The New York State Department of Financial Services (DFS) recently issued guidance on actions it will take to ensure compliance with suitability review requirements concerning annuity sales and replacements. See December 8, 2016 Press Release at http://www.dfs.ny.gov/about/press/pr1612081.htm

The December 8, 2016 guidance (Insurance Circular No. 7 (2016)) can be found at: http://www.dfs.ny.gov/insurance/circltr/2016/cl2016_07.htm

This guidance follows recent investigations by DFS which revealed that insurers, producers and distributors were violating N.Y. Ins. Reg. 187 (11 NYCRR 224) and 60 (11 NYCRR 51) by recommending replacement of existing deferred annuities with immediate annuities, without providing a comparative analysis with regard to lost benefits and income benefits.

DFS indicated that it will conduct further industry-wide review and that it is taking action with regard to improper replacements. The following are suggestions on how life insurers, producers and distributors might respond to the new DFS guidance in this area: How can New York insurers and producers improve compliance?

In recommending an annuity sale or deferred-to-immediate annuity contract replacement consider:

  • Are there “reasonable grounds” to support that the recommendation is suitable?

In making this determination, analyze:

- Facts disclosed by the consumer regarding consumer investments, other insurance policies or contracts, and other “suitability information.”

  • With regard to “suitability information” see 11 NYCRR 224.3(e):
    • Consumer age
    • Annual income
    • Financial situation and needs (including resources for funding the annuity)
    • Financial experience
    • Financial objectives
    • Intended use of the annuity
    • Financial time horizon
    • Existing assets (including investments and life insurance holdings)
    • Liquidity needs
    • Liquid net worth
    • Risk tolerance
    • Tax status

1) Inform the consumer. The consumer must be reasonably informed regarding the features of the annuity contract;

2) Evaluate whether the annuity is beneficial to the consumer. The consumer must benefit from the features of the annuity contract;

3) Be particular. The whole transaction must be suitable for the particular consumer based on that consumer’s suitability information. All contracts, subaccounts, riders and similar product enhancements, if any, must be suitable. 4) Consider the whole. With regard to suitability in a replacement transaction consider:

a. Any surcharges, the surrender period, loss of existing benefits, tax implications, increased fees, investment advisory fees, and charges for riders or similar product enhancements;

b. Whether the consumer would benefit from the annuity contract enhancements and improvements; and

c. Whether the consumer had another annuity replacement, in particular, within the last 36 months.

  • Ensure that the producers are adequately trained and knowledgeable with regard to the product. 11 NYCRR 224.4(g) and (h).
  • Establish and maintain a supervisory system designed to achieve compliance with the above.11 NYCRR 224.4(f)
  • Explain the reasoning behind a replacement using the form Disclosure Statement found at Appendix 10B to Regulation 60. 11 NYCRR 51.5(c)(7).
  • Have agent or broker complete and sign the Disclosure Statement prior to delivery of the contract.
  • Examine the sales material to determine accuracy and compliance with the law.
  • Deliver completed Disclosure Statement to the contract-holder no later than delivery of the contract. 11 NYCRR 51.6(e).

Following the foregoing should reduce potential violations and mitigate DFS compliance and enforcement proceedings.