NOTICES

Notice of Comments Issued

[32 Pa.B. 3184]

   Section 5(d) of the Regulatory Review Act (71 P. S. § 745.5(d)) provides that the designated standing Committees may issue comments within 20 days of the close of the public comment period, and the Independent Regulatory Review Commission (Commission) may issue comments within 10 days of the close of the Committee comment period. The Commission comments are based upon the criteria contained in section 5.1(h) and (i) of the Act (71 P. S. § 745.5a(h) and (i)).

   The Commission has issued comments on the following proposed regulations. The agency must consider these comments in preparing the final-form regulation. The final-form regulation must be submitted within 2 years of the close of the public comment period or it will be deemed withdrawn.

		Close of	IRRC
		of the Public	Comments
Reg. No.	Agency/Title	Comment Period	Issued
#11-200	Insurance Department    Life Insurance; Annuity Disclosure (32 Pa.B. 1869 (April 13, 2002))	5/13/02	6/13/02
#11-204	Insurance Department    Safeguarding Insurer Securities (32 Pa.B. 1873 (April 13, 2002))	5/13/02	6/13/02

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Insurance Department Regulation No. 11-200

Life Insurance; Annuity Disclosure

June 13, 2002

   We submit for consideration the following objections and recommendations regarding this regulation. Each objection or recommendation includes a reference to the criteria in the Regulatory Review Act (71 P. S. § 745.5a(h) and (i)) which have not been met. The Insurance Department (Department) must respond to these comments when it submits the final-form regulation. If the final-form regulation is not delivered within 2 years of the close of the public comment period, the regulation will be deemed withdrawn.

1.  General.--Reasonableness; Clarity.

Consistency with model regulation

   The proposed regulation varies from the National Association of Insurance Commissioners Annuity Disclosure Model Regulation (NAIC model) in certain areas. Particularly, §§ 83a.5 and 83a.8 (relating to disclosure statement; and report to contract owners) impose additional, substantive requirements not included in the NAIC model. The Department should explain the compelling public interest which requires departure from the NAIC model.

2. Section 83a.4.  Disclosure statement delivery.--Reasonableness; Need; Clarity.

Subsection (b)--Other than face-to-face solicitation

   This subsection requires an annuity disclosure statement to be delivered to the applicant ''no later than 5 business days after the completed annuity application is received by the insurer or producer or at the time of contract delivery if less than 5 business days after the completed annuity application is received by the insurer.'' Given that the purpose of the disclosure statement is to ensure that the applicant understands certain basic features of the terms of the annuity contract, it would appear to be counterproductive to provide the disclosure statement after the fact. We request the Department explain why the disclosure statement should be delivered after receipt of a completed application or at the time of contract delivery.

Subsection (b)(2)

   Under this subsection, for an online application via the Internet, the disclosure statement shall be ''available for viewing, printing, saving or downloading to a file from the marketing website for at least 7 days after application. . . .'' The comparable requirement in the NAIC model (section 5A(2)(b)(ii)) does not contain the 7-day requirement. It simply states that ''taking reasonable steps to make the disclosure document available . . . on the insurer's website shall be deemed to satisfy the requirement that the disclosure document be provided no later than five (5) business days after receipt of the application.''

   Subsection (b) of the proposed regulation contains the 5-day requirement consistent with the NAIC model. Why is it necessary to impose a 7-day requirement in subsection (b)(2)?

3.  Section 83a.5. Disclosure statement.--Reasonableness; Economic impact.

Subsection (b)--First page declarations

   Subsection (b) lists several pieces of required information to be included on the first page of the disclosure statement. Several commentators assert this requirement could impose significant costs for multi-state insurers that have already developed disclosure statements in compliance with the NAIC model (which does not have the ''first page'' requirement). Why is it necessary for the Commonwealth's requirements on this issue to depart from the NAIC model? The Department should explain.

4.  Section 83a.7.  Department right of review of disclosure statements.--Reasonableness; Clarity.

Request for a completed disclosure statement

   This section states, ''The Department may request the submission of a completed disclosure statement.'' We have two concerns. One, the regulation does not specify under what circumstances the Department would make this request. The Department should include examples of when it will require submission of completed disclosure statements.

   Two, the term ''completed'' is vague. Based on discussions with the Department, we understand that a ''completed'' statement refers to a disclosure statement that meets all the requirements of this chapter. However, the determination that a disclosure statement meets the requirements of this chapter will be made after the statement is submitted to the Department for review. Therefore, the term ''completed'' is confusing and should be deleted.

5.  Section 83a.9. Penalties.--Statutory authority; Reasonableness; Clarity.

Hold harmless clause

   This section includes penalties for failing to make the required disclosure about the product or other violations of this chapter. Commentators assert this section should include a hold harmless clause for the producer of the annuity to limit their liability when the producer uses the disclosure statement supplied by the insurer. In the Preamble to the final-form regulation, the Department should explain why a hold harmless clause is unnecessary.

Subsection (d)

   This subsection includes a citation to the Unfair Insurance Practices Act (act). This citation represents the entirety of the act. For clarity, the Department should specify which sections of the act would be violated if a failure to make the required disclosures occurs.

Subsection (e)

   Under this subsection, ''The insurer shall bear the burden in any investigation, hearing or determination by the Department . . . to prove that a properly completed disclosure was provided to the annuity applicant.'' What is the Department's basis for shifting the burden of proof from the Department to the insurer?

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Insurance Department Regulation No. 11-204

Safeguarding Insurer Securities

June 13, 2002

   We submit for consideration the following objections and recommendations regarding this regulation. Each objection or recommendation includes a reference to the criteria in the Regulatory Review Act (71 P. S. § 745.5a(h) and (i)) which have not been met. The Insurance Department (Department) must respond to these comments when it submits the final-form regulation. If the final-form regulation is not delivered within 2 years of the close of the public comment period, the regulation will be deemed withdrawn.

1.  Section 148a.1. Definitions.--Clarity.

Custodian

   In subparagraphs (i)(A) and (ii)(C) the phrase ''adequately capitalized'' is used. The word ''adequately'' is unnecessary and should be deleted from both of these subsections.

   A Federal Savings Bank commented that while they are not a member of the Federal Reserve System, they are regulated by the Office of Thrift Supervision and meet all other requirements for the definition of ''custodian.'' Why isn't a Federal Savings Bank included in the definition of custodian?

Instructions

   Subparagraph (ii)(B) states that verbal instructions are to be followed ''promptly'' by written instructions. The Department should replace the term ''promptly'' with a specific time frame in which they will require written instructions.

Insurer

   In subparagraph (x) the Department has included the phrase ''other entity'' as an insurer. This phrase is vague and should be deleted.

State

   Both the District of Columbia, listed in subparagraph (ii), and Puerto Rico, listed in subsection (iii), are territories as listed in subparagraph (i). Therefore, subparagraph (ii) and (iii) are unnecessary.

2.  Section 148a.2.  Permissible methods of holding securities.--Clarity.

   Under subsection (d), will custodial agreements be required for insurers' securities held by a state treasurer or other regulatory authority? If not, this section should be clarified.

3.  Section 148a.3.  Requirements for custodial agreements.--Clarity.

   We have several concerns with subsection (b).

   Paragraph (3) allows a custodian to utilize an agent to gain entry in a clearing corporation or the Federal Reserve book-entry system. We have two concerns with this subsection. First, the regulation does not contain a provision that the insurer must be notified if a custodian enters an agreement with an agent. Second, subparagraph (ii) contains the phrase ''ultimate responsibility.'' The word ''ultimate'' is superfluous and should be deleted from the final-form regulation.

   Paragraph (10) is one sentence that contains two separate provisions. It requires custodians to indemnify the insurer for any loss of securities in certain circumstances (for example, burglary, mysterious disappearance). It also states that a custodial agreement may provide that the custodian will not be liable for failure to take action under other circumstances (for example, war, act of God, strikes). For clarity, the final-form regulation should divide this paragraph into two sentences.

   Paragraph (12) requires a custodian to notify the Department if a custodial agreement is terminated or if 100% of the assets are withdrawn from the account. This notice must be provided to the Department within 3 days.

   We question why the Department set the trigger for notification at 100% of all assets. Any time a substantial amount of an insurers' securities are withdrawn the Department should be notified. The Department should consider setting a lower rate to trigger notification.

   In addition, if the intent is to insure that adequate resources are maintained, wouldn't the Department want to know as soon as possible, such as within 24 hours, that substantial holdings have been withdrawn?

   The Preamble notes that paragraphs (13)--(17) address record-keeping and reporting duties under the custodial agreements. It states that these sections assure that the custodian is aware of its responsibilities to provide the Department with timely access to information required in a financial examination conducted under Article IX of the Insurance Act of 1921 (40 P. S. §§ 323.1--323.8). For clarity, the final-form regulation should include a reference to this statute.

   Paragraph (14) requires the custodian to provide certain information to the insurer if the request is made in writing. The final-form regulation should provide a specific time frame for submission of the required information by the custodian.

   In addition, will an internal audit meet the requirements in subparagraph (ii)?

4.  Section 148a.4.  Requirements for investment company securities.--Reasonableness.

   This section allows an insurer's investment company securities to be held by the investment company if two conditions are met. First, the investment company must provide the insurer with reports on at least a monthly basis. Second, the investment company must maintain records and information to enable the insurer to comply with certain requirements of the Department, and provide the information required for an audit or financial examination of the insurer.

   Since custodial agreements are not required between an insurer and an investment company, how would an insurer or the Department be certain that the investment company is maintaining records required by paragraph (2)?

5.  Section 148.a.5.  Penalty and existing custodial agreements.--Clarity.

   This section includes two different topics, penalty and existing custodial agreements. For clarity, this section should be divided into two subsections, one for penalty and one for existing custodial agreements.

JOHN R. MCGINLEY, Jr.,   
Chairperson

[Pa.B. Doc. No. 02-1155. Filed for public inspection June 28, 2002, 9:00 a.m.]

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