ACLI Sections Annual Meeting 2017

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


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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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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Company Formation


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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Company Formation


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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Company Formation


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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Company Formation

Policy Issuance


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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Company Formation


Policy Issuance


Reinsurance

Product Development


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.


Company Formation


Policy Issuance


Reinsurance

Product Development


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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Documents

ACLI Sections Annual Meeting 2017