NY DFS Addresses Discrimination in the Writing of Life and Annuity Products

New guidance from the New York Department of Financial Services (DFS) takes aim at improper discrimination by life and annuity writers in the state.

DFS Insurance Circular Letter No. 6, issued on July 17, explains that New York Insurance Law Section 2606(a)(1) prohibits an insurer from making any distinction or discrimination, because of race, color or national origin, among persons as to the premiums or rates charged for insurance policies. New York Insurance Law Section 4224(a)(l) prohibits insurers from making any unfair discrimination among individuals “of the same class and of equal expectation of life” in premiums, dividends or other features of a life product.

The circular letter explains that in a 2000 opinion the Insurance Department (predecessor to DFS) wrote

A life insurer is free to set its own appropriate underwriting standards … which may or may not include different underwriting for different products … as long as such underwriting standards have a factual and rational basis, are grounded in generally accepted insurance and actuarial principles, and are not contrary to law. Use of different terms and conditions regarding different policies is not prohibited provided such terms and conditions are consistent with regard to a particular policy and not contrary to law.

Subsequent to the 2000 opinion, the Insurance Department issued guidance to the effect that if an insurer offers two identical products, where the only difference is the amount of premium charged, such insurer must have “appropriate actuarial justification for the different premiums, such as differences in insurance agent compensation or other expenses.”

With that as background, the July 17 circular letter provides as follows:

• It does not constitute a “different” policy merely to have a different form number on an alternate version of the policy or contract or to use a different application, set of data pages or variable material for the same policy or contract. “Such ministerial changes do not create ‘different policies’ that then justify similarly-situated consumers being put into separate classes. A class distinction should always be reasonable, equitable, non- discriminatory, and based on sound actuarial principles.”
  
  
• A mere difference in insurance producer compensation does not constitute appropriate actuarial justification for the purpose of creating class distinctions. Where DFS has approved different policy forms for the same insurance product, this has been “where insurers have demonstrated a sound actuarial basis for treating consumers in these markets [e.g., the fee-based advisor market or the direct sales market] as a different class. … However, within each market or channel, there can be no unfair discrimination between individuals of the same class and of equal expectation of life, in the amount of interest being credited, the amount or payment or return of premium, or rates charges, or dividends or other benefits or in any of the terms and conditions of the policy or contract.”
  
  
• DFS “has not found adequate actuarial justification to support treating similarly-situated life insurance and annuity consumers as separate classes solely due to differing levels of compensation paid to producers. … [T]he amount of the compensation paid to a producer should not vary the ultimate premium or fees charged or terms, conditions, or benefits provided to a consumer.” 
  
  
• The group product structure should not be used to sell what is essentially individual insurance, such as life insurance sold to an individual through a bank or credit card issuer. Some insurance programs have features of both individual and group insurance and are more in the nature of individual coverage with the group label being applied mainly for the purpose of marketing and sales enhancement. Accordingly, DFS indicates it will apply the guidance in the circular letter to situations in which individual coverage is marketed through a group format.
  
  
  • DFS cites, as examples of life insurance or annuity contracts sold through groups, certain categories of insurance products recognized under New York Insurance Law as being offered to bank customers. Groups such as these are “unique in that the consumer’s association or affiliation with the group policyholder is tenuous as compared to a traditional group, such as an employer or labor union, and, like individual insurance, the cost of insurance is paid primarily, if not entirely, by the consumer.”
    
    
• The guidance in the circular letter applies to any new life insurance and annuity policy form filing made after July 17, 2023. The circular letter notes that DFS will “inquire about compliance with Insurance Law §§ 2606(a)(1) and 4224(a)(1) for the new policy and contract forms as part of the approval process.” 

• Insurers are directed to review their current portfolios of products in light of the circular letter. DFS “expects to examine portfolios of existing products for compliance with §§ 2606(a)(1) and 4224(a)(1) during regular and targeted market conduct examinations beginning in 2025.”