On July 17, 2023, the New York Department of Financial Services (DFS) issued Insurance Circular Letter No. 6 (2023) (“Letter No. 6”) and a concurrent press release seeking to clarify, and in our opinion repeal, earlier guidance from the Department relating to permitted differences in life insurance and annuity products, and their premiums and terms and conditions, as well as those purported differences which indicate impermissible discrimination. According to DFS, certain insurers have misinterpreted previous guidance to justify offering what amount to the same products at different rates based upon what the Department has determined to be impermissible bases. This new guidance imposes new obligations on carriers selling life insurance or annuities in New York, as well as significant changes to DFS’ enforcement procedures.

DFS’ 2000 Guidance and Industry Response

In 2000, DFS issued Opinion No. 00-12-05 responding to an inquiry relating to underwriting practices and terms and conditions in life insurance products (the “2000 Opinion”).  Subsequent to the 2000 Opinion, the former Insurance Department posted guidance on its website (the “Guidance” and together with the 2000 Opinion, the “Prior Guidance”), which stated that if an insurer offers two identical products, with the only difference being 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. The relevant portions of the Prior Guidance heavily implied that insurers could create class differences and charge different premiums based upon certain policy differences, including different policy form numbers, producer compensation structures or exclusive policy offerings, policies for other marketing purposes, terms and conditions, underwriting standards, application forms, sets of data pages, or variable material. In addition, DFS stated in the Prior Guidance that it would enforce the cited nondiscrimination statues and policies solely through the Market Conduct Examination (MCE) process.

Changes to DFS’ Guidance and Enforcement Process

In essence, DFS’ updated guidance in Letter No. 6 states the Department’s opinion that certain insurers have focused on differences primarily in form rather than substance, but that the substance of the difference in product and premium is what DFS is primarily concerned with. In addition, DFS believes that this is a serious enough problem to justify a new, proactive enforcement process. Letter No. 6 describes the above policy differences as being “ministerial changes” that alone cannot form a sufficient actuarial basis to justify separating classes or charging different premiums, especially because it exposes minority or other vulnerable consumers to discrimination because they are unaware that they could have purchased substantially the same product for a lesser price solely if they had purchased through a different producer or had additional information. To the extent that costs (including producer compensation), standing alone, can be an actuarially justified basis, those costs must show significant changes in overall administrative, acquisition, and other expenses due to the nature of the market that the insurer is passing on to the consumer.

The key phrase in Letter No. 6 is that “within each market or channel there can be no unfair discrimination between individuals of the same class,” in certain key actuarial categories, or in any of the terms and conditions of the policy or contract. This changes the previous guidance that the most important distinction was whether the policies were being sold in the same channel to now evaluating whether the policies are being offered in the same market, as well as whether the changes in cost are artificially created by the insurer or producer or otherwise completely divorced from truly relevant actuarial factors. Letter No. 6 also includes a specific focus on what is, in essence, individual insurance sold through group product structures such as through banks or credit card issuers and puts insurers on notice that the industry cannot skirt Letter No. 6’s guidance by the creative use of these structures. Finally, Letter No. 6 informs insurers that new policy form approval submissions will be subject to inquiries on compliance with the Letter starting immediately, and will apply to all future MCEs, both scheduled and targeted, starting in 2025. The DFS advised insurers to begin proactively reviewing life insurance and annuity portfolios to ensure these products sold in New York fully comply with Letter No. 6’s guidance.

Insurance Industry Impact

The bottom-line guidance to insurers and producers who develop exclusive policy offerings with advantageous compensation structures is that they are well-advised to ensure that what are substantively the same products, with differing premiums charged, and sold within the same market or channel are truly actuarially justified and do not unlawfully discriminate against minority populations for all current and future life insurance and annuity products. In essence, insurers should be asking whether a consumer could have gotten a better price for what is substantively the same underlying product solely by purchasing through a different producer in a different location or on some other basis the consumer wouldn’t easily know. If a New Yorker living in Plattsburgh or Saratoga could have purchased a life insurance policy with the same benefits, terms, and conditions for a lower premium simply by using a larger producer in New York City, that insurer should immediately consider making appropriate changes.

In analyzing compliance with Letter No. 6, insurers should consult extensively with insurance regulatory counsel to ensure that current and future policy forms and offerings comply with DFS’ interpretation of the relevant nondiscrimination statutes. The insurance regulatory attorneys in Foley’s Insurance Practice Group have the experience and understanding to help insurers navigate New York’s new regulatory landscape and properly document actuarially justified reasons for policy differences that will aid insurers both in getting new products and policy forms approved as well as responding satisfactorily to any related questions in a future MCE.