PROPOSED RULEMAKING
INSURANCE DEPARTMENT
[31 PA. CODE CH. 83a]
Life Insurance; Annuity Disclosure
[32 Pa.B. 1869] The Insurance Department (Department) proposes to add Chapter 83a (relating to annuity disclosure) to read as set forth in Annex A. The proposal is made under the authority of sections 205, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412). Likewise, this proposal is made under the Department's rulemaking authority in the Unfair Insurance Practices Act (40 P. S. §§ 1171.1--1171.15) (as such authority is further explained in PALU v. Insurance Department, 371 A.2d 564 (Pa. Cmwlth. 1977)), because the Insurance Commissioner has determined that the inadequate disclosure of key elements of annuity contacts by members of the insurance industry constitutes an unfair method of competition and an unfair or deceptive act or practice.
Purpose
The purpose of this rulemaking is to add Chapter 83a to provide new consumer protections that apply to certain individual annuity contracts and riders and group certificates and certificate riders. This proposed rulemaking would require insurers and insurance producers selling certain types of annuity products in this Commonwealth to provide their consumers with a simplified document that discloses important components of the annuity contract. These components include, inter alia, any applicable interest rates, bonuses and persistency credits as well as any fees, surrender charges or value reductions caused by contract withdrawals. With the information provided in the disclosure statement, an insurance consumer will be able to more adequately and completely understand the nature of the annuity product that is being purchased or applied for, thereby allowing the consumer to make a more informed decision on the suitability of the contracts. This proposed rulemaking is not intended to prohibit insurers or producers from using, in the sale of an annuity contract, additional material or disclosures which are not in violation of this proposed rulemaking or any other law or regulation currently in effect.
The Department worked closely with this Commonwealth's insurance industry on the development of this proposed rulemaking. The Department shared this proposed rulemaking with the agent associations and the insurance industry trade groups. Informal meetings were held with members of the industry to discuss earlier drafts of the regulation. Comments were received from members of the agents association and the insurance industry, and these comments were taken into consideration during the drafting of this proposed rulemaking.
Explanation of Regulatory Changes
Section 83a.1 (relating to purpose) is being proposed to explain the purpose of the chapter.
Section 83a.2 (relating to applicability) explains the exemptions to the rulemaking.
Sections 83a.3 (relating to definitions) defines the terms used in this rulemaking.
Section 83a.4 (relating to disclosure statement delivery) describes the procedures to be followed for face-to-face solicitation and solicitations made in other manners, such as through telephonic and electronic means.
Section 83a.5 (relating to disclosure statement) describes the elements that are necessary to provide a consumer with a complete and adequate disclosure statement.
Section 83a.6 (relating to use and nonmodification of annuity disclosure system results) provides that a producer may not alter or modify the results of an annuity disclosure system that is provided or approved in writing by the insurer.
Section 83a.7 (relating to Department right of review of disclosure statements) describes when the Department may ask for submission of a completed disclosure statement.
Section 83a.8 (relating to report to contract owners) describes the insurer's responsibility to provide a report at least annually to consumers purchasing certain deferred annuity contracts.
Section 83a.9 (relating to penalties) describes the enforcement actions and penalties that the Department may consider for violating this chapter.
Fiscal Impact
There will be a minor fiscal impact as a result of the proposed rulemaking. Insurers will be required to provide a disclosure to the consumer. The disclosure must be separate from the annuity contract, thereby creating some additional costs will be incurred in the production and provision of the disclosure. Any fiscal impact on insurers or insurance producers is expected to be relatively minimal, especially when compared to the important value that consumers will gain in being provided the disclosure statements for consideration when purchasing annuity contracts.
Paperwork
The proposed rulemaking will affect all licensed insurers and insurance producers that sell or market annuities in this Commonwealth.
Effectiveness
The rulemaking will become effective upon final-form publication in the Pennsylvania Bulletin.
Contact Person
Questions or comments regarding the proposed rulemaking may be addressed in writing to Peter J. Salvatore, Regulatory Coordinator, Insurance Department, 1326 Strawberry Square, Harrisburg, PA 17120, within 30 days following the publication of this notice in the Pennsylvania Bulletin. Questions and comments may also be e-mailed to psalvatore@state.pa.us or faxed to (717) 772-1969.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on April 4, 2002, the Department submitted a copy of this proposed rulemaking to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate Banking and Insurance Committee and the House Insurance Committee. In addition to the submitted proposed rulemaking, the Department has provided IRRC and the Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of that material is available to the public upon request.
Under section 5(g) of the Regulatory Review Act, if IRRC has objections to any portion of the proposed rulemaking, it will notify the Department within 10 days after the close of the Committees' review. The notification shall specify the regulatory review criteria that have not been met by that portion. The Regulatory Review Act specifies detailed procedures for the Department, the Governor, and the General Assembly to review these objections before final publication of the regulations.
M. DIANE KOKEN,
Insurance CommissionerFiscal Note: 11-200. No fiscal impact; (8) recommends adoption.
Annex A
TITLE 31. INSURANCE
PART IV. LIFE INSURANCE
CHAPTER 83a. ANNUITY DISCLOSURE Sec.
83a.1. Purpose. 83a.2. Applicability. 83a.3. Definitions. 83a.4 Disclosure statement delivery. 83a.5. Disclosure statement. 83a.6. Use and nonmodification of annuity disclosure system results. 83a.7. Department right of review of disclosure statements. 83a.8. Report to contract owners. 83a.9. Penalties. § 83a.1. Purpose.
The purpose of this chapter is to:
(1) Provide standards for the disclosure of certain minimum information about annuity contracts to protect consumers and foster consumer education.
(2) Specify the minimum information which must be disclosed and the method for disclosing the information in connection with the sale of annuity contracts.
(3) Ensure that purchasers of annuity contracts understand certain basic features of the contracts being purchased.
§ 83a.2. Applicability.
This chapter applies to all individual annuity contracts and riders and group certificates and certificate riders except transactions involving the following:
(1) Group annuities used to fund prearranged funeral contracts.
(2) Registered or nonregistered variable annuities, or other registered products subject to the prospectus delivery requirements of the Securities Act of 1933 (15 U.S.C.A. §§ 77a--77aa).
(3) Immediate annuities that do not contain any nonguaranteed elements.
(4) Annuity contracts used to fund any of the following plans:
(i) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act of 1974 (ERISA) (29 U.S.C.A. §§ 1001--1461).
(ii) A plan described by section 401(a), 401(k) or 403(b) of the Internal Revenue Code (26 U.S.C.A. §§ 401(a), 401(k) and 403(b)), when the plan, for purposes of ERISA, is established or maintained by an employer.
(iii) A governmental or church plan as defined in section 414 of the Internal Revenue Code (26 U.S.C.A. § 414).
(iv) A deferred compensation plan of a state or local government or tax exempt organization under section 457 of the IRC (26 U.S.C.A. § 457).
(v) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor.
(5) Notwithstanding paragraph (4), the requirements of this chapter apply to annuities used to fund a plan or arrangement that is funded solely by contributions an employee elects to make, whether on a pretax or after-tax basis, and when the insurer has been notified that plan participants may choose from among two or more fixed annuity providers and there is a direct solicitation of the individual employee by a producer for the purchase of an annuity contract. As used in this subsection, ''direct solicitation'' does not include any meeting held by a producer solely for the purpose of educating individuals about the plan or arrangement or enrolling individuals in the plan or arrangement.
(6) A structured settlement annuity.
§ 83a.3. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
Agent--As defined in section 601 of The Insurance Department Act of 1921 (40 P. S. § 231).
Application--The first form used by the producer or the insurer that constitutes or captures the applicant's request for an annuity contract or that captures from the applicant information needed to issue an annuity contract.
Bonus--An amount credited to the account value, cash surrender value or annuitization value of a contract in addition to the credited interest rates.
Broker--As defined in section 622 of The Insurance Department Act of 1921 (40 P. S. § 252).
Commissioner--The Insurance Commissioner of the Commonwealth.
Contract--Any individual annuity contract or rider or group annuity certificate or certificate rider.
Contract owner--The owner named in the annuity contract or certificate holder in the case of a group annuity contract.
Department--The Insurance Department of the Commonwealth.
Determinable elements--The premiums, crediting interest rates, benefits, values, bonuses, persistency credits, noninterest based credits, charges, fees and elements of formulas used to determine any of these that are guaranteed at issue but not determined until some point in time after issue. The processes or methods that are applied to derive the determinable elements are guaranteed at issue and not subject to insurer discretion. An element is considered determinable if it was calculated from underlying determinable elements only, or from both determinable and guaranteed elements.
Direct response solicitation--A solicitation of an annuity through a sponsoring or endorsing organization or individually through the mail, telephone, Internet or other mass communication medium.
Equity indexed annuity--An annuity contract with interest credits or benefits that are linked to an external equity reference or an equity index.
Generic name--A short title descriptive of the annuity contract, any supplemental built in benefit being disclosed. Examples of acceptable generic names are ''single premium deferred annuity'' and ''equity indexed deferred annuity.''
Guaranteed elements--The premiums, crediting interest rates, benefits, values, bonuses, persistency credits, non-interest based credits, charges, fees and elements of formulas used to determine any of these, that are guaranteed and determined at issue of the contract. An element is considered guaranteed if all of the underlying elements that are used in its calculation are guaranteed.
Guaranteed minimum interest rate--The underlying guaranteed interest rate.
Insurer--A life insurance company licensed under section 202 of The Insurance Company Law of 1921 (40 P. S. § 382) or a fraternal benefit society licensed under the Fraternal Benefit Societies Code (40 P. S. §§ 1142-101--1142-701).
Internet--The global information system comprised of independent computer networks which are interconnected and share information without the use of a central processing center by use of the transmission control protocol/internet protocol (TCP/IP) suite, to include without limitation, the World Wide Web, proprietary or ''common carrier'' electronic delivery systems or similar media.
Nonguaranteed elements--The premiums, crediting interest rates, benefits, values, bonuses, persistency credits, noninterest based credits, charges, fees and elements of formulas used to determine any of these, that are subject to insurer discretion and are not guaranteed at issue of the contract. An element is considered nonguaranteed if any of the underlying elements that are used in its calculation are nonguaranteed.
Producer--An agent or broker.
Prominent type--Font or formatting techniques which differentiate selected text from other text. The term includes, for example, capital letters, contrasting color and underscoring.
Structured settlement annuity--A qualified funding asset as defined in section 130(d) of the Internal Revenue Code (26 U.S.C.A. § 130(d)) or an annuity that would be a qualified funding asset under section 130(d) of the Internal Revenue Code but for the fact that it is not owned by an assignee under a qualified assignment.
§ 83a.4. Disclosure statement delivery.
(a) Face-to-face solicitation. When the application for an annuity contract to which this chapter applies is taken in a face-to-face meeting, the applicant shall be given an annuity disclosure statement in compliance with this chapter no later than the time the application for the annuity is signed.
(b) Other than face-to-face solicitation. When the application for an annuity contract to which this chapter applies is taken by means other than in a face-to-face meeting, the applicant shall be provided with an annuity disclosure statement in compliance with this chapter 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.
(1) With respect to an application received as a result of a direct response solicitation through the mail, providing the disclosure in a mailing inviting a prospective applicant to apply for an annuity contract shall be deemed to satisfy the delivery requirement of subsection (b).
(2) With respect to an online application via the Internet, taking reasonable steps to make available for viewing, printing, saving or downloading to a file from the marketing website for at least 7 days after application shall be deemed to satisfy the delivery requirement of subsection (b).
§ 83a.5. Disclosure statement.
(a) Disclosure statement requirements. The following information shall be included in the disclosure statement:
(1) A prominent type title as follows: Annuity Disclosure Statement.
(2) The name and home office address (city and state) of the insurer to whom application will be made and a mailing address of the insurer's home, executive or administrative office to which correspondence should be addressed.
(3) The identification of the contract, any rider or supplemental benefit built into the contract, including:
(i) The fact that the contract is an annuity.
(ii) The generic name of the contract, any supplemental built-in benefit or any rider.
(4) A description of the contract and its specific features, relating to the annuity solicited and applied for, emphasizing its long-term nature, including examples when appropriate. The examples may be based on assumed premiums. The description shall include:
(i) The guaranteed, nonguaranteed and determinable elements of the contract, and their limitations, if any, and an explanation of how they operate.
(ii) An explanation of the initial crediting rate, the duration of the initial crediting rate, and the fact that future crediting rates may change from time to time and are not guaranteed.
(iii) A description, whether or not stated in the contract, of any adjustments in the credits, charges or settlement option rates necessary to offset the cost to the insurer for providing the bonus (for example, the interest credit will be 1% less than the rate that would be credited if the contract did not contain a bonus). If because of the pricing structure, an explicit expense charge or reduction in interest credits can not be determined, a general description that the expense charges may be higher or interest credits lower than the charges or credits for a contract without the bonus and that the amount of the charges or reduction in interest credits may exceed the amount of the bonus or an alternative description that provides the same level or degree of disclosure and is found acceptable by the Department.
(iv) Any value reductions caused by withdrawals from the contract or surrender of the contract
(v) The values used to determine the annuity income payments.
(vi) If applicable, an explanation that the values upon surrender of the contract are less than the values used to determine the annuity income payments.
(vii) How values in the contract can be accessed.
(viii) Periodic income options with an explanation of the guaranteed and nonguaranteed basis.
(ix) The death benefit, if available, and how it is calculated.
(x) A summary of the Federal tax status of the contract and any penalties applicable on withdrawal of values from the contract.
(xi) The impact of any rider, such as a long-term care rider or disability surrender fee waiver rider, on the contract benefits.
(b) First page declarations. The first page of the disclosure statement shall include the information required by subsection (a)(1) and the descriptions concerning the following:
(1) Interest rates.
(2) Bonuses and persistency credits.
(3) Charges and fees.
(4) Surrender charges.
(5) Value reductions caused by contract withdrawals or surrenders
(6) Any difference between the surrender value and the value used to determine the annuity income payment.
(c) Nonguaranteed disclosure. Any nonguaranteed element amounts appearing in the annuity disclosure statement shall be accompanied by a prominent type disclosure that the amounts are not guaranteed and are subject to change by the insurer.
(d) Right to examine contract. The disclosure statement shall include the language of the applicable right to examine contract provision required by section 410E of The Insurance Company Law (40 P. S. § 510d).
(e) Page numbers. Each page of the disclosure statement shall be numbered and show its relationship to the total number of pages in the disclosure statement.
(f) Language of statement. Terms used in the disclosure document shall be written in terms that are not confusing or misleading to a person of average intelligence. Terminology that would not be ordinarily understood by a person of average intelligence shall be defined or explained.
§ 83a.6. Use and nonmodification of annuity disclosure system results.
A producer shall only use and may not withhold, alter, change or in any way modify the results of an annuity disclosure system provided by an insurer or approved in writing by an officer of the insurer or another person as the insurer may designate for that purpose.
§ 83a.7. Department right of review of disclosure statements.
The Department may request the submission of a completed disclosure statement.
§ 83a.8. Report to contract owners.
A report shall be provided, at least annually, to the contract owner of a deferred annuity during the accumulation period and to the contract owner of a deferred or immediate annuity during the payout period if the contract provides for nonguaranteed elements during the payout period. The report shall be provided without charge.
(1) The report for a nonequity indexed annuity shall contain at least the following information:
(i) The beginning and ending date of the current report period
(ii) The account value, if any, at the beginning of the current report period and at the end of the current report period.
(iii) The cash surrender value, if any, at the end of the report period.
(iv) For an annuity which provides for an adjustment in the cash surrender values based on changes in the market value of the assets underlying the contract, a statement that the cash surrender value includes a reduction for the surrender charge and for either a market value adjustment or a total return adjustment.
(v) The amounts, if any, that have been credited or debited to the contract during the current report period. The credited and debited amounts shall be identified by type; for example, premium payments, interest credits, bonus credits, persistency credits, expense charges, withdrawal amounts and withdrawal charges.
(vi) The amount of outstanding loans, if any, as of the end of the current report period.
(2) The report for an equity indexed annuity shall contain at least the following information:
(i) The beginning and ending date of the current report period.
(ii) The minimum guaranteed cash surrender value at the beginning of the current report period and at the end of the current report period.
(iii) The amounts, if any, that have been credited or debited to the minimum guaranteed cash surrender value during the current report period. The credited and debited amounts shall be identified by type; for example, premium payments, interest credits, bonus credits, persistency credits, expense charges, withdrawal amounts and withdrawal charges.
(iv) The vested index adjusted account value at the beginning of the current report period and at the end of the current report period.
(v) The amounts, if any, that have been credited or debited to the vested index adjusted account value during the current report period. The credited and debited amounts shall be identified by type; for example, premium payments, interest credits, bonus credits, persistency credits, expense charges, withdrawal amounts and withdrawal charges.
(vi) The cash surrender value, if any, at the end of the current report period.
(vii) The amount of outstanding loans, if any, as of the end of the current report period.
(3) The end of the current report period may not be more than 3 months prior to the date of the mailing of the report.
§ 83a.9. Penalties.
(a) For failing to make the required disclosure about the product being sold or otherwise violating this chapter, a producer may be subject to the penalties provided in:
(1) Section 639 of The Insurance Department Act of 1921 (40 P. S. § 279) for conduct that would disqualify a producer from the initial issuance of a certificate of qualification or a license under sections 604 or 622 of that act (40 P. S. §§ 234 and 252).
(2) Section 637 of The Insurance Department Act of 1921 (40 P. S. § 277) for misrepresenting the terms of an insurance policy.
(b) For failing to ensure the required disclosure about the product being sold or otherwise violating this chapter, an insurer may be subject to the penalties provided in section 350 of The Insurance Company Law of 1921 (40 P. S. § 475) for violation of sections 347--349 of that act (40 P. S. §§ 472--474).
(c) For failing to ensure the required disclosure about the product being sold or otherwise violating this chapter, a fraternal benefit society may be subject to the penalties provided in section 610 of the Fraternal Benefit Society Code (40 P. S. § 1142-610).
(d) In addition to subsections (a)--(c), failure to make the required disclosures outlined in this chapter or otherwise violating this chapter may be considered a violation of the Unfair Insurance Practices Act (40 P. S. §§ 1171.1--1171.15).
(e) The insurer shall bear the burden in any investigation, hearing or determination by the Department or the Commissioner to prove that a properly completed disclosure was provided to the annuity applicant as required by this chapter.
[Pa.B. Doc. No. 02-572. Filed for public inspection April 12, 2002, 9:00 a.m.]
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