Jeanann Smith, DTCC Director of Wealth Management Services.
On August 1, 2019, the New York Insurance Regulation 187 “Suitability and Best Interest in Life Insurance and Annuity Transactions” (Reg 187) went into effect for annuity transactions, introducing a host of new compliance mandates for the annuities and life insurance industry.
We spoke with Jeanann Smith, DTCC Director of Wealth Management Services, about the implications of the new rule, and how DTCC’s Insurance & Retirement Services (I&RS) Insurance Profile can help clients meet the new best interest standards.
What is the New York State Best Interest Rule Regulation 187?
JS: Reg 187 redefines the meaning of clients’ best interests for both insurance carriers and producers who sell on behalf of those carriers, for annuity and life insurance transactions. It covers the recommendations of purchases, replacements and other post-issuance (in-force) transactions.
New York’s Department of Financial Services (NYDFS) issued Reg 187 last year. For annuities, the ruling became effective on August 1, 2019 and will be effective on February 1, 2020 for life insurance contracts.
To comply with the new regulation, additional disclosures, enhanced training and supervisory obligations are required to make sure that the “best interest standard” is being followed for both new and in-force contracts. Recommendations need to be based on an evaluation of the consumer to ensure that the insurance products are suitable and in the consumers’ best interest, and apply to both sales transactions and also to post-issuance transactions that are conversions or modifications of an in-force policy.
Reg 187 is intended to extend suitability and best interest protection to consumers of both annuities and life insurance. New York is among the first to enact these additional regulations to protect annuity and insurance clients, and many other states are expected to raise sales standards and follow suit. In fact, it’s my understanding that at least 17 states currently have a version of the best interest standard on their docket for review.
One of the more notable differences between the former DOL rule and Reg 187 is the inclusion of life insurance products, as the DOL ruling applied only to annuities.
What is the impact on the industry?
JS: One of the biggest impacts has been the added mandates on insurance carriers, by the inclusion of life insurance in the regulation, as well as differentiating new sales from in-force transactions. Client suitability was formerly delegated to the broker-dealer partners by the insurance carriers; while they can still delegate suitability, there are new, additional standards that can’t be delegated – such as creating training programs for Reg 187. Reg 187 requires the supervisory obligation of insurance carriers, training of the distribution partners and added disclosures. Insurance carriers or their distributors are now required to establish, maintain and audit a system of supervision, as it pertains to annuity transactions. The carriers now need to perform due diligence and abide by a suitability review process for risk-based audits to ensure they are following the best interest standard.
How does this new regulation impact DTCC clients?
JS: Each of our distribution partners is required to follow the best interest standard, which means every annuity contract or life insurance product sold in the State of New York will need to follow the new suitability standards: effective now for annuities and beginning in February for life insurance contracts. What type of information needs to be disclosed? How are financial advisors being trained? Who is responsible for supervisory obligation? These are some of the challenges facing the industry right now.
Recommendations for annuity and life insurance contracts must be based on the relevant suitability and only in the interest of the consumer. This includes disclosing to clients that there are several versions of a product, which may have different costs and benefits.
What solutions can DTCC offer to help clients meet Reg 187?
JS: Insurance Profile, an automated service that facilitates data exchange between insurance carriers and distributors, is a solution available today and can help our clients meet the requirements of Reg 187.
DTCC developed Insurance Profile in 2016 to help the annuities marketplace meet the greater demands for data transparency, and to comply with the original DOL fiduciary ruling. The service also affords insurance carriers the ability to deliver fee, expense and commission schedule information and enable distributors to enhance their disclosures to clients.
How exactly does Insurance Profile help with Reg 187 compliance?
JS: Insurance Profile provides access to the data needed for the additional disclosures and product comparisons required by Reg 187. It has the capabilities to provide information needed as it pertains to the best interest standard and helps to mitigate the compliance burden for our clients.
A Commission Schedule Transmittal, as well as a Fee & Expense Transmittal, are currently available to both carriers and their distributors. These tools allow carriers to submit and maintain standardized expense, fee and commission schedule data. Insurance Profile is the only repository for annuities distributors to access expense, fee and commission schedule data from carriers in a centralized location. It allows distributors to access expense data at the contract, feature/rider and fund (subaccount) levels from I&RS’ secure, centralized hub. Carriers submit and maintain the required data centrally, and distributors can retrieve it via a data file or through DTCC’s web portal. The service allows comparisons between products, giving the information needed to enhance disclosures, as they apply to the best interest standard.
DTCC is working to have Insurance Profile available for insurance contracts ahead of the effective date of February 1. There are still several outstanding issues in discussion, and to that end, DTCC is co-leading an industry working group with the Insurance Retirement Institute, the leading financial services trade association for the retirement income industry. We will share more information as further developments occur.