Thursday, April 20, 2017

No. 214: Cost-of-Insurance Increases and the New York Department of Financial Services

For many years, life insurance companies have been imposing substantial cost-of-insurance (COI) increases on the owners of universal life and variable universal life insurance policies. Many of the COI increases have prompted class action lawsuits against the companies.

In No. 212 (posted April 7, 2017), I wrote about the consolidation of four class action lawsuits filed recently in federal court in Philadelphia against Lincoln National Life Insurance Company. The lawsuits relate to COI increases that Lincoln imposed in October 2016 on owners of certain universal life insurance policies. One of my readers—an insurance agent in New York—shared with me a pair of letters that prompted this follow-up post.

Lincoln's May 2016 Letter
In early May 2016, Lincoln Life & Annuity Company of New York sent letters to agents on the subject of "Cost of Insurance Increase—Effective June 1, 2016." The opening sentence said the purpose of the letter was "to provide you with important information regarding your client's life insurance policy so that you are able to help ensure they continue to receive the coverage they need." Here are the next two paragraphs of the letter:
Effective June 1, 2016, current cost of insurance (COI) rates will increase on some UL and VUL policies. Lincoln is the administrative agent and reinsurer for the policies, which were issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company). Lincoln will implement these changes as a matter of prudent risk and financial management.
These adjustments are based on material changes in future expectations of key cost factors associated with providing this coverage, including lower investment income and higher reinsurance costs. The changes are not taken lightly and are being made only after an in-depth actuarial analysis along with a rigorous review process, including thoughtful consideration of the effect on the policyholders and our distribution partners.
Lincoln went on to describe the situation in more detail. The company enclosed a sample of the letter to be sent to policyholders and "Advisor Questions" consisting of 17 questions and answers.

Lincoln's August 2016 Letter
In early August 2016, Lincoln sent follow-up letters to agents on the subject of "Cost of Insurance Increase." The opening sentence said the purpose of the letter was "to provide you with important information to help you stay informed regarding your client's policy." Here are the next two paragraphs of the letter (the second of the two paragraphs was emphasized in the original):
You recently received a letter advising that effective June 1, 2016, the cost of insurance (COI) rates were increasing on some UL and VUL policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company).
We are notifying you of a temporary postponement of the COI rate change for policies issued in the state of New York. Until further notice, your client's policy will continue to receive the previous COI rates. We will notify you of any change by letter.
Lincoln went on to apologize for any inconvenience to the agent or client. The company also provided contact information for questions the agent might have.

New York's Proposed Regulation
On November 17, 2016, the New York Department of Financial Services (DFS) issued a press release entitled "DFS Proposes New Regulation to Protect New Yorkers from Unjustified Life Insurance Premium Increases" and subtitled "The proposed regulation requires life insurers to notify DFS at least 120 days prior to an adverse change in non-guaranteed elements of an existing life insurance or annuity policy." The proposal is "Insurance Regulation 210" entitled "Life Insurance and Annuity Non-Guaranteed Elements."

According to the press release, "In response to consumer complaints, a DFS review found that some insurers have not been implementing these increases in accordance with DFS approved policy provisions and the relevant provisions of the New York Insurance Law." The press release said the proposed rule was subject to a 45-day comment period beginning November 30. During the comment period, the life insurance industry probably inundated DFS with negative comments about the proposed regulation. Although the comment period ended in mid-January 2017, DFS has not promulgated the rule. DFS may issue the rule in its original form, may issue a revised rule reflecting comments received, may issue a revised rule subject to another comment period, or may not issue a rule.

On November 18, The Wall Street Journal carried an article entitled "Life Insurers Face Heat in New York." The proposed rule applies only to insurance companies operating in New York, but the reporter speculated that it could be copied in other states to address a major problem that many middle-class retirees face.

My Documents Request
On April 10, 2017, I filed with DFS a request pursuant to the New York Freedom of Information Law (FOIL). I mentioned Lincoln's postponement of the COI increase, said I assumed DFS has conducted an investigation of the increase, and asked for the DFS file on the investigation. DFS confirmed receipt of my request.

I probably will not receive documents from DFS in response to my FOIL request any time soon. Under FOIL, if DFS should decide to provide documents to me, Lincoln would have to be notified and given the opportunity to object to release of the documents. Also under FOIL, if Lincoln objects to release of the documents, and if DFS overrules Lincoln, the company would have to be given an opportunity to seek court review of the DFS ruling. In short, if Lincoln decides to do so, the company would be able to delay release of the documents for months or even years.

General Observations
Numerous class action lawsuits filed in recent years provide ample evidence of the problems that life insurance policyholders are facing because of COI increases. Yet state insurance regulators have shown no interest in addressing the problems. The exception is the proposed New York regulation discussed above. Even if the regulation is adopted, I believe that few if any other states will follow New York's lead. I hope I am wrong in that belief.

Available Material
I am offering a complimentary 16-page PDF consisting of Lincoln's May 2016 letter including the sample notification letter and the Q&A (5 pages), Lincoln's August 2016 letter (1 page), the November 2016 DFS press release (1 page), and the DFS proposed Regulation 210 (9 pages). Email and ask for the April 2017 package about the New York developments relating to COI increases.