8A-2004 Replacement of Annuity Contracts - REISSUE

1 DATE: May 28, 2004 BULLETIN NO.: 8A-2004 TO: ALL LICENSED LIFE AND ANNUITY INSURERS, LIFE INSURANCE PRODUCER AND INSURER TRADE ASSOCIATIONS, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS, AND OTHER INTERESTED PARTIES FROM: ARKANSAS INSURANCE DEPARTMENT RE: APPLICATION OF REPLACEMENT PROCEDURES UNDER ARK. CODE ANN. §23-66-307 TO BOTH LIFE AND ANNUITY CONTRACTS; REPLACEMENT OF LIFE INSURANCE Please be advised the Arkansas Insurance Department interprets its Replacement of Life Insurance Bulletin 6-89 and the replacement requirements of Ark. Code Ann. §23-66-307 and Ark. Code Ann. §23- 66-206(2)(Supp. 2003) to apply to annuities. The Department will enforce this interpretation beginning on January 1, 2005. Also, the Department will work toward promulgating a regulation based on the NAIC Life Insurance and Annuities Replacement Model Regulation. Annuities are unquestionably insurance (see Ark. Code Ann. §23-60-102(1)(B). Given that annuities are included within the definition of insurance, they likewise must be included somewhere within the definition of Kinds of Insurance set forth in Ark. Code Ann. §23-62-101 et seq. The Department believes annuities are encompassed within the definition of life insurance, as life insurance is defined as “insurance on human lives” set forth in Ark. Code Ann. §23-62-102(a). Consistent with this interpretation is the specific inclusion of annuities with life insurance in one of the more recent and widely adopted model laws; namely, The Producer Licensing Model Act (specifically see Ark. Code Ann. §23-64-507(a)(1). The Department finds the subject replacement law (and its accompanying bulletin) safeguards accumulated values within a life insurance contract and ensures the consumer is apprised of the proposed replacement product’s suitability; and that consistent therewith is the need to safeguard accumulated values within an annuity contract and to ensure that suitable recommendations are made to consumers when an existing annuity product is replaced. (It is the safeguarding of the accumulated values and the need for the insurance producer to demonstrate benefit and betterment for the insurance consumer via a replacement product that lies behind the suitability language and replacement requirements in Ark. Code Ann. §23-66-307. Annuity contracts have accumulated values that are as much in need of safeguarding as the accumulated values in life insurance policies.) Consistent with the foregoing, the Departments considers “churning of business” pursuant to Ark. Code Ann. §23-66-206(2)(Supp. 2003) to occur when the insurance producer replaces an existing annuity and that replacement is not in accordance with Ark. Code Ann § 23-66-307 or that replacement is without objective demonstration by the insurance producer of the purpose of replacing the annuity for the benefit and betterment of the annuity holder. Arkansas Insurance Department 1200 West Third Street Little Rock, AR 72201-1904 1-501-371-2600 1-800-282-9134 Mike Huckabee Mike Pickens Fax 1-501-371-2618 Governor Commissioner www.state.ar.us/insurance 2 You may view these various laws on-line via a State website, via links ”Research Resources”, “Arkansas Code”, and either “HTML” or “JAVA” at www.arkleg.state.ar.us. This Bulletin is not intended to and does not replace Bulletin 6-89; it is intended to be cumulative to Bulletin 6-89. Contact the Legal Division at 501-371-2820 or insurance.legal@arkansas.gov for a copy of Bulletin 6-89. Direct your questions to Mr. Joe Musgrove, Director, Life and Health Division, at the Department at 501- 371-2800 or joe.musgrove@arkansas.gov. (signed by mike pickens) (may 28, 2004) ____________________________________ ______________________________________ MIKE PICKENS DATE INSURANCE COMMISSIONER STATE OF ARKANSAS