Insurance 101: Regulating Twisting and Churning and Best Practices for Carriers
November 4, 2021
As we covered in a previous installment, twisting and churning are the dark side of contract turnover. While there are perfectly legit reasons a consumer might want to upgrade their coverage, there’s also a whole lot of reasons they might just be getting pushed into it by an insurance producer looking for a commission.
Check out part one for a more in-depth exploration of twisting and churning, and why untangling motives makes them so difficult to regulate.
In this article, however, we’re going to be diving more into how these products are, ultimately, regulated by the authorities. Of course, before this discussion churns your stomach or you get yourself twisted up in knots, please keep in mind this is, after all, an online source you’re reading and not in fact a DIY guide to legal or insurance regulation advice. So, while we’ll be talking regulation and best practices, it’s up to you to do your own research and due diligence to follow applicable laws.
Regulating churning and twisting: NAIC model regs
The National Association of Insurance Commissioners (NAIC) has a model for just about everything, and the topic of insurance churning and twisting is no exception. The NAIC’s Life Insurance and Annuities Replacement Model Regulation assigns responsibility for preventing this practice to producers and insurers alike. Though the most recent model was published in 2015, the NAIC committee notes most states (but not all) have some version of the model or a past draft.
The NAIC’s guidance for preventing twisting and churning includes fun tedium like a list of products that aren’t similar or which don’t count as replaceable policies, but cutting to the chase, producer duties include:
- If a client has a life insurance or annuity policy and a producer is recommending a new product, they should review the how and why of any potential conflicts with the applicant, possibly in writing.
- The producer should list the specifics of the old contract and new policy and provide a copy for the client to hang onto.
- The producer should maintain a copy of all sales material provided to the client to be able to verify none of it was inducing the client to an inappropriate contract replacement.
Insurers in this scenario also have duties:
- Training producers how to comply in supplying information justifying a contract replacement.
- “A system to review appropriateness of each replacement transaction.”
- Actively monitor producer’s contract replacements, keep records, and be prepared to present records to the relevant state insurance departments.
- Records should include:
- Replacement contracts as a percentage of each producer’s annual business
- Lapsed policies as a percentage of each producer’s annual business
- Transactions that may be replacements that went unreported by the producer
- Replacement contracts indexed by replacing producer and existing insurer
Basically, for insurers, this kind of contract tracking, where you’re obligated to discover whether a new applicant has other annuity or life insurance contracts with other carriers, and then research whether your producer is aware of this and did their due diligence is… well, to call it a pain in the neck would be an understatement.
And, remember, just because a contract is a replacement doesn’t mean it’s not a totally valid thing – there are many reasons a client may truly want their contract replaced.
What is New York Regulation 60?
New York – more than just a great place for hot dogs from street vendors and arguing about what “upstate” really means. It’s also one of the more regulated states, and they have the final word in churning and twisting prevention. The New York Regulation 60, also known as Part 51, actually requires that, regardless of whether the client has disclosed previous life insurance or annuity contracts, the producer must proceed as though they do by default. Basically, in any life insurance or annuity sales situation, the producer has to provide the “IMPORTANT Notice Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts” and a “Disclosure Statement” signed both by the producer and the consumer, giving any information about potential conflicts of interest.
According to the New York Department of Financial Services website: “It is the position of the Department that, under circumstances surrounding the sale of products, where fees and charges may be a significant factor in a determination by a client to purchase or replace a product, an illustration of applicable fees and charges is an essential element in the disclosure.”
Another element of note: Prior to reforms in 2015, NY Regulation 60 actually required a two-step process for replacing a contract. Recently, a New York Supreme Court ruling shot down Regulation 187, aka “Suitability and Best Practices,” which was a further extension of Regulation 60, that wrapped up replacement guidelines into a “best practices” standard, which the court said exceeded New York Department of Financial Services’ authority.
There is, of course, still the chance that this issue comes before the New York state government, or even falls under a future national regulation. So, while NY Regulation 60 is the final word of contract replacement regulation, it probably isn’t the final word of contract replacement regulation, if you know what we mean.
Best practices for carriers
Carriers in New York will, of course, be best-served by taking New York’s regulation to heart and leaning into treating anyone with a life or annuity contract as though they were replacing them any time they acquire or change coverage. Elsewhere, most states require that carriers keep detailed records of transactions that even might be contract replacements.
Between New York and the NAIC guidelines, carriers (and relevant MGAs) that want to stay on the straight and narrow concerning product turnover should follow a process to track and report these changes.
That process should look something like:
- Client should self-report any prior contracts.
- Agent should report illustrations, ads, and other inducements for their sales process, as well as a detailed explanation of why they recommended the new contract over the old.
- Agent should compile a side-by-side comparison of products, insofar as it’s possible.
- The agent or agency should then digitally compile this information together for the carrier
- The carrier should review this information for compliance and completeness, and, if the old product was sold through a different carrier, alert that carrier and provide this information to them for their records.
- The carrier should flag products that are not differentiated enough to be objectively superior. If a contract represents coverage that is the same or worse than a client’s previous coverage, a carrier may need to investigate further or even report the producer to the state.
- Carriers are also required to organize data about contract replacements based on what portion of a producer’s business it makes up or based on which insurers they most routinely replace coverage for (or are replaced by, if you happen to be the carrier for the old coverage).
We can’t stress heavily enough that this should be a digital, automated process. For one thing, doing this manually is impossibly labor-intensive. For another, a manual approach to tracking churning or twisting trends means always being reactive instead of proactive.
For example, imagine a producer is consistently turning over products. Manual compliance here won’t identify this trend other than possibly an annual accounting. Digital processes, however, can flag this practice early on, and even send that producer a warning to cease any unethical practices before it becomes a true red flag.
Additionally, by tracking which products are consistently replaced in real-time, your business may see insights into any contracts that truly are inferior and can legally, ethically be replaced with no problem.
Each state has specific guidelines for what reporting it requires of carriers in this regard, but having access to these trends is integral to your own internal data-driven decision-making purposes.
The future of life insurance and annuity contract regulation
Churning and twisting will likely continue to be a topic of debate as they represent significant pain points in the industry, ones that largely go unchecked. While regulations like NY Reg 60 are well-intentioned, there’s a real risk that the disclosure paperwork has the opposite of its intended purpose, making consumers’ eyes glaze over and becoming one more box to check, one additional paper to sign when they flip through the stack saying, “sign here, here, and here.”
Contract turnover will also continue to be a subject of debate as the conversation around whether the industry should follow a “best interest” standard ebbs and flows. More interesting perhaps is the possibility of digitized processes and tools helping insurers enforce compliance and heighten best practices for tracking replacements as a share of individuals’ production.