New York Amends Controversial Provisions of Replacement Regulation
April 8, 2015
| Agents of America
After almost two decades, the New York Department of Financial Services (DFS) has approved amendments to New York Insurance Regulation 60, which will now permit insurance agents to immediately bind coverage where an existing life insurance policy or annuity contract is being replaced. The Third Amendment to Regulation 60, effective April 21, 2015, will allow insurers to begin underwriting new applicants on an expedited basis and will make buying insurance over the internet more feasible. Insurance agents and insurers will have to decide whether they want to take advantage of this new procedure, and if they do, file revised Regulation 60 procedures within 30 days of April 21, 2015.
Background: Regulation 60’s Two-Step Application Process
In 1998, Regulation 60 was revised to require New York insurance agents to engage in a two-step application process when a new life insurance policy or annuity contract was to be issued in New York and that policy or contract was replacing existing coverage.
The two-step process works as follows: A Definition of Replacement Form, which defines whether the particular transaction involves the replacement of existing coverage, must be completed with, or as part of, every application. Where a replacement is to occur as a result of the issuance of a new life insurance policy or annuity contract, the insurance agent must provide the applicant with an Important Notice Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts as well as a completed Disclosure Statement, no later than at the time the application is taken. The Important Notice is a requirement found under replacement regulations outside of New York. By contrast, the Disclosure Statement, which is designed to provide a side-by-side comparison of the existing coverage and the new coverage, is exclusively a New York mandate. In order to provide this comparison, the applicant authorizes the existing carrier to provide the relevant information to the agent and the agent requests such information from the existing carrier. The existing carrier has 20 days to comply with this request for information. The practical effect of this process is that once the agent identifies the transaction as involving a replacement, the application process must stop and the initial meeting must end. The agent must then wait up to 20 days for the existing carrier to provide the information for the Disclosure Statement. Once this information has been obtained and the Disclosure Statement has been completed, the agent can then meet again with the applicant to complete the application and other point of sale documents.
Confusion over the timing of completion of the Definition of Replacement Form, the insurance application, the Important Notice and the Disclosure Statement, as well as frustration over the delay that the regulation imposed on the application process, persisted for years after the regulation went into effect. Many agents obtained the information for the Disclosure Statements from the existing carriers in advance of every meeting with the client, so that the Disclosure Statement could be prepared and provided to the applicant at the same time that the application was signed. In instances where agents engaged in these practices, the Definition of Replacement Forms, Important Notice, application, and Disclosure Statement were all signed on the same date. Common dating of each of these forms was a red flag for DFS during market conduct examinations of agents and carriers. While Regulation 60 contains no specific dating requirements, the regulation does require that the Disclosure Statement be presented to the applicant no later than the date upon which the application was taken. This requirement indirectly dictates that the Definition of Replacement Form must be signed on a date before the application is signed. This is because where the applicant has indicated a replacement on the Definition of Replacement Form, the agent does not have the information necessary to complete the Disclosure Statement at that same time. Instead, the agent has to secure authorization from the applicant to obtain the information from the existing carrier and wait to obtain the data necessary to complete the Disclosure Statement. The regulation was designed in this way not only to provide consumers with more information, but also to give the existing carriers time to conserve the business. Many carriers whose Regulation 60 files were subject to market conduct review experienced multiple violations and significant fines where these forms were dated in such a way as to demonstrate non-compliance with the two-step process.
Over the years, various industry groups have attempted to amend the regulation to eliminate this two-step process and permit insurance agents to submit an application immediately without having to stop the sales process where a replacement is involved. The new amendments will facilitate this goal.
Amendments: Application Can Be Taken Without Completed Disclosure Statement
Under the revised regulation, the Disclosure Statement must be provided to the purchaser no later than at the time the policy is delivered. This change allows the agent to complete the application and submit it for underwriting before the company whose policy is being replaced provides the information for the Disclosure Statement. Additionally, moving the Disclosure Statement requirement to the back-end of the transaction limits the amount of revised Disclosure Statements that may need to be provided to the applicant. This is because Regulation 60 requires the applicant to receive an amended Disclosure Statement when the policy is issued other than as applied for. When the Disclosure Statements had to be presented at the time of application, there was a greater chance that the terms and conditions of the policy would change during the underwriting process. With the Disclosure Statement being provided at the time of delivery, presumably any changes made to the policy as applied for would have already occurred and will be captured in the original Disclosure Statement. Also, while the agent still has to sign the Disclosure Statement, the revisions grant the insurer discretion as to whether to the applicant has to sign the Disclosure Statement. If the insurer decides to require the applicant’s signature, the applicant must sign the same Disclosure Statement as the agent.