Wednesday, May 24, 2017

No. 219: Cost-of-Insurance Increases, Aetna, Lincoln, Voya, and the New York State Department of Financial Services—An Update

In No. 214 (posted April 20, 2017), I reported that, in August 2016, Lincoln Life & Annuity Company of New York (Lincoln) sent letters to agents informing them of a "temporary postponement" of previously announced cost-of-insurance (COI) increases that were to have been imposed on owners of policies issued in New York State. I also said that, on April 10, I filed with the New York State Department of Financial Services (DFS) a request pursuant to the New York State Freedom of Information Law (FOIL). In the request, I mentioned the postponement, said I assume DFS conducted an investigation, and asked for the file on the investigation. On May 10, DFS sent me a package of letters relating to the investigation. In this update, I describe the letters, show some excerpts I edited lightly to improve readability, and offer readers the full package.

DFS's May 13, 2016 Letter
Aetna Life Insurance and Annuity Company (Aetna) issued the affected policies between 1983 and 2000. Aetna is now Voya Retirement Insurance and Annuity Company (Voya). Lincoln administers the policies through a reinsurance arrangement under which Lincoln acts as both reinsurer and administrative agent for the Aetna block on behalf of Voya.

On May 13, 2016, after learning of the upcoming COI increase, DFS sent Voya a two-page letter. Aside from introductory material and contact information, the letter reads:
DFS is investigating whether these increases comply with all applicable New York State laws and regulations. Voya is hereby requested pursuant to Insurance Law §308 to provide the following information to DFS by no later than May 20, 2016.
  1. A side-by-side comparison of new and old COI rates by duration. Please also indicate if there are any no-lapse premium guarantees involved.
  2. A copy of the contract language for each policy form for which the COI rate will increase.
  3. A detailed explanation of the increase in reinsurance costs.
  4. The original profit margins projected from the time of the proposed COI increase forward, assuming no COI increase was made compared to the new profit margins reflecting the effect of the proposed changes. This projection should not factor in reinsurance costs.
  5. Confirmation that no other nonguaranteed elements are changing, such as expense loads, other than changes in any fixed account interest rates merely to reflect changes in expected investment returns.
  6. An explanation of why the change is being made and the derivation of the previous and current pricing assumptions.
  7. A description of the affected market, including whether any of this business is owned by life settlement providers or secondary market life settlement investors.
Voya's September 23 Letter
Emails followed DFS's May 13 letter. They mentioned meetings of Voya and DFS officials on June 30 and July 30. On September 23, Voya sent DFS a five-page letter. Here is the two-paragraph conclusion:
In reviewing the policy language and its reference to class, neither the policy nor the submissions to DFS provide any guidance on how class is to be defined. Accordingly, applying a COI increase uniformly to the entire cohort of policies is consistent with the policy language and thus is the approach underlying Voya's June 14, 2016 submission. [Blogger's note: I do not have Voya's June 14 submission.] While we do not believe using two classes (smoker/nonsmoker) is required under the policy language, we agree that doing so would be consistent with Actuarial Standards of Practice (ASOP) and the policy.
While we submit that the COI rate determination submitted by Voya appropriately applies uniformly across the entire cohort of policies, and neither the policy language nor ASOP requires otherwise, if DFS insists that the redetermination must vary depending upon the premium class of the insureds in the Aetna block, we will submit new calculations for COI redetermination on that basis.
DFS's October 14 Letter
On October 14, DFS sent Voya a three-page letter explaining why DFS disagrees with Voya's analysis and conclusions. Here is the final paragraph:
If Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the §308 letter for DFS's consideration. If Voya implements the increase without providing any additional information and on the basis you suggest, DFS reserves all of its rights with respect to what it believes is a violation of §§4232(b) and 4224(a)(1).
Voya's November 18 Letter
On November 18, Voya sent DFS a three-page letter saying that "we must respectfully disagree with many of the propositions underlying the October 14 letter as well as its overall findings." Here is the final paragraph:
It is Voya's great desire to reach an agreement with DFS as to an acceptable methodology for adjusting COI rates, consistent with policy language, to reflect the increases in costs and loss of profitability that Voya is experiencing. In that regard, as you know, Voya and DFS have had continuing dialogue in the form of face-to-face meetings, calls, letters and emails. Throughout this process, Voya has been concerned by what we view as the apparently changing standards DFS is seeking to apply to these requested increases. Accordingly, so that we may have a clear understanding of the standards and methodology that, in DFS's opinion, are to be applied, we request a letter addressing in detail the information DFS requests to not object to the changes, including DFS's definition of class and acceptable profit metric.
DFS's December 5 Letter
On December 5, DFS sent Voya a two-page letter. Following an introductory paragraph, here is the remainder of the letter:
While your letter references "changing standards DFS is seeking to apply to these requested increases," DFS has been consistent in its application of the law throughout the many iterations of proposed COI increases with multiple insurers. DFS has made clear from the beginning that, in order to demonstrate compliance with standards set forth in the Insurance Law, Voya should provide:
  1. a comparison of the original COI and the proposed COI, with a clear illustration of the credible experience from Voya that justifies the proposed increase [italics in original];
  2. confirmation that the proposed increase is purely prospective and that Voya will not attempt to recoup past losses;
  3. confirmation that only eligible criteria under §4232(b) are used as experience factors to determine the credible experience, not including reinsurance (that is, investment experience, mortality, persistency and expenses);
  4. confirmation that the classes of policyholders upon which the proposed increased COIs are to be assessed comport, to the extent practicable (such as 5-year age bands), with the original classes established by the original pricing at the time the policies were issued, which for the Aetna block appear to be "the insured's sex, attained age and premium class";
  5. confirmation that the proposed COI increase is compliant with all the approved policy provisions; and
  6. confirmation that no increase in profit will be obtained through the proposed COI increase.
We understand that Voya believes it has appropriately "considered [the ASOP 2] factors and determined that the policy class ... can be entire cohorts of policies by policy form." We note that Section 3.4 of ASOP 2 provides for factors to be considered in establishing classes "if the policy classes have not been defined in the determination policy." Based upon our discussions and information provided, we cannot conclude that in this case policy classes were not established. Nor can we conclude that a single cohort is appropriate; a single cohort was clearly not the class determined at the time the policies were originally sold and would not be the reasonable expectation for the consumer based on the policy language. Establishing a single cohort as the class would be inconsistent with §§4232 and 4224 and may, if acted upon, constitute an unfair and deceptive trade practice under Article 24.
As stated previously, if Voya intends to pursue the COI increase in question, it should provide a response using the appropriate classes in a manner that is consistent with the foregoing criteria and the §308 letter for DFS's consideration. If Voya implements the COI increase without providing any additional information and on the basis you suggest, DFS continues to reserve all of its rights with respect to what it believes are violations of law.
Voya's February 23, 2017 Email
On February 23, 2017, Voya sent DFS an email ending the correspondence. Voya's attorney said:
I spoke with the client and they do not intend to have any further communication unless they decide to revisit raising the rates, something on which they have not come to a final position. They believe that the prior communication is still accurate and alerted the policyholders that if there was a change, then they would receive further notification.
More on my FOIL Request
I received two responses to my April 10 FOIL request—one from DFS's New York City office and one from the Albany office. Each said I would be hearing from the other. The New York City office sent the material discussed in this post. The Albany office said that Voya had requested confidential treatment when it submitted material, and that DFS must therefore inform the company of my request and ask whether the company has any objection to release of the material. If the company approves release, the material would be sent to me. If the company objects to release, DFS would make a determination. If DFS rules against the company, DFS would have to inform the company so that it could seek court review of DFS's determination. Thus I anticipate a long delay and may or may not receive any material from the Albany office.

General Observations
I lean toward DFS's position in this dispute. I say "lean toward" because I am uncomfortable taking a firm stand without seeing the material filed with DFS's Albany office.

As I have said in articles in The Insurance Forum and posts on this blog, disputes about COI increases often focus on what constitutes a "class." For example, the "class" question was at the heart of numerous lawsuits against the Phoenix Companies, who created—after sale—a separate class for stranger-originated life insurance policies that were funded by minimum premium outlay and maximum borrowing. I usually oppose "post-sale classification" because I think the practice generally is contrary to the interests of policyholders.

I wrote in detail about "post-sale classification" almost 40 years ago in a major article about the calculation of life insurance policy dividends. The article, in the March 1978 issue of The Journal of Risk and Insurance, included a section about post-sale classification. I am including that section in the package mentioned below.

Available Material
I am offering a complimentary 31-page PDF containing the material I received from DFS's New York City office (23 pages) and my 1978 discussion of post-sale classification (8 pages). Email and ask for the May 2017 package relating to the DFS/Voya COI dispute.