In July 2019, the New York Department of Financial Services (DFS) announced an amendment to New York Insurance Regulation 187 that affects annuities and life insurance sales. It requires insurers to establish new standards and procedures for how agents and brokers make insurance and annuity product recommendations. In this article, I’ll explain the amendment, what it means for insurers and producers, and where you can get more education on this regulatory change.
The “Best Interest Rule” is an amendment to existing New York State suitability standards for annuity transactions. Prior to this change, annuity recommendations producers had to be suitable for the client. The amendment raises the bar in that it requires recommendations to be in the best interests of the consumer. These requirements also apply to life insurance recommendations.Since the DOL Fiduciary Rule was vacated, regulatory bodies and states have been seeking other ways to hold insurance producers, brokers, and financial companies to the same standards.
Amending Regulation 187 is New York’s answer to the issue. The New York DFS official announcement states that the rule “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 State so that any transaction with respect to those policies is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.” On August 1, 2019, the best interests rule went into effect for annuities; for insurance, the effective date is February 1, 2020.
By mandating that life insurance or annuity recommendations to be based on the best interests of the communities, the rule is designed to keep financial compensation or incentives from influencing the recommendation made to a client. It requires insurers to develop, maintain, and manage procedures for preventing consumer financial exploitation. Basically, insurers must educate and supervise agents and brokers to make sure that they are putting their clients’ needs above their own when they recommend life insurance and annuities products. Also, insurers should take note of the “life insurance policies and annuity contracts issued in New York State” language because it means that non-resident, as well as resident producers, are affected.
There are important exemptions, however. The rule does not apply to retirement plans covered by the Employee Retirement Income Security Act (ERISA), other retirement and deferred compensation plans maintained by employers, and direct sales to consumers where no recommendation has been made by the insurer.
There is controversy around the amendment. The New York Chapter of the National Association of Insurance and Financial Advisors filed a lawsuit to stop it, claiming that exempting direct sales to consumers gives those insurers a competitive advantage over producers. Another lawsuit has been filed by several independent agents’ organizations stating that the amendment is too subjective in the use of the term “best interest.”
If Regulation 187 clears these hurdles, it is very likely that other states and organizations will follow suit. In fact, the SEC has already adopted a package of best-interest rules and regulations. The National Association of Insurance Commissioners (NAIC) is drafting a model regulation that has standards similar to those of Regulation 187. And, New Jersey and Nevada are exploring best-interest rules of their own.
Kaplan Financial Education offers several Regulation 187 courses to give you the tools and knowledge you need to establish standards and procedures that meet its resident and non-resident qualifications. You can learn more on our New York Insurance Continuing Education web page.