NOTE: WITHDRAWN EFFECTIVE OCTOBER 11, 2002

Circular Letter No. 7 (1996)

April 11, 1996

TO:	All Life Insurance Companies Authorized To Write Life Insurance and Annuities
RE:	Filing Of Fund Based Compensation Plans

Section 4228(d)(4) and (5) of the Insurance Law allow companies to compensate agents on plans other than commissions, provided that the aggregate limits set forth in subsection (a), (b) and (d)(1) of Section 4228 are not exceeded and any such plan has been approved by the Superintendent.

The Department is aware that many companies may wish to provide fund based compensation plans to their agents pursuant to plans requiring approval under the above provisions, and that the time required for designing and preparing such plans may be substantial. Therefore, beginning immediately, the Department will accept for filing plans of fund based compensation which comply with the attached guidelines. The Department is recommending formal adoption of these guidelines as a regulation. Those plans of fund based compensation which could be deemed approved without filing under paragraph 3(c) of the guidelines may be used immediately, provided that, prior to use of the plan, the Department has received an informational filing of the plan and a certification from an officer of the company that the plan complies with that provision of the regulation.

If the Department adopts a regulation in final form which differs from the attached guidelines so that amendments to plans of fund based compensation already in use are required, the Department expects such amendatory filings to be made immediately after the effective date of the regulation. Any such plans which are not amended to conform with the final regulation will be deemed disapproved and may not be used for business issued after the effective date of the regulation.

 

Section XX.1 Preamble

Paragraphs (4) and (5) of subsection (d) of section 4228 of the Insurance Law authorize companies to compensate their agents on plans other than commissions provided that the aggregate limits set forth in subsections (a), (b), and paragraph (1) of subsection (d) of section 4228 are not exceeded and any such plan has been approved by the superintendent. This part establishes, for single premium deferred annuities and single premium immediate annuities, the basis on which plans of fund based compensation will be approved, and the types of such plans that will be deemed approved without submission of an application therefor. For purposes of compensation, each premium paid under a flexible premium annuity is deemed to be a single premium.

Subsection (o) of section 4228 of the Insurance Law authorizes the superintendent to prescribe a regulation establishing maximum amounts of expense reimbursements to agents; 11 NYCRR Part 11 (Regulation 49), which requires all plans of expense allowance payments to be filed and approved by the superintendent before they are used, was promulgated for this purpose. This part establishes, for single premium deferred annuities and single premium immediate annuities, the basis on which plans of fund based expense allowance payments will be approved. For purposes of expense allowance payments, each premium paid under a flexible premium annuity is deemed to be a single premium.

For purposes of group annuities marketed on an individual basis, plans of fund based payments made in compliance with Section XX.3(a)(1) only are permitted under this regulation.

Section XX.2 Definitions

(a) "Fund" means (i) with respect to an annuity not in payment status, a contract accumulation account, fund, or any other policy or contract value at a particular time, before application of surrender charges and market value adjustment, if any, whether or not it is immediately available to the owner of a policy or contract and (ii) with respect to an annuity in payment status, the statutory reserve for the contract, calculated on the basis used by the company to establish such reserves, excluding any additional reserves required by [cash flow testing results] Part 95 of this Title (Regulation 126).

(b) "Fund based compensation" means compensation on a policy or contract consisting of a series of payments that are percentages of a fund, as defined herein. The amount of the fund may be determined as of the time of payment or averaged over a period of time covered by the payment.

(c) "Fund based expense allowance payments" means expense allowance payments on a policy or contract where the plan consists of a series of payments that are percentages of a fund, as defined herein. The amount of the fund may be determined as of the time of payment or averaged over a period of time covered by the payment.

(d) "Fund based payments" means the sum of fund based compensation and fund based expense allowance payments.

(e) "Premium based compensation" means compensation calculated as a percentage of policy or contract premium.

(f) "Premium based expense allowance payments" means payments made pursuant to an expense allowance payments plan whose maximum limits are defined as a percentage of policy or contract premium.

(g) "Premium based payments" means the sum of premium based compensation and premium based expense allowance payments.

Section XX.3 Fund Based Compensation and Fund Based Expense Allowance Payments

(a) In any plan of annuity compensation submitted under paragraph (5) of subsection (d) of section 4228 of the Insurance Law and in any plan of annuity expense allowance payments submitted under subsection (o) of section 4228 of the Insurance Law, any payment of premium based payments or part thereof that could otherwise have been paid in respect of a policy or contract may be converted, in whole or in part, into fund based payments based on the fund under such a contract, subject to the following:

(1) If the rate of fund based payments is level over all years in which fund based payments are paid and such payments begin in the year in which the premium is paid and continue only while the policy or contract (including the period after annuitization if the company so elects) is in force, the maximum allowable payment is 0.1429% (one seventh of one per cent) per annum of the fund value for each 1% of premium based payments that could otherwise have been paid with respect to the premium.). Modal rates shall be level, and the sum of such rates within a year may not exceed the maximum annual rate. The maximum rate of fund based payments that can be made in any year, if the plan is described as above and all compensation and expense allowance payments are fund based, is one per cent which is the equivalent of seven per cent of premium based payments.

(2) To the extent that a schedule of fund based payments is other than as described in paragraph (1):

(A) such schedule shall not provide, in any year, a rate of fund based payments in excess of 0.2143% (150% of one seventh of one per cent) for each one percent of combined premium based compensation and premium based expense allowance payment that could otherwise have been paid, and

(B) such schedule shall not exceed, in present value, as of the issue date of the policy or contract, the combined value of the premium based compensation and premium based expense allowance payments that could otherwise have been paid with respect to the premium, and

(C) such present value shall be calculated assuming a 4% annual rate of interest accumulation on the fund, a 4% rate of discount, mortality based on the American Men (5) Table for males with issue age 45, rates of contract termination as set forth in the Linton B scale of lapse rates, and no partial withdrawals (no assumption of agent survival may be included in the calculation), and

(D) such present value shall be calculated over one or more periods of 15 years (even though payments are scheduled to continue for longer) provided that each 15 years shall be measured from:

(i) the year in which fund based payments begin and

(ii) for any increase in the rate of fund based payments, the year of that increase in the compensation percentage set forth in the schedule, and

the total present value of such a plan is the sum of the present values of the various individual pieces.

(b) A demonstration of compliance with the above requirements shall be filed and approved in advance for each plan of fund based compensation; provided, however, that a plan which provides not more than 0.5% of fund based compensation in any year instead of premium based compensation, shall be deemed approved without filing. All fund based plans of expense allowance payments must continue to be filed pursuant to 11 NYCRR Part 11 (Regulation 49).

Section XX.4 Aggregate Expense Limits

For purposes of reporting expenses pursuant to section 4228 of the Insurance Law, the appropriate lines in the company's Schedule Q supplement to its Annual Statement shall be charged, in the year in which each premium is received, with the present value of the fund based compensation to be paid thereon in accordance with the methodology described in section XX.3(a)(2) above. A reconciliation of such charges to the insurance expenses in the Annual Statement must be provided.

Section XX.5 Severability

If any provision of this regulation the application thereof to any person or circumstance is adjudged invalid by a court of competent jurisdiction, such judgment shall not be affected or impair the validity of the other provisions of this regulation or the application thereof to other persons or circumstances.