In a statement made by CEO Eileen McDonnell and President Dave O'Malley, Penn Mutual announced it will suspend the sale of its life insurance and annuity contracts in the state of New York.
The suspension comes in two phases.
Phase number one affects the sale of annuities. Effective August 30, 2019, Penn Mutual will no longer accept applications for annuities in the state of New York.
Phase number two affects the sale of life insurance. Effective December 31, 2019, Penn Mutual will no longer accept applications for life insurance in the state of New York.
Additionally, the dates mentioned above are also business close dates. This means Penn Mutual will reject any pending business for applicants living in New York that are not finalized by those dates.
This is a somewhat unusual timeline as most phase-outs for new business follow an application deadline and different business close date. The fact that they are the same makes the effective application deadline much sooner than the stated date. For example, it's unlikely that any annuity applications submitted to Penn Mutual right now involving a replacement will close before the August 30th deadline.
What Caused Penn Mutual to Stop Doing Business in New York?
We can only speculate. We do not have privileged knowledge regarding Penn's decision. We do know that New York uses much more restrictive investment allowances than all other states in the U.S.
However, Penn Mutual has presumably maintained the ability to meet those requirements as the company normally conducted business in New York for years.
While this move could take motivation from a desire to open the general account up to investment options frowned upon by New York regulators, it seems unlikely the cause.
New York's Best Interest Rule, a Likely Culprit
Last year, New York codified its Best Interest Rule. The rule applies to the sale of life insurance an annuities in New York and borrows heavily from the Best Interest Contract provisions of the now-defunct Department of Labor (DOL) Fiduciary Rule.
The high-level effect of the new regulation are:
- Producers must disclose all suitability considerations and product information that form the basis of their recommendations.
- Insurance agents/brokers must have a reasonable expectation that the consumer can meet the obligations of the contract (i.e. the consumer can afford it).
- Restricts agents/brokers from telling consumers that a recommendation is part of a financial plan or investment advice unless the agent/broker is a certified professional
- Requires insurance companies to disclose relevant policy information needed to evaluate the transaction
- Establish procedures to prevent exploitation/abuse
- Provide producers with the necessary information to evaluate replacements (reinforcement of Reg 60 protocol).
The roll-out date for New York's Best Interest Rule (which the New York DFS made through amendments to Regulation 187) is August 1st for annuities. Life insurance sales are subject to the regulation six months following the annuity roll-out date. Sound a little familiar?
The amendment to Regulation 187 is a rare step in the protocol for developing insurance regulation. Normally areas of insurance that appear devoid of official rules depend on the National Association of Insurance Commissioners (NAIC) to develop a model regulation that states review and adopt (usually with their own twist to address their unique circumstances). But New York leapfrogged the NAIC on this one.
While the NAIC worked on its own version of the best interest rule, New York put together and made official Reg 187. Some suggest that New York wants to now let Reg 187 be the framework for state-by-state adoption of a similar standard.
Why would Penn Mutual Want to Avoid New York's Best Interest Rule?
I don't want to suggest that Penn Mutual doesn't want to comply with a policy for placing the client's best interest first. If the suspension's motivation comes from the new provisions of Reg 187, my guess is Penn Mutual is worried about how it might technically be in violation of this rule. A collateral damage aspect come to mind.
For example, the new Reg 187 compels insurance companies to notify consumers if it has multiple versions of a product, such as a commission versus fee-based product, and it must disclose the differences of those products that might be meaningful to the consumer. Insurers have never held this responsibility in the past. Instead, they've held the position that they manufacture products and it's up to agents to decide what is appropriate for the specific consumer.
The announcement from Penn Mutual did hint that this suspension is temporary and that the company plans to resume doing business in New York after “[realigning it's] corporate infrastructure for the future.”
I believe Penn Mutual has a strong motivation to resume business in New York. Data we pulled from the NAIC shows us that Penn Mutual took in nearly 14% of all life insurance premiums for 2018 from NY. This makes NY Penn's largest source of premiums.
Penn Mutual is not the only company to announce it's a decision to stop doing business in NY. Earlier last year, Mutual of Omaha announced its decision to cease business there and closed down all of its offices in New York.
I also don't think Penn Mutual will be the last company to make such an announcement. I have a feeling there are other companies that will make similar announcements in the coming months.