New York Best Interest Rule Regulation 187 Everything you Need to Know

Earlier this year, New York State amended Regulation 187 to establish what we're all calling the “Best Interest Rule.”  After taking some careful time to pick through the entire amended regulation, we are bringing you a comprehensive breakdown of the regulation so you know exactly what conducting business in New York State looks like moving forward.  

While I realize not all of The Insurance Pro Blog readers necessarily do business in New York (thank your lucky stars), we do have considerable web site traffic that comes from the Empire State.  I'm also guessing that several of our non-New York resident readers have some connection to New York and will find this information enlightening.  

New York Best Interest Rule At-a-Glance

• Applies only to sales to individual consumers in New York State.
• Extends New York Regulation 187 to cover annuities, life insurance contracts, and fraternal certificates.
• Sets a protocol for information producers and/or insurance companies must collect to form the basis of a recommendation to consumers for the purchase or non-purchase of an insurance contract.
• Compels insurance producers and/or insurance companies to make recommendations that meet the consumers “best interest” and cannot weigh compensation to the producer when deciding on the recommendation.
• Does explicitly permit producers to earn commissions for insurance sales.
• Requires producers to possess “adequate knowledge” about products before making recommendations.
• Does allow career captive producers to limit recommendations, but does not clearly elaborate the steps for regulatory approval.
• Establishes new requirements for insurance companies to document and monitor compliance with the regulation.

Regulation 187 – Some Background

Regulation 187 (hereinafter Reg 187) originally codified rules for annuity sales to New Yorkers.  The amendments made to the regulation seek to extend the standard of care insurance companies, agents, and brokers must now adopt when making recommendations to prospective clients for ALL life insurance related purchases (i.e. life insurance contracts, annuities, and fraternal certificates).  

The regulation tasks the Superintendent of the NY Department of Financial Services (NY DFS) with the responsibility of “regulating trade practices” for insurance business conducted in NY in order to “prevent acts or practices that are unfair or deceptive.”  

The move to adopt a “best interest” rule is strange when it comes to the norm followed for a rule establishment of this magnitude.  While NY is under no obligation to delay its amendments to Reg 187, historically states wait for guidance from the National Association of Insurance Commissioners (NAIC).  This traditionally takes the form of the NAIC adopting a model regulation that states then use as a blueprint to mold their own specific regulations.  The NAIC is currently working through best interest-like regulatory guidance, but no official model exist.  

Though slightly strange for NY to leap frog the NAIC on the best interest process, it's not entirely unheard of.  In the past, New York established sweeping changes to insurance replacement and commission disclosure regulation without waiting for the NAIC to take up the issue.  

Competent and Trustworthy

Reg 187 amendments establish a standard that compels insurance companies, agents, and brokers to act in a competent and trustworthy manner.  Remember that NY is one very few states that actually differentiates between insurance agents and insurance brokers, I'll refer to them both as producers from hereon out because the regulation does.

The regulation further explains that the Superintendent of the NY DFS must ensure proper conduct from insurers and producers, but not guarantee or warrant an outcome.  While I'm sure some will criticize or sensationalize the regulation's language here, my suspicion is that this actually serves as a safety mechanism for producers and–to some degree–insurers.  Should a consumer complain about an insurance purchase because he/she is unhappy with the results, but the producer can prove that he/she followed the requirements of Reg 187, the new laws place some well defined ways the producer (or company) can avoid negative consequences from the complaint.  

Transactions where Best Interest Rule Applies

The new Best Interest Rule applies to all life insurance related transactions to individual consumers in New York.  This means both new business and in force transactions fall under the rule.  

The rule does not apply to:

• ERISA qualified plan transactions (they already have a set of rules the producer must follow that require fiduciary conduct)
• Business owned insurance transactions
• Bank owned insurance transactions
• Structured settlement payments (i.e. the sale of structured annuities for structured settlements awarded by a court of law).  

Reg 187 actually identifies six exclusions from the rule, but I take some of them to be redundant so I paraphrased the exclusion list.  You can always reference the exact regulation word-for-word if you are interested.  The biggest takeaway to me is that all sales to individuals that do not include funds from a qualified account must follow the new Best Interest rule.  

Recommendation – Critical Component of the Best Interest Rule

Reg 187 amendments clearly define the term recommendation and it takes on a central role of the Best Interest Rule.  The key trigger to compliance with the regulation is that producers and/or insurance companies make recommendations that are in New York consumers' best interest.  The regulation further states that recommendations cannot take producer compensation into consideration.  

The regulation identifies a recommendation as statements or acts that a consumer would reasonably interpret to be advice that results in a consumer either entering into or refraining from entering into an insurance purchase.  

Note that Reg 187 extends to both the purchase or the dissuasion thereof.  Technically speaking this means a producer who tells a client–current or prospective–not to buy might face liability if regulators deem the advice not in the best interest of the consumer.

I find it highly unlikely that Reg 187 will result in punitive actions against insurance producers who flat out recommend a consumer not buy an insurance contract of some sort.  I suspect this language exists to enable NY regulators to bring action against producers who recommend against replacements when such replacements might create negative consequences to the producer. 

For example, some career agents at a very well known mutual life insurer tend to recommend against whole life replacements in almost all situations, and this could take motivation from renewal commissions.  The policyholder might want to stop paying premiums, or seek a reduction in premiums paid.  Guaranteed universal life insurance might serve the client better in this situation, but it could produce lower compensation to the producer.  If the producer suggests that the client keep his/her whole life policy instead of replacing it with a different life insurance policy, that producer likely violated the new Reg 187. 

Recommendations also extend to all parties involved in the sales transaction.  This potentially implicates entities and individuals who never held responsibilities in the past for sales recommendations such as wholesalers and Insurance Marketing Organizations et. al.  

Generic Information is not a Recommendation

The Best Interest Rule will not apply to generic information.  The regulation specifically mentions such generic information as online calculators.  So if a consumer uses an online calculator to estimate his/her life insurance needs, Reg 187 does not consider the calculator nor its creator's actions as a recommendation.  

However, if a producer uses such a calculator as part of a presentation to a consumer as justification to make a purchase or not make a purchase, the producer has given a recommendation under Reg 187 guidelines.  

So the big takeaway from this element of the regulation is that creators of generic information hold no responsibility to the end consumer.  But anytime a producer or insurance company uses such generic information as a reason for a consumer to buy or not buy an insurance contract, the producer or insurance company now takes that generic advice as part of the recommendation.  

This potentially makes the insurer or producer responsible for the validity of the generic information.  While this isn't necessarily earth shattering.  It does potentially create a new level or responsibility that producers and insurers never had prior.  It might thwart a practice some insurers had to reproduce information that was inaccurate–or at least misleading–but wasn't their own creation so they felt no obligation to clarify inaccurate or misleading information. 

Necessary Information to Formulate a Best Interest Recommendation

The new Best Interest rule clearly identifies the information producers and/or insurance companies must collect to guide recommendations.  This information includes:

• Age
• Income
• Financial resources used to fund the policy
• Financial objectives
• Intended use of the policy
• Time horizon
• Existing assets (both insurance and non-insurance)
• Liquidity needs
• Liquid net worth
• Risk tolerance
• Willingness to accept non-guaranteed elements of contract
• Tax status
• Any other information reasonably viewed as relevant to the suitability of the insurance transaction

Reg 187 does omit tax status for term life insurance (i.e. non cash value life insurance) sales.  The regulation does state that this list encompasses the information that is reasonably appropriate.  It doesn't necessarily require a producer or insurance company to collect all of this information.  Reg 187 appears to suggest these items as a framework for the basis of a recommendation.  

The Precise Definition of “Best Interest”

After detailing the information that New York deems appropriate for the basis of a recommendation, Reg 187 defines compliance in the following way:

A producer or insurance company makes a recommendation that is in the best interest of the consumer when the producer or company weighs all of the information regarding suitability and makes a recommendation that reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would make under similar circumstances.

The above is not an exact copy of the regulation language, I have instead paraphrased a bit.  However, Reg 187 does use such terms as care, skill, prudence, and diligence as well as prudent person acting in like capacity.  

Reg 187 further notes that a transaction is suitable provided the consumer understands the favorable and unfavorable components of the policy.  The regulation goes on to list several examples.  I won't include all of them here, but they include items like: surrender period, insurance costs, market exposure, investment expenses, secondary guarantees, and tax implications.  Additionally, Reg 187 compels producers to make consumers aware of and explain the differences between fee-based and commission based versions of the same insurance product if the two types exist for sale.  

Fee based insurance products are most widely found among variable universal life insurance policies.  Several life insurers rolled out versions of these products that were friendly to WRAP accounts for advisors who favored this method of compensation.  Generally these products omit sales commissions and surrender charges (or have reduced surrender charges) and instead used asset fees to compensate the advisor.  

Reg 187 does specifically state that a producer can earn commissions and be compliant with the regulation.  The regulation further explicitly notes that other compensation like career agent benefits do not violate the Reg 187.  

Reg 187 also explicitly notes that transactions encompass both new purchases and replacements.  So replacements must use the same information mentioned above as a basis for the replacement recommendation.  Further, the consumer should understand the same items mentioned above in order for the transaction to meet compliance.  And of course, producer compensation cannot factor into the recommendation to replace or not replace a contract.  

Producer Must Possess Adequate Knowledge about Product

Interestingly, Reg 187 specifically prohibits a producer from making a recommendation about products he or she lacks adequate knowledge.  This actually isn't a new component of the regulation, but now that its reach extends to all life insurance related products, it could have some interesting implications.  

The regulation doesn't clearly define adequate knowledge, so the door is quite wide open for much legal argument in the future.  There are a few specific individuals for whom this might become a burden.

I'd predict this is a potential burden for the Primerica Life Insurance company's term-only approach to life insurance planning.  It's also potentially problematic for investment salespeople who recommend against products like whole life insurance purely because they think the stock market will achieve higher returns.  Lastly, those who lack sufficient knowledge in certain product categories, and try to work in a generalist role, might wind up in trouble.  

Reg 187 does task insurance companies with ensuring that producers are adequately trained to sell their products.  This is pure speculation on my part, but I'm wondering if this will create more knowledge tests that producers will need to take and pass before the company will allow them to submit business.  Some companies already have such training for indexed products, and they require agents to complete it before selling products in any state–not just New York.

Specific Prohibition on Claiming Comprehensive Financial Plan

Reg 187 now specifically prohibits insurance producers from claiming that the sale of a life insurance contract is part of a comprehensive financial plan–unless the producer is licensed or holds proper certification to provide such comprehensive financial planning.  

This will cause some frustration among some career insurance company sales staff.  For years, insurance producers marketed their services as financial planning (often complementary) as a way to get in the door and talk about life insurance.  Some companies even make financial planning software available to their producers to perform some degree of analysis and plan design.  

Option to Limit Recommendations

Criticism towards the Best Interest Rule and other legislative attempts to create similar standards often focus on the career captive producer whose job is to market and sell the insurance products manufactured by his/her company.  The spirit of the Best Interest Rule is that producers show consumers options from an array of companies.  This standard dramatically changes the career model and potentially damages companies that rely on it.

Reg 187 does allow an option to limit recommendations for such producers.  While the regulation is extremely vague on how one goes about doing this, we know that the producer/insurance company must develop a disclosure presented to all consumers that explains the reason for the limited recommendations.  The Superintendent of the NY DFS must approve the disclosure and the disclosure must explain why the limitation exists.  The regulation is very clear in stating that the disclosure cannot merely state that the limitation is taking place.  

No Other Opt Out Explicitly Permitted

Chatter about the New York Best Interest Rule compared it to the Best Interest Contract established by the now defunct Department of Labor Fiduciary Rule.  The DOL Rule did provide producers with an option to effectively opt out through disclosure provided a consumer was willing to sign off on it.  

Reg 187 does not allow a producer to opt out for any other reason than being a career captive.  If a consumer refuses to provide information deemed necessary to make an informed best interest recommendation, the regulation does permit the producer to move forward with a sale.  However, Reg 187 specifically prohibits a producer or insurance company from influencing a consumer to refuse providing information in order to avoid the Best Interest protocol.  

Insurance Company Responsibilities for Compliance with New York Best Interest Rule

Reg 187 mandates that all life insurers establish an audit system of supervision reasonably designed to achieve producer and company compliance with the Best Interest Rule.  It specifically requires insurers to collect and organize information that shows:

• How the collection of suitability information takes place
• The documentation and disclosure of recommendations
• The review of complaints submitted regarding recommendations inconsistent with the Best Interest Rule
• A process for monitoring compliance (this process can be formulaic, i.e. it does not need to be a case-by-case manual review)

Insurers are free to use third-part systems to comply with Reg 187.  Insurance companies can offer varying compensation on insurance products, but it cannot do this in a fashion that will influence a producer to favor one product over another, especially if it causes a conflict with the consumer's best interest.  

Lastly, Reg 187 includes language that holds the insurance company culpable when violations occur.  This is not a new element to the regulation, but it prevents insurers from laying blame on the producer when he/she fails to act in compliance with the Best Interest Rule.  Since the Best Interest Rule is a new addition to Reg 187, this extends the responsibility and liability insurers now face to ensure sales are compliant with the regulation.

Ramifications of Regulation 187 Amendments

We reported earlier in the year about Penn Mutual's abrupt announcement to cease annuity and life insurance sales in New York.  We speculated at the time that New York's Best Interest Rule motivated the decision.  We also now know that Lincoln National and Jackson National Life have taken similar actions.  

We also found out last week that New York has already begun fining insurers for transactions it deems not in the best interest of consumers.  

While I don't view the New York Best Interest Rule in quite the same doom and gloom reality others who write about it suggest, I do see it bringing a lot more paperwork into the process of selling life insurance.  New York already has a penchant for over-complicating transactions and this isn't a step in the opposite direction.  The additional oversight responsibilities placed on life insurers themselves will create some headaches for producers. 

I'd speculate the new compliance procedures could tend to mimic compliance documentation required by the investment industry.  Producers will need to keep complete files about their discussions with New York consumers and clearly document the reasoning for recommendations.  Maintaining these files will be critical, so producers will need to take care to keep them safe as time goes one and situations change.