fined another firm $5 million and ordered it to pay restitution of up to $11 million to settle charges relating to thousands of variable annuity exchanges. In addition, the firm was ordered to pay a fine of $2 million to state regulators. The charges arose out of an “aggressive campaign” to switch customers from one issuer of variable annuities to another issuer. In addition, the firm’s former president and the firm’s former national sales manager were suspended and fined. (Click here for the link to FINRA’s press release)

Policies, Procedures and Surveillance Tools

As always, firms should remain diligent in their review of replacement transactions. In particular, firms may consider the need to review their existing procedures and checklists related to replacements and determine whether they should be revised or updated in light of recent events. In addition, firms should consider the need to provide education and training to their field force about the level of regulatory scrutiny being placed on certain replacement transactions.