Empire State Adopts ‘Best Interest’ Standard for Life Insurance and Annuities

The New York State Department of Financial Services (DFS) has finalized regulations implementing a “best interest” standard for those licensed to sell life insurance and annuity products.

Touted as an effort to protect New York consumers from conflicted advice, the final regulation requires insurers to establish standards and procedures to supervise recommendations by agents and brokers to consumers with respect to life insurance policies and annuity contracts issued in New York.

A statement by the DFS suggests that the regulation “will fill in regulatory gaps” resulting from the elimination of the Department of Labor’s conflict of interest rule, following the ruling by the U.S. 5th Circuit Court of Appeals.

“As the federal government continues to roll back essential financial services regulations, New York once again is leading the way so that consumers who purchase life insurance and annuity products are assured that their financial services providers are acting in their best interest when providing advice,” Financial Services Superintendent Maria Vullo said in a statement announcing the regulation.

The new rule builds on an existing New York State regulation that contained suitability standards for annuity transactions. It continues to exempt plans covered by ERISA and other retirement and deferred compensation plans maintained by employers, but expands the scope with a so-called best interest standard for insurance producers, life insurers and annuity writers.

According to the statement, the final regulation amends New York’s current suitability regulation to provide for a “best interest standard of care” for all sales of life insurance and annuity products, including both in the specific context of retirement planning, when recommendations are made prior to the sale of an insurance product or after the sale but during the servicing of the product for the consumer.

The new language in the regulations appears to be very similar to the ERISA prudent person rule. It reads, in part, that, in recommending a sales transaction to a consumer, the producer or insurer acts in the best interest of the consumer when:

  • The recommendation is based on an evaluation of the relevant suitability information of the consumer and reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing.
  • Only the interests of the consumer are considered in making the recommendation.

The producer’s receipt of compensation or other incentives permitted by New York State insurance law and regulations is permitted by the final regulation provided that the amount of the compensation or the receipt of an incentive does not influence the recommendation.

In addition to other described conditions, the revisions specify that a producer or insurer in making a recommendation “may weigh multiple factors that are relevant to the best interests of the consumer including, but not limited to, the benefits provided by the policy, the price of the policy, the financial strength of the insurer, and other factors that differentiate products or insurers.”

Insurers are also required to develop and maintain procedures to prevent financial exploitation of consumers under the revised rule.

The new regulation becomes effective Aug. 1, 2019, but compliance will be phased in. To wit:

  • Insurers and producers will be required to comply with the requirements for any annuity contract transactions beginning on the Aug. 1, 2019 effective date.
  • For transactions concerning a life insurance policy, insurers and producers will be required to comply with the new requirements six months from the effective date, or Feb. 1, 2020.

The DFS first proposed the new regulations in December 2017 and subsequently issued a revised proposal in April 2018.

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