United States: New York Adopts Non-Guaranteed Elements Rule For Life Insurance And Annuity Products

On September 19, the New York Department of Financial Services promulgated the final version of new Regulation 210 "Life Insurance and Annuity Non-Guaranteed Elements" (the "Rule").The Rule takes effect on March 19, 2018.

As discussed in our recent Expect Focus article on the Rule's previous draft, which the Department exposed for comment on May 24, the Rule will impose comprehensive requirements on insurers offering individual and group life insurance and annuity products in New York containing non-guaranteed elements (NGEs), including requirements for board-approved determination policies, substantive requirements for NGE determinations, and mandated disclosures and notices to the Department and policy owners of NGE changes. We also noted in our article that the Department received comments on the May 24 draft and informally advised us that the final Rule would incorporate only "non substantive" changes. That proved true, as only the following clarifying changes were added to the final Rule:

  • Section 48.1(h)'s definition of "Experience factors" was clarified to reflect that experience factors are to be determined by reference to the insurer's financial experience on "a class of policies," as contrasted with a reference to "a policy" in the prior version.
  • An additional sentence was added to Section 48.1(l)'s "Non-guaranteed element" definition to clarify that the NGE definition does not include current annuity rates.
  • The earlier version of the Rule made reference to "profit margin" without defining those words. The final Rule defines profit margin in new Section 48.1(o) as "expected revenues less costs."
  • The actuarial memorandum required for new policy forms by Section 48.4(b) somewhat relaxes the content requirements by requiring only "sufficient detail of the pricing assumptions," as contrasted with a "a tabulation by pricing cell," for the specific points to be addressed in the actuarial memorandum.

As with the May 24 draft Rule, the final Rule was accompanied by an Assessment of the Public Comments, which provides insights into the Department's positions on 37 unique comments submitted to the Department on the May 24 draft Rule. Particularly noteworthy were the Department's remarks in rejecting comments that had suggested the following modifications:

  • One commenter recommended that the Rule should clarify that insurers are not required to make NGE changes as this requirement would exceed the Department's statutory authority. The Department noted that "certain sections of the law require non-guaranteed elements to be based on reasonable assumptions. If an assumption is no longer reasonable it needs to be changed, which may mean that one or more non-guaranteed elements would change." The Department also noted the Rule establishes thresholds for making NGE changes, which must be applied fairly to both increases and decreases in non-guaranteed elements.
  • Three commenters recommended that instead of requiring the profit margin at a given policy year be fixed, the Rule should require only that the present value of profits be fixed from the time of an NGE change. The Department responded by stating that its concern with this approach is that if profit margins are increased at certain durations and reduced at others, some policyholders could be harmed.
  • One commenter suggested that the Rule's requirement for a new actuarial memorandum when NGEs are changed for new issues should not apply to changes in interest crediting rates. The Department did not change the Rule because it believes that changing interest crediting rates for only new issues might imply the creation of a new pricing class.
  • One commenter recommended exempting fixed accounts from variable annuities from the Rule. The Department believes the Rule's protections are needed for such accounts.

With the effective date of the Rule only six months away, insurers would be well advised begin work to comply with the Rule, such as the required "Board-approved criteria" for determining non-guaranteed charges or benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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