acli sections annual meeting 2017
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PAULA C LUDRAY ‐ ENGE LKEVOYA
ASS I STANT V I C E PRES IDENT, S EN IOR COUNSE L PAU LA . C LUDRAY ‐ ENGE L K E
@VOYA .COM
ASHLEY STREETUSAA
SEN IOR AT TORNEY, F INANC IA L ADV I C E & SOLUT IONS GROUPASHE LY. S TREET@USAA .COM
ACLI Compliance & Legal Sections
Annual Meeting 2017Boot Camp: Insurance 101
Overview of Legal Issues Eight Broad Areas Includes: Product Development Distribution Contract Formation Policy Administration Claims
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Agenda
Getting Started Overview3
Company Formation
Policy Administration
Policy Issuance
Marketing & Distribution
Reinsurance
Product Development
Contracting & underwriting
Claims Processing
Getting Started Overview4
Company Formation
Company Formation & Oversight5
• Type of company: Stock or mutual• Articles of Incorporation & bylaws include
organizational information, such as:• Name, location & kinds of business • The number of directors and applicable
procedures, such as those for voting and the election and replacement of directors.
• Applying for a Certificate of Authorization to engage in an insurance business . Requirements include:
• Corporate documents • BIO’s for incorporators, directors & officers• Plan of operations• Capital deposit with DOI• Required minimum capital & surplus
• Once requirements are satisfied, the state will issue a Certificate of Authority for the selected line(s) of business (life, health, P&C).
Company Formation & Oversight
Examples of state solvency regulation Risk‐based capital ‐ Insurance companies must maintain a minimum level of risk‐adjusted
capital and surplus. Conservative reserve requirements – For life insurance, Principle‐based Reserves uses a
combination of formula and modeling based methods to help ensure assets set aside to meet policy obligations (reserves) match company and product risks.
Statutory Accounting Principles – Insurance specific accounting standards emphasize conservatism & liquidity.
Standardized financial reporting ‐ Insurance companies submit annual and quarterly financial statements to state regulators.
Regulation of investments – States regulate the types and amounts of assets companies in which companies may invest and the values of those investments.
Holding companies – Insurance companies that are part a group of companies must report certain transactions between and dividends to affiliates.
Enterprise Risk Management and Own Risk Solvency Assessment (ORSA) – Requires companies to adopt a framework for managing and regularly assessing risks.
Periodic Financial Examinations – State regulators conduct onsite financial examinations every 3‐5 years.
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Getting Started Overview7
Company Formation
Product Development
Product Development8
Nothing makes me
happier than yelling at
lawyers. It’s why I hire them.
Developing Our Product
Product standards and requirements McCarran‐Ferguson Act – Established insurance as being primarily
regulated by the states. Individual state standards –Each state is responsible for setting its own
standards for policy provisions, rates and filing requirements. These requirements may be found in state laws, regulations administrative guidance and even on DOI websites.
National Association of Insurance Commissions ‐ The NAIC is a regulatory support organization. It assists state insurance commissioners by, for example, supporting the development of model laws and regulations. These model laws and regulations , if adopted, can help provide some consistency between the various states.
Interstate Insurance Compact–Member states (45) agree, by statute, that certain products filed with and approved by the Interstate Compact Commission, under its standards, will be available sale in member states.
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Developing Our Product
Optional benefits –Life products and annuities often offer optional benefits, usually for an additional cost. The benefits are most often added as a “rider” to the base policy. Optional benefits will usually be governed by benefit‐specific product standards.
Applications, illustrations and policy disclosures – When developing a new product , consider the entire policy package. For ex., does an app need updating? Will the product be illustrated.? Is there an accelerated death benefit requiring disclosure?
Actuarial & Tax– Actuaries will determine product costs based on various assumptions about, for example, how long insureds are expected to live and future investment performance expectations. Actuaries will also determine if a life policy must provide cash values and other nonforfeiture benefits. Finally, policies must be designed so that they will be considered a life insurance policy under the federal tax code.
Product Filing – Once developed & priced, a policy can be filed with the Compact or with the various states.
Variable products, which must be filed with and cleared by the SEC, require a detailed prospectus .
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Getting Started Overview11
Company Formation
Marketing & Distribution
Product Development
Marketing and Distribution
NAIC Marketing Regulations Advertising Review and Approval Licensing as an agent and/or registered rep Fixed products licensed agent in each state where selling Variable products require FINRA registration and passing securities exams Registered Reps must have an affiliation with a broker dealer to which carrier has an arrangement (carrier pays commission to BD which pays rep)
Producer Contracting ‐ Appointment with the insurance carrier in which they plan to sell (just in time appointments)
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Marketing and Distribution
Sales Practices Rebating – while permitted in some states, many carriers prohibit rebating
by agents Replacement practices
Internal Exchanges – carrier practices/commissions/suitability External Exchanges – 26 USC section 1035
Disclosures UETA and E Commerce Requirements Suitability Requirements (fixed products; VL, VA) Illustration Requirements Temporary Insurance Receipts/Agreements Compensation – Ex. NY Section 4228 DOL Fiduciary Rule – discussed elsewhere in this meeting
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Getting Started Overview14
Company Formation
Marketing & Distribution
Reinsurance
Product Development
Reinsurance
Reinsurance agreement ‐ an insurer (ceding company) agrees to transfer its risks on one or a group of policies to another insurer (reinsurer). Reinsurance may be “facultative” (reinsurer decides whether to accept an individual risk) or
“treaty reinsurance” (risks are automatically ceded through a reinsurance agreement, also called a “treaty.”)
Although not to the same extent as retail insurance, states will require reinsurance agreements to have certain provisions, such as an insolvency clause (reinsurer remains on the risk in the event the insurer becomes insolvent).
Life and Health Reinsurance Agreements Model Regulation ‐ generally requires "duly executed” agreements and prevents ceding companies from reducing liabilities (through reserve credit) unless all material risks are transferred as part of the agreement. Depending on product, material risks may include mortality, morbidity, lapse, credit quality, reinvestment or disintermediation.
Credit for Reinsurance Model Law ‐ regulates when a ceding company can take reserve credit, including collateral requirements for certain unauthorized reinsurers.
Types of reinsurance. Common types include coinsurance and yearly renewable term. AG48‐ Certain types of reinsurance transactions may use affiliated reinsurers (captives) to help
finance reserve requirements. These structures are subject to Actuarial Guideline 48, which regulates the types of security that may be used by captives to support reinsured policies.
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Getting Started Overview16
Company Formation
Marketing & Distribution
Reinsurance
Product Development
Contracting & Underwriting
Forming the Life Insurance Contract
Contract Characteristics Unilateral contract Contract of adhesion Entire contract
Contract Roles Owner Insured Beneficiary Annuitant*
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Forming the Life Insurance Contract
Formation of Contract Offer: insurance application Acceptance: Insurer issues policy and certain conditions are met
Policy delivery Representations as to insured’s health remain true Premium is paid
Amendments
Valid Contract Insurable interest Consent of insured Accurate representations in application
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Underwriting
Underwriting = risk assessment and classification Primary source of underwriting information is the life insurance application
Regulation of Information Fair Credit Reporting Act, GLB, and state equivalents HIPAA
Discrimination Actuarial justification Unfair discrimination prohibited
Adverse underwriting notice
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Underwriting Innovation
Big Data
Electronic Medical Records
Genetic Testing
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Getting Started Overview21
Company Formation
Policy Issuance
Marketing & Distribution
Reinsurance
Product Development
Applications & Underwriting
Policy Issuance
Delivery Requirements: signed Amendment, “as sold illustration”; delivery receipt; payment
Free look – requirements vary by state; product and carrier practice
Application and any amendments attached to and made part of the Policy in order to be enforceable
Issue Date/Policy Date – important for contestability; effective date of coverage issues
Credit cards for payment – state law and carrier practice 26 U.S. Code Section 1035 Exchanges – life to life; life to annuity; annuity to annuity
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Getting Started Overview23
Company Formation
Policy Administration
Policy Issuance
Marketing & Distribution
Reinsurance
Product Development
Applications & Underwriting
Policy Administration Issues24
Annual statements
In‐force illustrations
Lapse process
Reinstatement
Collateral assignments
Ownership changes
Beneficiary changes
Complaints
Annuitization
Loans
Taxes
Secondary addressee
Power of Attorney
Etc.
Policy Administration Issues25
Annual statements
In‐force illustrations
Lapse process
Reinstatement
Collateral assignments
Ownership changes
Beneficiary changes
Complaints
Annuitization
Loans
Taxes
Secondary addressee
Power of Attorney
Etc.
Getting Started Overview26
Company Formation
Policy Administration
Policy Issuance
Marketing & Distribution
Reinsurance
Product Development
Applications & Underwriting
Claims
Claims
What
Who
When
How
How much
Where
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Claims
What do you pay (if anything)? Contestability
Suicide exclusion
Good order requirements
Annuity death claims
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Claims
Who do you pay? Primary v. secondary/contingent beneficiaries
Irrevocable beneficiaries
Ex‐spouse beneficiaries
Murder
Simultaneous Death
Minor beneficiaries
Non‐natural beneficiaries
Assignments
If you don’t know: Interplead
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Claims
When do you pay? Prompt payment statutes Annuity tax rules
How do you pay? (settlement options)
How much do you pay? Death benefits Interest?
Where do you pay? Interpleader Death Master File and Unclaimed Property
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Summary – Big Picture31
Company formationLicensing Lines of BusinessCapital requirementsCorporate Structure & Governance Company Annual statements
Reinsurance Traditional reinsurance Captives
ClaimsContestableSuicideIn Good Order
QUESTIONS??
Questions?
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