WSR 98-04-083

PROPOSED RULES

INSURANCE COMMISSIONER'S OFFICE

[Filed February 4, 1998, 11:28 a.m.]

Original Notice.

Title of Rule: Life disclosure.

Purpose: Update, clarify, and improve the existing regulatory scheme.

Other Identifying Information: Insurance Commissioner Matter No. R 97-4.

Statutory Authority for Adoption: RCW 48.02.060, 48.030.010 [48.30.010].

Statute Being Implemented: RCW 48.23A.005, 48.30.040, 48.30.090, 48.30.180.

Summary: The existing regulation, WAC 284-23-200 to 284-23-270, was identified as a part of the commissioner's regulatory improvement process as a regulation that needed to be updated. Changes have been made in state law and in NAIC model regulations and publications that will be reflected in the regulation. The existing regulatory scheme will be stronger, clearer, and more streamlined.

Reasons Supporting Proposal: The rules should increase the ease and clarify the methods of compliance for life insurers while strengthening consumer protection.

Name of Agency Personnel Responsible for Drafting: Jon Hedegard, Lacey, Washington, (360) 407-0728; Implementation: Scott Henderson, Olympia, Washington, (360) 664-3783; and Enforcement: Ida Zodrow, Olympia, Washington, (360) 664-8137.

Name of Proponent: Deborah Senn, Insurance Commissioner, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: The rule will update existing disclosure requirements for life insurance. The regulation will bring the WACs into accord with recent changes in Washington state law and model laws and publications of the NAIC. The existing regulation was adopted over eighteen years ago, changes in circumstances have made the existing regulation less effective and efficient. Amending the regulation should make disclosure requirements more understandable and easier to comply with for life insurers while strengthening consumer protection.

Proposal Changes the Following Existing Rules: The proposed rules amend several existing rules and repeals two existing rules. The regulatory scheme for life insurance disclosure is updated and reorganized to improve clarity and effectiveness. Subsections are moved within a WAC or moved to a different WAC to increase continuity. Amended WAC sections are WAC 284-23-210, 284-23-220, 284-23-230, 284-23-235, 284-23-240, and 284-23-250. WAC 284-23-260 and 284-23-270 will be repealed.

A small business economic impact statement has been prepared under chapter 19.85 RCW.

Introduction: This report analyzes a proposal to modify rules related to life insurance disclosure. The changes are proposed in an effort to make the rules more current, effective and efficient. This evaluation is completed to demonstrate the proposed changes improve the rules without imposing significant costs on insurers or insureds.

Background: In 1976, the National Association of Insurance Commissioners (NAIC) developed a model regulation on life disclosure illustrations. These model rules were adopted as rules by the insurance commissioner and placed in chapter 284-23 WAC in 1979. These rules require, in part, that insurers selling life insurance policies deliver a buyer's guide containing language specified in WAC 284-23-270. It also requires insurers to deliver a cost disclosure policy summary containing specified cost and benefit information to buyers.

The purpose of the 1979 rules was to improve the buyer's understanding of the benefits and costs of the policy purchased. Since 1979, new life insurance illustration laws (chapter 48.23A RCW) have been developed and passed in the state of Washington. The requirements of chapter 48.23A RCW have a more comprehensive scope than previously adopted life disclosure rules. When the new life illustration laws apply to a sale, the requirements of WAC 284-23-270 are outdated and ineffective.

The proposed amendments reflect changes in the statute and the availability of the updated buyer's guide. The amendments are intended to make the rules more current, effective and efficient.

Federal Law and Other State Law: This rule does not conflict with any other state or federal law.

Industry Codes: This rule shall apply to any solicitation, negotiation or procurement of life insurance occurring within the state of Washington. This would affect life insurance companies (industry code #6311).

Probable Costs: The proposed rules do not impose any direct costs on the regulated industry. The proposed amendments make the rules more current and improve the efficiency and clarity of regulation concerning life disclosure illustration regulation. The rules do not restrict current provisions and do not impose new filing requirements. The commissioner recognizes the potential for costs associated with the time required to read and comprehend the amended rules. These probable costs would be insignificant relative to the benefits associated with the proposed rules.

Probable Benefits: The proposed amendments make the rules more current by eliminating outdated versions of the buyer's guides and allowing the use of current versions of the buyer's guide. The rules also increase the flexibility of the regulation by allowing substitution of a compliant life illustration for a cost disclosure policy summary. The amendments also improve the efficiency of the rules requiring a cost disclosure policy summary that only illustrates the guaranteed elements of the policy. By illustrating guarantees only, the policy summary is not an "illustration" pursuant to chapter 48.23A RCW. Because the current statute requires a company to provide a basic life illustration at the point of sale that discloses both guaranteed and nonguaranteed elements, a policy summary would not be needed. The proposed changes eliminate the requirements that company representatives provide a policy summary when a basic illustration (which includes sufficient information) has already been provided. Insurers and agents are only required to provide the policy summary to insureds for policies sold without the use of a basic life illustration.

Small Business Impact: The proposed rules do not impose a disproportionately higher economic burden on small businesses within the four-digit classification. There are no new filing requirements associated with the proposed rules. The rules are being amended to permit more flexibility by allowing insurers to deliver current buyer's guides to buyers and allows them also to substitute compliant life illustration for cost disclosure policy summaries. Small businesses will not be required to change their business practices to comply with the proposed rules.

Mitigation: Mitigation to reduce the economic impact of the proposed rules on small businesses is not necessary because there are no cost impacts on small businesses. The proposed amendments could be considered a form of mitigation because they provide potentially more benefits to both insurers and buyers, without imposing costs on the regulated industry.

Industry Involvement: Businesses that will be affected by the proposed rules were invited to provide input to the commissioner's staff throughout the rule-writing process. A Preproposal Statement of Inquiry was filed for the rule on October 1, 1997.

Conclusion: The proposed amendments increase the potential benefits of current rules without increasing the costs of compliance. The proposed rules also clarify life illustration rules. These rules do not impose any direct costs on the regulated industry. The proposed rules benefit insurers selling life insurance policies as well as purchasers of these policies. Because the rules increase potential benefits without imposing any direct costs, it is reasonable to conclude that the probable benefits of this proposed rule making are greater than probable costs.

A copy of the statement may be obtained by writing to Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0256, Internet e-mail KacyB@oic.wa.gov, phone (360) 407-0729, or FAX (360) 407-0351.

RCW 34.05.328 applies to this rule adoption. The changes in this regulation alter the disclosure requirements for life insurance, noncompliance is an unfair method of competition and an unfair act or practice.

Hearing Location: Conference Room Downstairs, RoweSix, Building 4, 4224 6th Avenue S.E., Lacey, WA, on March 10, 1998, at 9:00.

Assistance for Persons with Disabilities: Contact Steve Carlsberg by January 23, 1998, TDD (360) 664-3154.

Submit Written Comments to: Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0256, Internet e-mail KacyB@oic.wa.gov, FAX (360) 407-0351, by March 10, 1998.

Date of Intended Adoption: March 17, 1998.

February 4, 1998

Greg J. Scully

Chief Deputy Commissioner

((SOLICITATION REGULATION))

LIFE INSURANCE DISCLOSURE

AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-200 Purpose. (1) The purpose of this regulation is to require insurers to deliver to purchasers of life insurance, information which will improve the buyer's ability to select the most appropriate plan of life insurance for ((his)) the buyer's needs, improve the buyer's understanding of the basic features of the policy which has been purchased or which is under consideration and improve the ability of the buyer to evaluate the relative costs of similar plans of life insurance.

(2) This regulation does not prohibit the use of additional material which is not in violation of this regulation or any other Washington statute or regulation.

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-200, filed 6/25/79, effective 1/1/80.]

AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-210 Scope. (1) Except ((as hereafter exempted)) for the exemptions specified in subsection (2) of this section, this regulation shall apply to any solicitation, negotiation or procurement of life insurance occurring within this state. This regulation shall apply to any issuer of life insurance contracts including fraternal ((mutual life insurers)) benefit societies.

(2) Unless ((otherwise)) specifically included, this regulation shall not apply to:

(a) Annuities.

(b) Credit life insurance.

(c) Group life insurance whose cost is borne in whole or in part by the individual insured's employer or by an association of which the individual insured is a member.

(d) Life insurance policies issued in connection with pension and welfare plans as defined by and which are subject to the federal Employee Retirement Income Security Act of 1974 (ERISA).

(e) Variable life insurance under which the death benefits and cash values vary in accordance with unit values of investments held in a separate account.

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-210, filed 6/25/79, effective 1/1/80.]

AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-220 Definitions. For the purposes of this regulation, the following definitions shall apply:

(1) (("Buyer's guide." A buyer's guide is a document which contains, and is limited to, the language contained in WAC 284-23-270 or language approved by the commissioner.

(2) "Cash dividend." A cash dividend is the current illustrated dividend which can be applied toward payment of the gross premium.

(3) "Equivalent level annual dividend." The equivalent level annual dividend is calculated by applying the following steps:

(a) Accumulate the annual cash dividends at five percent interest compounded annually to the end of the tenth and twentieth policy years.

(b) Divide each accumulation of step (a))) "Buyer's Guide" is a document that contains, and is limited to, the current buyer's guide, which has been recommended for use by the National Association of Insurance Commissioners. A company must use the current Buyer's Guide no later than six months after approval by the National Association of Insurance Commissioners.

(2) Cost comparison indexes:

(a) "Surrender cost comparison index--Guaranteed basis" is calculated by applying the following steps:

(i) Step one: Determine the guaranteed cash surrender value, if any, available at the end of the tenth and twentieth policy years.

(ii) Step two: Divide the result of step one by an interest factor that converts it into one equivalent level annual amount that, if paid at the beginning of each year, would accrue to the values in step (((a))) one over the respective periods stipulated in step (((a))) one. If the period is ten years, the factor is 13.207 and if the period is twenty years, the factor is 34.719.

(((c) Divide the results of step (b) by the number of thousands of the equivalent level death benefit to arrive at the equivalent level annual dividend.

(4) "Equivalent level death benefit." The equivalent level death benefit of a policy or term life insurance rider is an amount calculated as follows:

(a) Accumulate the guaranteed amount payable upon death, regardless of the cause of death, at the beginning of each policy year for ten and twenty years at five percent interest compounded annually to the end of the tenth and twentieth policy years respectively.

(b) Divide each accumulation of step (a) by an interest factor that converts it into one equivalent level annual amount that, if paid at the beginning of each year, would accrue to the value in step (a) over the respective periods stipulated in step (a). If the period is ten years, the factor is 13.207 and if the period is twenty years, the factor is 34.719.

(5) "Generic name." Generic name means)) (iii) Step three: Determine the equivalent guaranteed level premium by accumulating each guaranteed annual premium payable for the basic policy or rider at five percent interest compounded annually to the end of the period stipulated in step one and dividing the result by the respective factors stated in step two. (This amount is the guaranteed annual premium payable for a level premium plan.)

(iv) Step four: Subtract the result of step two from step three.

(v) Step five: Divide the result of step four by the number of thousands of the equivalent guaranteed level death benefit, using the company's guaranteed rate schedule to determine the amount payable upon death for purposes of subsection (3) of this section, to arrive at the "surrender cost comparison index--Guaranteed basis."

(b) "Net payment cost comparison index--Guaranteed basis" is calculated in the same manner as the comparable "surrender cost comparison index--Guaranteed basis" except that the cash surrender value is set at zero.

(3) "Equivalent guaranteed level death benefit" of a policy or term life insurance rider is an amount calculated as follows:

(a) Step six: Accumulate the amount payable upon death, regardless of the cause of death, at the beginning of each policy year for ten and twenty years at five percent interest compounded annually to the end of the tenth and twentieth policy years respectively.

(b) Step seven: Divide each accumulation of step six by an interest factor that converts the accumulation into one equivalent level annual amount that, if paid at the beginning of each year, would accrue to the value in step six over the respective periods stipulated in step six. If the period is ten years, the factor is 13.207 and if the period is twenty years, the factor is 34.719.

(4) "Generic name" is a short title ((which)) that is descriptive of the premium and benefit patterns of a policy or a rider.

(((6) "Life insurance surrender cost index." The life insurance surrender cost index is calculated by applying the following steps:

(a) Determine the guaranteed cash surrender value, if any, available at the end of the tenth and twentieth policy years.

(b) For participating policies, add the terminal dividend payable upon surrender, if any, to the accumulation of the annual cash dividends at five percent interest compounded annually to the end of the period selected and add this sum to the amount determined in step (a).

(c) Divide the result of step (b) (step a. for guaranteed-cost policies) by an interest factor that converts it into an equivalent level annual amount that, if paid at the beginning of each year, would accrue to the value in step (b) (step a. for guaranteed cost policies) over the respective periods stipulated in step (a). If the period is ten years, the factor is 13.207 and if the period is twenty years, the factor is 34.719.

(d) Determine the equivalent level premium by accumulating each annual premium payable for the basic policy or rider at five percent interest compounded annually to the end of the period stipulated in step (a) and dividing the result by the respective factors stated in step (c). (This amount is the annual premium payable for a level premium plan.)

(e) Subtract the result of step (c) from step (d).

(f) Divide the result of step (e) by the number of thousands of the equivalent level death benefit to arrive at the life insurance surrender cost index.

(7) "Life insurance net payment cost index." The life insurance net payment cost index is calculated in the same manner as the comparable life insurance cost index except that the cash surrender value and any terminal dividend are set at zero.

(8) "Policy summary." For the purposes of this regulation, policy summary means)) (5) "Policy data" is a display or schedule of guaranteed numerical values for each policy year or a series of designated policy years of the following information: Premiums; death benefits; cash surrender values and endowment benefits.

(6) "Policy summary" is a written statement describing the elements of the policy including but not limited to:

(a) A prominently placed title as follows: Statement of policy cost and benefit information.

(b) The name and address of the insurance agent, or, if no agent is involved, a statement of the procedure to be followed in order to receive responses to inquiries regarding the policy summary.

(c) The full name and home office or administrative office address of the company in which the life insurance policy is to be or has been written.

(d) The generic name of the basic policy and each rider.

(e) The following amounts, where applicable, for the first five policy years and representative policy years thereafter sufficient to clearly illustrate the premium and benefit patterns, including, but not necessarily limited to, the years for which life insurance cost indexes are displayed and at least one age from sixty through sixty-five or maturity whichever is earlier:

(i) The guaranteed annual premium for the basic policy.

(ii) The guaranteed annual premium for each optional rider.

(iii) The guaranteed amount payable upon death, at the beginning of the policy year regardless of the cause of death other than suicide, or other specifically enumerated exclusions, which is provided by the basic policy and each optional rider, with benefits provided under the basic policy and each rider shown separately.

(iv) ((Total)) The guaranteed total cash surrender values at the end of the year with values shown separately for the basic policy and each rider.

(v) ((Cash dividends payable at the end of the year with values shown separately for the basic policy and each rider. (Dividends need not be displayed beyond the twentieth policy year.)

(vi))) Any guaranteed endowment amounts payable under the policy which are not included under guaranteed cash surrender values above.

(f) The effective policy loan annual percentage interest rate, if the policy contains this provision, specifying whether this rate is applied in advance or in arrears. ((())If the policy loan interest rate is ((variable)) adjustable, the policy summary shall ((include the maximum annual percentage rate.))) also indicate that the annual percentage rate will be determined by the company in accordance with the provisions of the policy and the applicable law.

(g) ((Life insurance surrender cost and life insurance net payment)) Cost comparison indexes for ten and twenty years but in no case beyond the premium paying period. Separate indexes are displayed for the basic policy and for each optional term life insurance rider. Such indexes need not be included for optional riders which are limited to benefits such as accidental death benefits, disability waiver of premium, preliminary term life insurance coverage of less than 12 months and guaranteed insurability benefits nor basic policies or optional riders covering more than one life.

(h) ((The equivalent level annual dividend, in the case of participating policies and participating optional term life insurance riders, under the same circumstances and for the same durations at which life insurance cost indexes are displayed.

(i) A policy summary which includes dividends shall also include a statement that dividends are based on the company's current dividend scale and are not guaranteed in addition to a statement in close proximity to the equivalent level annual dividend as follows: An explanation of the intended use of the equivalent level annual dividend is included in the life insurance buyer's guide.

(j))) A statement in close proximity to the life insurance cost indexes as follows: An explanation of the intended use of these indexes is provided in the ((life insurance)) Buyer's Guide.

(((k))) (i) The date on which the policy summary is prepared.

The policy summary must consist of a separate document. All information required to be disclosed must be set out in such a manner as to not minimize or render any portion ((thereof)) obscure. Any amounts which remain level for two or more years of the policy may be represented by a single number if it is clearly indicated what amounts are applicable for each policy year. Amounts in item (e) of this section shall be listed in total, not on a per thousand nor per unit basis. If more than one insured is covered under one policy or rider, guaranteed death benefits shall be displayed separately for each insured or for each class of insureds if death benefits do not differ within the class. Zero amounts shall be displayed as zero and shall not be displayed as a blank space.

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-220, filed 6/25/79, effective 1/1/80.]

AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-230 ((Disclosure requirements.)) Duties of insurers. (1) The insurer shall provide a Buyer's Guide and a policy summary to any prospective purchaser upon request.

(2) The insurer shall provide, to all prospective purchasers, a Buyer's Guide and a policy summary prior to accepting the applicant's initial application, premium, or premium deposit, ((unless the policy for which application is made contains an unconditional refund provision of at least ten days or unless the policy summary contains such an unconditional refund offer, in which event the buyer's guide and policy summary must be delivered with the policy or prior to delivery of the policy. (RCW 48.23.380, requiring a 10-day free examination of policy, must be complied with.)

(2) The insurer shall provide a buyer's guide and a policy summary to any prospective purchaser upon request.

(3) In the case of policies whose equivalent level death benefit does not exceed $5,000, the requirement for providing a policy summary will be satisfied by delivery of a written statement containing the information described in WAC 284-23-220 (8)(b), (c), (d), (e)(i), (ii) and (iii), (f), (g), (j) and (k))) provided, however, that:

(a) If an illustration, subject to the requirements of chapter 48.23A RCW (Life insurance policy illustrations), is used in the sale of a policy, a policy summary does not have to be provided. Only guarantees may be shown in the policy summary for policies written with an application date on or after the effective date of chapter 48.23A RCW (Life insurance policy illustrations).

(b) If the policy for which application is made or its policy summary contains an unconditional refund provision of at least ten days, the policy summary must be delivered with the policy or prior to delivery of the policy.

(c) If the equivalent guaranteed level death benefit of the policy for which application is made does not exceed five thousand dollars, the requirement for providing a policy summary will be satisfied by delivery of a written statement containing the information described in WAC 284-23-220 (6)(b), (c), (d), (e)(i), (ii), (iii), (iv), (f), (g), (h), and (i).

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-230, filed 6/25/79, effective 1/1/80.]

NEW SECTION

WAC 284-23-235 Special plans and solicitation by direct response. (1) In the case of a solicitation by direct response methods, the insurer shall provide a Buyer's Guide and a policy summary prior to accepting the applicant's application: Provided, however, That if the policy for which application is made contains an unconditional refund provision of at least ten days, the Buyer's Guide and a policy summary may be delivered with the policy.

(2) Special plans. This subsection modifies the application of this rule as indicated for certain special plans of life insurance:

(a) "Flexible premium and benefit policies." For policies sold without illustrations which:

(i) Permit the policyowner to vary the amount and timing of premium payments, or the amount payable on death, all indexes and other data shall be displayed assuming specific schedules of anticipated premiums and death benefits at issue.

(ii) Provide for a cash value that is based on separately identified interest credits and mortality and expense charges applied to the policy, then the policy summary shall indicate when the policy will expire based on the interest rates and mortality and other charges guaranteed in the policy and the anticipated or assumed annual premiums shown in the policy summary.

(b) "Multitrack policies." For policies which allow a policyowner to change or convert the policy from one plan or amount to another, the policy summary:

(i) Shall display all indexes and other data assuming that the option is not exercised; and

(ii) May display all indexes and other data using a stated assumption about the exercise of the option.

(c) "Policies with any rate subject to continued insurability." For policies which allow a policyowner a reduced premium rate if the insured periodically submits evidence of continued insurability, the policy summary:

(i) Shall display cost indexes and other data assuming that the insured always qualifies for the lowest premium;

(ii) Shall display cost indexes and other data assuming that the insured fails to qualify for the lowest premium and the company always charges the highest premiums allowable; and

(iii) Shall indicate the conditions that must be fulfilled for an insured to qualify periodically for the reduced rate.

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AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-240 General rules. (1) Each insurer shall maintain at its home office or principal office, a complete file containing one copy of each document authorized by the insurer for use pursuant to this regulation. Such file shall contain one copy of each authorized form for a period of three years following the date of its last authorized use unless otherwise provided by this regulation.

(2) An agent shall inform the prospective purchaser, prior to commencing ((a life insurance sales)) any presentation that may lead to the sale of life insurance, that ((he)) the agent is acting as a life insurance agent and inform the prospective purchaser of the full name of the insurance company which ((he)) the agent is representing to the buyer. In sales situations in which an agent is not involved, the insurer shall identify its full name.

(3) Terms such as financial planner, investment advisor, financial consultant or financial ((counseling)) counselor shall not be used by an agent unless ((he)) the agent is generally engaged in an advisory business and receives a material part of his or her compensation from that source unrelated to the sale of insurance.

(4) ((Any reference to policy dividends must include a statement that dividends are not guaranteed.)) There shall be no reference to a dividend or nonguaranteed element.

(5) ((A system or presentation which does not recognize the time value of money through the use of appropriate interest adjustments shall not be used for comparing the cost of two or more life insurance policies. Such a system may be used for the purpose of demonstrating the cash-flow pattern of a policy if such presentation is accompanied by a statement disclosing that the presentation does not recognize that, because of interest, a dollar in the future has less value than a dollar today.

(6) A presentation of benefits shall not display guaranteed and nonguaranteed benefits as a single sum unless they are shown separately in close proximity thereto.

(7) A)) Any statement regarding the use of the life insurance cost comparison indexes shall include an explanation to the effect that the indexes are useful only for the comparison of the relative costs of two or more similar policies.

(((8) A life insurance cost index which reflects dividends or an equivalent level annual dividend shall be accompanied by a statement that it is based on the company's current dividend scale and is not guaranteed.

(9) For the purposes of this regulation, the annual premium for a basic policy or rider, for which the company reserves the right to change the premium, shall be the maximum annual premium.))

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-240, filed 6/25/79, effective 1/1/80.]

AMENDATORY SECTION (Amending Order R 79-2, filed 6/25/79, effective 1/1/80)

WAC 284-23-250 Failure to comply. Failure of an insurer or an agent to provide or deliver a Buyer's Guide, ((or)) a policy summary, or policy data as provided ((in)) under WAC 284-23-230 and 284-23-235 shall constitute an unfair method of competition and an unfair act or practice, pursuant to RCW 48.30.010.

[Statutory Authority: RCW 48.02.060, 48.30.010, and 48.30.090. 79-07-053 (Order R 79-2), 284-23-250, filed 6/25/79, effective 1/1/80.]

REPEALER

The following sections of the Washington Administrative Code are repealed:

WAC 284-23-260 Effective date.