New regulations for New York insurers elevate consumer interests above business interests when recommending insurance products
Best practices are meant to ensure that businesses meet high standards. And for insurers in states like New York, that means putting consumer interests above their own. In these states, regulations forbid insurance companies and agents from steering customers toward policies that are not in their best interests.
However, establishing universal standards for what’s in the best interest of consumers is tough, and specific best practices often vary for each individual insurer and insuree. Getting consensus and compliance can be a struggle. Here’s how New York is tackling the issue, and what it means for brokers and agents in the state.
A consumer-first philosophy
Insurance is supposed to be there to protect customers when they are most vulnerable. New York’s best practice regulations are designed to ensure that insurance agents put their clients’ needs first, and not their own financial gain.
A breach of these best practices is a breach of consumer trust. When an agent dishonestly recommends or even aggressively pushes, policies that are unsuitable for the client in order to benefit themselves (or their employers), that benefit comes at the expense of the customer. Whether the agent presents a disadvantageous new policy from the outset or tries to convince a policyholder to switch from one type to another, this type of exploitation often results in a customer paying far more than they should. And that’s what the New York regulations are designed to prevent.
Why it’s difficult to define insurance best practices
Not all insurers are alike. They may offer similar policies, but they offer them “their” way. What constitutes a “best” practice for one provider may not be so for another. This is especially true when we consider that, like any other business, insurers are constantly trying to differentiate their products and practices from those of their competitors in order to gain an edge.
It’s this ambiguity that sometimes makes a violation of best practice regulations difficult to prove. To tackle that issue, the New York Department of Financial Services (DFS) took steps in 2016 to put preventative measures in place and moved to further clarify these guidelines last year.
New York clarifies “consumer best interests”
An amendment to 11 NYCRR 224 (also termed Regulation 187) will come into effect on August 1, 2019. It will alter the regulation’s name to “Suitability and Best Interests in Life Insurance and Annuity Transactions” and clarify its wording. The amendment is an effort to stamp out deceptive or unfair insurance practices by establishing a transparent and honest code of conduct.
The new regulations require agents to act in a trustworthy and competent manner to ensure that every transaction is in the best interest of the consumer. The policies offered should appropriately address their insurance needs and financial objectives at the time of the transaction.
The amendment will place much greater responsibility on insurers to be fully aware and respectful of multiple client metrics, such as age, annual income, their future financial objectives, and the duration of existing liabilities and obligations. Failure to comply at all levels could mean serious repercussions.
How much will NY insurers have to pay for best-practice breaches in future? A good indicator is a penalty imposed on the National Integrity Life Insurance company in 2018. It was fined $240,000 for breach of Regulations 187 and 60 as well as ordered to pay an undisclosed amount of restitution to the 476 affected policyholders.
The DFS hopes other insurance companies will fall into line quickly—a hope that only underscores the fact that many insurers are too willing to exploit their customers.
The implications of this legislation
The implications may seem straightforward: Consumers are safer, and insurers will have to meet higher standards or face punitive action. The new legislation hasn’t been universally welcomed, however, and some insurance bodies are actively fighting it on several grounds.
One concern is that such demanding standards will increase the burden on insurers in the form of research. To satisfy every requirement of the new legislation will mean gathering and accessing extensive information on each individual consumer—some of which the consumers may not be able to provide themselves.
This research would come at a greater cost of time and money for insurers. Some see this added expense as a counter-intuitive effect of the new rule: If insurers must pay more to do their job, the customer will ultimately be charged more. The same knock-on effect applies to the possibility of greater litigation against insurers as a result of the new rule.
Other providers fear that a uniform standard of practice will rob them of their own professional judgment. Since not all insurers offer identical policies—and all customers have unique needs—the new legislation is seen by some as a barrier to making their own decisions.
Worse still, some critics see the change amounting to a direct violation of the right to free speech. They argue that it will curtail the ability of insurance providers to recommend their own products and needlessly limit the choices available to clients.
Some consensus form of best practice must eventually take shape. Until then, the consumer best interest is likely to remain a contested concept.
Everyone looking for insurance coverage has the right to review all available options with an experienced and accountable agent. This helps inform and guide consumers toward the most suitable choice for them without pressure or fear of exploitation. At NICRIS Insurance, we pride ourselves on always recommending the appropriate suite of products to protect each client’s individual needs and interests.
Whomever you choose to work with, you should make sure they do the same—whether they are legally required to or not.