NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES
REPORT ON MARKET CONDUCT EXAMINATION
OF THE
PENN MUTUAL LIFE INSURANCE COMPANY
CONDITION: DECEMBER 31, 2015
DATE OF REPORT: OCTOBER 28, 2016
NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES
REPORT ON MARKET CONDUCT EXAMINATION
OF THE
PENN MUTUAL LIFE INSURANCE COMPANY
AS OF
DECEMBER 31, 2015
DATE OF REPORT: OCTOBER 28, 2016
EXAMINER: FLORA EGBUCHULAM
TABLE OF CONTENTS
ITEM
PAGE NO.
1.
Executive summary
2
2.
Scope of examination
3
3.
Description of Company
4
A. History
4
B. Territory and plan of operation
4
4.
Market conduct activities
6
A. Advertising and sales activities
6
B. Underwriting and policy forms
17
C. Treatment of policyholders
18
5.
Summary and conclusions
22
Andrew M. Cuomo
Maria T. Vullo
Governor
Superintendent
April 13, 2018
Honorable Maria T. Vullo
Superintendent of Financial Services
New York, New York 10004
Madam:
In accordance with instructions contained in Appointment No. 31436, dated
February 22, 2016, and annexed hereto, an examination has been made into the condition and
affairs of The Penn Mutual Life Insurance Company, hereinafter referred to as “the Company,” at
its home office located at 600 Dresher Road, Horsham, PA 19044.
Wherever “Department” appears in this report, it refers to the New York State Department
of Financial Services.
This report indicating the results of this examination is respectfully submitted.
O N E S TA TE ST RE ET , 2 ND FL O O R, NE W Y OR K, N Y 1 0 0 04 - 15 11 | WW W . D FS .N Y. G OV
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1. EXECUTIVE SUMMARY
The material violations contained in this report are summarized below.
• The Company violated several sections of Insurance Regulation No. 60, 11 NYCRR by
failing to: (i) provide revised Disclosure Statements in instances where revised disclosure
statements were necessary and required; (ii) review Disclosure Statements to ascertain that
they were accurate and met the requirements of the Regulation; and (iii) enforce required
state and company replacement procedures and designate a principal officer specifically
responsible for the monitoring procedures of the Regulation. (See item 4A-3 of this report)
• The Company violated Insurance Regulation No. 152, 11 NYCRR Section 243.2(b)(1)(iv)
by failing to maintain various replacement documents needed to complete replacements
for life policies and annuity contracts. (See item 4A-3 of this report)
• The Company violated several sections of Insurance Regulation No.74, 11 NYCRR 53,
including violation of sections 53-2.7 and 53-2.8 of the Regulation by utilizing a buyer’s
guide that did not contain all the statements required by Section 53-2.7 of the Regulation
or did not contain any portion of the “ADDENDUM TO LIFE INSURANCE BUYER’S
GUIDE” required by Section 53-2.8 of the Regulation. (See item 4A-4 of this report)
• The Company violated Section 3201(b)(1) of the New York Insurance Law by issuing 320
annuity contracts using an unapproved version of policy form No. VA-CS.X-11, and by
issuing 462 life insurance policies with unapproved endorsement form No. SOP-01. (See
item 4B-1of this report)
• The Company violated Section 2611(a) of New York Insurance Law by failing to obtain
proper written informed consent prior to subjecting an applicant to an HIV-related test.
(See item 4B-2 of this report)
• The Company violated Section 3211(b)(2) of the New York Insurance Law by failing to
include disclosure language on notices of premium due provided to whole life insurance
policyholders informing such policyholders that unless payment is made on or before the
date when due or within the specified grace period thereafter, the policy shall terminate or
lapse except as to the right to any cash surrender value or nonforfeiture benefit. (See item
4C-3 of this report)
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2. SCOPE OF EXAMINATION
This examination covers the period from January 1, 2010, through December 31, 2015. As
necessary, the examiner reviewed matters occurring subsequent to December 31, 2015, but prior
to the date of this report (i.e., the completion date of the examination).
The examination comprised a review of market conduct activities and utilized the National
Association of Insurance Commissioners’ Market Regulations Handbook or such other
examination procedures, as deemed appropriate, in such review.
This report on examination is confined to comments on matters which involve departure
from laws, regulations or rules, or which require explanation or description.
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3. DESCRIPTION OF COMPANY
A. History
The Company was incorporated as a mutual life company under the laws of Pennsylvania
on February 24, 1847, and commenced business on May 25, 1847. The Company obtained its
New York license on March 1, 1869.
This is the Company’s first statutory examination by the Department.
B. Territory and Plan of Operation
The Company is authorized to write life insurance, annuities and accident and health
insurance as defined in paragraphs 1, 2 and 3 of Section 1113(a) of the New York Insurance Law.
The Company is licensed to transact business in all 50 states and the District of Columbia.
In 2015, 15.5% of life insurance premiums, 15.2% of annuity considerations, 32% of accident and
health premiums, 9.1% of deposit-type funds, and 10% of other considerations were received from
New York. Policies are written on a participating and non-participating basis.
The following tables show the percentage of direct premiums received, by state, and by
major lines of business for the year 2015:
Life Insurance Premiums Annuity Considerations
New York
15.5%
New York
15.2%
California
14.4
Minnesota
10.8
Pennsylvania
6.5
California
8.2
New Jersey
5.7
Florida
8.1
Florida
4.9
Massachusetts
7.2
Subtotal
47.0%
Subtotal
49.5%
All others
53.0
All others
50.5
Total
100.0%
Total
100.0%
5
Accident and Health
Insurance Premiums Deposit Type Funds
New York
32.0%
Massachusetts
22.0%
Florida
10.3
Florida
12.0
New York
9.1
All others
57.7
Subtotal
43.1%
All others
56.9
Total
100.0%
Total
100.0%
The principal lines of business sold during the examination period are individual life
insurance and annuity products offered to affluent individuals, professionals and owners of small-
to-medium size entities. The products offered include whole life, term life, universal life, and
variable universal life policies, as well as deferred and immediate annuity products. The Company
generated most of its premium income from ordinary annuities. In 2014, the Company’s net
premiums from ordinary life business decreased by approximately $849 million. This decrease
was due to the cession of a block of Guaranteed Protect Universal Life business on December 31,
2014, to The Penn Insurance and Annuity Company, the Company’s wholly owned subsidiary,
under a coinsurance agreement with funds withheld.
The Company’s agency operations consist of two distribution channels, the Career Agency
System (“CAS”) and the Independent Financial Network (“IFN”), including the Company’s
proprietary broker-dealer, Hornor, Townsend & Kent, Inc. (“HTK”). The CAS is a retail
distribution model that provides life and annuity products directly to consumers. The IFN is a
wholesale distribution model that deals with intermediaries, both non-registered independent
advisors and registered advisors of independent broker-dealers. Variable products are offered
through HTK, which does so through outside independent broker-dealers.
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4. MARKET CONDUCT ACTIVITIES
The examiner reviewed various elements of the Company’s market conduct activities
affecting policyholders, claimants, and beneficiaries to determine compliance with applicable
statutes and regulations and the operating rules of the Company.
A. Advertising and Sales Activities:
The examiner reviewed a sample of the Company’s advertising files and sales activities of
the agency force including trade practices, solicitation and the replacement of insurance policies.
1. Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(c) states:
“The use of the terms instant, savings, guaranteed cost, guaranteed renewable,
noncancellable, deposit, investment, or words of similar import, or phrases which
include such words, may, in the context used, be deemed to be misleading and
capable of being deceptive.”
Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(e) states, in part:
“The words free, no cost, without cost, no additional cost, at no extra cost, without
additional cost, or words of similar import, may not be used with respect to any
benefit or service being made available with the policy. . . .”
Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(h) states:
“Any insurer using the phrase low cost or similar term, to characterize its operation,
policy portfolio, or a particular policy form shall, upon request of the
superintendent, submit to the superintendent such evidence as it may have to
substantiate such use.”
The examiner reviewed a sample of 38 advertisements used to market life insurance and
annuity products during the examination period. Twenty-five advertisements were selected from
the Company’s advertisement logs and 13 advertisements were selected from the Company’s
public website. The examiner’s review revealed that 6 (15.8%) of the 38 advertisements contain
the word “deposit” which, in the contexts used, may be deemed potentially misleading and capable
of being deceptive to consumers.
7
The Company violated Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(c) by
using a potentially misleading or deceptive word on advertisements for whole life and annuity
products.
The examiner’s review also revealed that 4 (10.5%) of the 38 advertisements contained the
words and/or phrases, “at no additional cost”, or “at no additional charge" to describe the options
and benefits being made available with the Company’s deferred annuity, universal life, and
variable universal life products. Rather than specify the charge for the benefit or service, or state
that a charge is included in the premium, the Company used words and phrases that may be deemed
potentially misleading and capable of being deceptive to consumers.
The Company violated Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(e) by
failing to specify the charge for the benefit or service, or state that a charge is included in the
premium for the guaranteed coverage for deferred annuity, universal life, and variable universal
life products.
The examiner’s review revealed that 3 (7.9%) of the 38 advertisements contained words
and/or phrases, “low cost”, “lower cost”, or similar term, to describe the cost of the annuity and
universal life products being offered. The Company was unable to provide sufficient evidence to
substantiate the use of the words “low-cost” on the three advertisements for annuity and universal
life products.
The Company violated Insurance Regulation No. 34-A, 11 NYCRR Section 219.4(h) by
using the words and phrases “low cost” or “lower cost” on advertisements for annuity and universal
life products without substantive evidence of such use.
2. Section 2112(d) of the New York Insurance Law states, in part:
“Every insurer, . . . or the authorized representative of the insurer, . . . doing business
in this state shall, upon termination of the certificate of appointment . . . of any
insurance agent, . . . file with the superintendent within thirty days a statement, in
such form as the superintendent may prescribe, of the facts relative to such
termination for cause. The insurer, . . . or the authorized representative of the
insurer, . . . shall provide, within fifteen days after notification has been sent to the
superintendent, a copy of the statement filed with the superintendent to the
insurance producer at his, or her or its last known address by certified mail, return
receipt requested, postage prepaid or by overnight delivery using a nationally
recognized carrier. . . . ”
8
The examiner reviewed the files of nine agents who were terminated for cause during the
examination period and noted that three (33.3%) of the termination-for-cause letters were hand-
delivered to the terminated producers.
The Company violated Section 2112(d) of the New York Insurance Law by failing to
provide insurance producers termination for cause letters by certified mail, return receipt
requested, postage prepaid or by overnight delivery using a nationally recognized carrier.
3. Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.5(c) states, in part:
“[Each insurance agent and broker shall]: . . .
where a replacement has occurred or is likely to occur: . . .
(3) present to the applicant, not later than at the time the applicant signs the
application, the ‘IMPORTANT Notice Regarding Replacement or Change of Life
Insurance Policies or Annuity Contracts’ and a completed ‘Disclosure Statement’
signed by the agent or broker in the form prescribed by the Superintendent of
Financial Services and leave copies of such forms with the applicant for his or her
records. . . . “
Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.5(c) states, in part:
“[Each insurance agent and broker shall]: . . .
where a replacement has occurred or is likely to occur: . . .
(4) present to the applicant, not later than at the time the applicant signs the
application, the “IMPORTANT Notice Regarding Replacement or Change of Life
Insurance Policies or Annuity Contracts” and leave a copy of such form with the
applicant for the applicant’s records . . .”
Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy or annuity contract shall: . . .
(2) require with or as part of each application a copy of any proposal, including the
sales material used in the sale of the proposed life insurance policy or annuity
contract, and proof of receipt by the applicant of the ‘IMPORTANT Notice
Regarding Replacement or Change of Life Insurance Policies or Annuity Contracts’
and the completed ‘Disclosure Statement’. . . . ”
Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy or annuity contract shall: . . .
(2) require with or as part of each application a copy of the sales material including
any proposal, used in the sale of the life insurance policy or annuity contract, and
9
proof of receipt by the applicant of the ‘IMPORTANT Notice Regarding
Replacement or Change of Life Insurance Policies or Annuity Contracts’. . . .”
The examiner reviewed a sample of replacement files consisting of 170 new annuity
contracts and 191 new life policies issued during the examination period. The sample included
both internal and external replacements. The review revealed several deviations from Insurance
Regulation No. 60, and significant inconsistencies in following or adhering to the Company’s own
replacement guidelines and procedures.
In 5 (2.6%) of the 191 life insurance policy replacements reviewed and in 6 (3.5%) of 170
annuity contract replacements reviewed, the examiner noted that the IMPORTANT Notice was
either not provided to the applicant, or it was provided to the applicant later than at the time of
application. The examiner also noted that in each instance, the Company failed to require with or
as part of the application a proof of receipt by the applicant of the “IMPORTANT Notice”.
The Company violated Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section
51.5(c)(3) and Insurance Regulation 60 (3
rd
Amendment), 11 NYCRR Section 51.5(c)(4) as well
as Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b)(2) and Insurance
Regulation No. 60 (3rd Amendment), 11 NYCRR Section 51.6(b)(2) by failing to require with, or
as part of the applications, proof of receipt by the applicants of the “IMPORTANT Notice”.
Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy or annuity contract shall: . . .
(3) Examine any proposal used, including the sales material used in the sale of the
proposed life insurance policy or annuity contract, and the ‘Disclosure Statement’,
and ascertain that they are accurate and meet the requirements of the Insurance Law
and this Part. . . . ”
Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy or annuity contract shall: . . .
(4) examine the sales material, including any proposal, used in the sale of the life
insurance policy or annuity contract, and the ‘Disclosure Statement’, and ascertain
that they are accurate and meet the requirements of the Insurance Law and
regulations . . . ”
In 129 (67.5%) of the 191 life insurance policy replacements reviewed and in 132 (77.6%)
of 170 annuity contract replacements reviewed, the examiner noted various inconsistencies on the
10
Disclosure Statements: failure to record the valuation date, recording an incorrect valuation date,
recording replaced policy surrender amounts that differed from the surrender amount on the
replaced insurer’s document. These inconsistencies indicated that sales material was used when
none was actually used or indicated that no sales material was used when sales material was
actually used.
The Company violated Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section
51.6(b)(3) and Insurance Regulation No. 60 (3
nd
Amendment), 11 NYCRR Section 51.6(b)(4) by
failing to examine and ascertain that the Disclosure Statement was accurate and met the
requirements of the Regulation.
Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy contract shall: . . .
(4) Within 10 [ten] days of receipt of the application furnish to the insurer whose
coverage is being replaced a copy of any proposal, including the sales material used
in the sale of the proposed life insurance policy or annuity contract, and the
completed ‘Disclosure Statement’ . . . ”
In 33 (19.4%) of the 170 annuity contracts replacements reviewed, the Company failed to
provide the company being replaced with a copy of the proposal, including the sales material used
in the sale of the proposed life insurance policy, and the completed “Disclosure Statement” or
failed to provide the documentation within 10 days of receipt of the completed application.
The Company violated Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section
51.6(b)(4) by failing to furnish to the insurer whose coverage is being replaced a copy of the
required materials or by failing to provide such materials within the required time frame.
Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy or annuity contract shall: . . .
(9) in the event the life insurance policy or annuity contract issued differs from the
life insurance policy or annuity contract applied for, ensure that the requirements
of this Part are met with respect to the information relating to the life insurance
policy or annuity contract as issued, including but not limited to the revised
‘Disclosure Statement,’ any revised or additional sales material used and
acknowledgement by the applicant of receipt of such revised material.”
11
Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(b) states, in part:
“Where a replacement has occurred or is likely to occur, the insurer replacing the
life insurance policy contract shall: . . .
(10) if an initial ‘Disclosure Statement’ was provided to the applicant prior to the
delivery of the life insurance policy or annuity contract and the life insurance policy
or annuity contract is issued other than as applied for, then the insurer shall provide
the owner a revised ‘Disclosure Statement’ that conforms to the life insurance
policy or annuity contract as issued no later than the time of delivery of the policy
or contract . . . ”
In 31 (16.2%) of 191 internal and external life insurance replacements and in 19 (11.2%)
of 170 of internal and external annuity contracts replacements reviewed, the examiner noted that
the Company did not provide the applicant with a revised Disclosure Statement, even though the
policy or contract was issued “other than as applied for”.
The Company violated Insurance Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section
51.6(b)(9) and Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(b)(10) by
failing to issue a revised Disclosure Statement in cases where the life policy or annuity contract
issued differed from the policy or contract applied for.
Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(e) states, in part:
“Both the insurer that issued the life insurance policy or annuity contract that is
being replaced and the insurer replacing the life insurance policy or annuity contract
shall establish and implement procedures to ensure compliance with the
requirements of this Part. These procedures shall include a requirement that all
material be dated upon receipt. Such insurers shall also designate a principal officer
specifically responsible for the monitoring and enforcement of these procedures.
All insurers . . . shall furnish the superintendent with these procedures and the name
and title of the designated principal officer . . . Any changes in these procedures or
the designated principal officer shall be furnished to the superintendent within 30
days of such change.”
In 148 (77.5%) of 191 of life insurance replacements reviewed, the Company failed to date
stamp replacement documents upon receipt. In addition, the examiner’s review of the replacement
function revealed that the Company did not designate a principal officer specifically responsible
for the monitoring and enforcement of Insurance Regulation No. 60 procedures during the
examination period.
The Company violated Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section
51.6(e) by failing to date stamp replacement documents upon receipt and by failing to designate a
12
principal officer specifically responsible for the monitoring and enforcement of its replacement
procedures.
Insurance Regulation No. 152, 11 NYCRR Section 243.2(b) states, in part:
“Except as otherwise required by law or regulation, an insurer shall maintain:
(1) A policy record for each insurance contract or policy for six calendar years after
the date the policy is no longer in force or until after the filing of the report on
examination in which the record was subject to review, whichever is longer. . . . A
policy record shall include: . . .
(iv) Other information necessary for reconstructing the solicitation, rating, and
underwriting of the contract or policy. . . .”
In 9 (4.7%) of the 191 life replacements reviewed, the Company failed to maintain one or
more replacement documents in the policy record, and in 52 (30.6%) of the 170 annuity
replacements reviewed, the Company failed to maintain one or more replacement documents in
the policy record. The review of the replacement transactions files revealed:
(i) In seven of life replacements and in 43 of annuity replacement transactions reviewed,
the information obtained from the existing insurer or the support for the proposed
policy necessary to complete the “Disclosure Statement” was not maintained in the
policy record.
(ii) In five of the annuity replacements reviewed, a copy of the agent authorization form,
which includes a list of all annuity contracts proposed to be replaced, was not
maintained in the policy record.
(iii) In two of the life replacement transactions reviewed and in nine of the annuity
replacement transactions reviewed, a copy of the sales material used in the sale was
not maintained in the policy record.
The Company violated Insurance Regulation No. 152, 11 NYCRR Section 243.2(b)(1)(iv)
by failing to maintain various replacement documents needed to complete replacements for life
policies and annuity contracts.
4. Insurance Regulation No. 74, 11 NYCRR Section 53-2.7 states, in part:
“. . . Once you have decided which type of policy to buy, you can use a cost
comparison index to help you compare similar policies. Life insurance agents or
companies can give you information about several different kinds of indexes that
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each work a little differently. One type helps you compare the costs between two
policies if you give up the policy and take out the cash value. Another helps you
compare your costs if you don't give up your policy before its coverage ends. Some
help you decide what kind of questions to ask the agent about the numbers used in
an illustration. Each index is useful in some ways, but they all have shortcomings.
Ask your agent which will be most helpful to you. Regardless of which index you
use, compare index numbers only for similar policies - those that offer basically the
same benefits, with premiums payable for the same length of time. . . .”
Insurance Regulation No. 74, 11 NYCRR Section 53-2.8 states, in part:
“ADDENDUM TO LIFE INSURANCE BUYER'S GUIDE
After you have decided which kind of life insurance fits your needs, look for a good
buy. Your chances of finding a good buy are better if you use two types of index
numbers that have been developed to aid in shopping for life insurance. One is
called the "Surrender Cost Index" and the other is the "Net Payment Cost Index."
It will be worth your time to try to understand how these indexes are used, but in
any event, use them only for comparing the relative costs of similar policies. LOOK
FOR POLICIES WITH LOW COST INDEX NUMBERS. . . .”
The examiner reviewed a copy of the life insurance buyer’s guide (the “Buyer’s Guide”)
provided to applicants during the examination period. The Buyer’s Guide did not include the
language required under Section 53-2.7 of Regulation 74.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-2.7 by using
a life insurance buyer’s guide that did not include the language required under this section.
The Buyer’s Guide also did not include the addendum required under Section 53-2.8 of
Regulation 74.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-2.8 by using
a life insurance buyer’s guide that did not include the addendum required under this section.
Insurance Regulation No. 74, 11 NYCRR Section 53-3.1 states, in part:
“. . . (b) Each insurer marketing policies to which this Subpart is applicable shall
notify the Superintendent whether a policy form is to be marketed with or without
an illustration. . . . Any previous identification may be changed by notice to the
superintendent.
(c) If the insurer identifies a policy form as one to be marketed without an
illustration, any use of an illustration for any policy using that form prior to the first
policy anniversary is prohibited.
(d) If a policy form is identified by the insurer as one to be marketed with an
illustration, a basic illustration prepared and delivered in accordance with this
Subpart is required . . .”
14
The examiner reviewed life insurance applications where an illustration was used to market
the policy. The review included checking policy forms that were illustrated against the Company’s
list of annual certifications of policy forms to be marketed with illustrations. The review revealed
that policy forms FL-08(S)(NY)-R, T10-95(S)(NY), and IALJ-08(S)(NY), which were not
certified to be marketed with illustrations., were marketed with illustrations.
The Company violated Insurance Regulation No. 74, 11 NYCRR Sections 53-3.1(b) and
53-3.1(c) by using illustrations with policy forms that were not certified to be marketed with
illustrations.
Insurance Regulation No. 74, 11 NYCRR Section 53-3.3(d) states, in part:
“. . . Statements substantially similar to the following shall be included on the same
page as the numeric summary and signed by the applicant, or the policyowner in
the case of an illustration provided at time of delivery, as required in this Subpart.
(1) A statement to be signed and dated by the applicant or policyowner
. . .
(2) A statement to be signed and dated by the insurance producer or other
authorized representative of the insurer . . .”
For 5 of the 84 (5.9%) new business files reviewed, basic illustrations signed and dated by
the applicant and the insurance producer were maintained in the policy records. For 13 of the 84
(15.5%) new business files reviewed, there were no basic illustration in the files, but illustrations
conforming to the policies as issued were signed and dated by the applicants and the producers
after the date the applications were signed. For 62 of the 84 (73.8%) new business files reviewed,
illustrations conforming to the policies as issued were maintained in the policy records, but they
were prepared after the date the applications were taken, and they were not signed by the applicants
or the agents.
The Company violated Insurance Regulation No. 74, Sections 53-3.3(d)(1) and
53-3.3(d)(2) by failing to have the applicants and the insurance producers or other authorized
representatives sign and date the illustrations.
Insurance Regulation No. 74, 11 NYCRR Section 53-3.3(f) states, in part:
“. . . In addition, the insurer shall provide with any illustration showing a suspension
of premium: . . .
15
(3) for a participating policy, disclosure that future dividends may be less than those
illustrated which may result in the need to continue premium payments or resume
premium payments after an initial suspension of such premium payments.”
The examiner reviewed copies of the illustrations for four participating whole life policies.
The review revealed that all four policies (100%) did not include the dividend disclosure required
under Section 53-3.3(f)(3) of Regulation 74.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-3.3(f)(3) by
failing to include the required dividend disclosure on the illustrations for participating whole life
policies.
Insurance Regulation No. 74, 11 NYCRR Section 53-3.5 states, in part:
“(a) If a basic illustration is used by an insurance producer or other authorized
representative of the insurer in the sale of a life insurance policy and the policy is
applied for as illustrated, a copy of that illustration, signed in accordance with this
Subpart, shall be submitted to the insurer at the time of policy application. . . . If
the policy is issued other than as applied for, a revised basic illustration conforming
to the policy as issued shall be sent with the policy. The revised illustration shall
conform to the requirements of this Subpart, shall be labeled “Revised Illustration”
and shall be signed and dated by the applicant or policyowner and producer…no
later than the time the policy is delivered. . . .
(b) If no illustration is used by an insurance producer or other authorized
representative of the insurer in the sale of a life insurance policy or if the policy is
applied for other than as illustrated, the producer or representative shall certify to
that effect in writing on a form provided by the insurer. On the same form the
applicant shall acknowledge that no illustration conforming to the policy applied
for was provided and shall further acknowledge an understanding that an
illustration conforming to the policy as issued will be provided no later than at the
time of policy delivery. This form shall be submitted to the insurer at the time of
policy application. If the policy is issued, a basic illustration conforming to the
policy as issued shall be sent with the policy and signed no later than the time the
policy is delivered. A copy shall be provided to the insurer and the policyowner.
. . .
(d) Such basic illustration or revised illustration shall satisfy the requirements for
preliminary information required under Section 3209(d) of the Insurance Law and
Section 53-2.1 of this Part, and the requirements for the policy summary required
under Section 3209(e) of the Insurance Law and Section 53-2.2 of this Part if
delivered to the applicant or policyowner in conformance with this Subpart. . . .”
16
Section 3209(b)(1) of the New York Insurance Law states, in part:
“No policy of life insurance shall be delivered or issued for delivery in this state
after the applicable effective date, as set forth in subsection (n) of this section,
unless the prospective purchaser has been provided with the following:
(A) a copy of the most recent buyer's guide and the preliminary information
required by subsection (d) of this section, at or prior to the time an application is
taken. . . .”
The examiner reviewed 84 new business files issued using a policy form identified by the
Company as one to be marketed with an illustration. For 80 of the 84 (95.2%) new business files
reviewed, the Company failed to provide applicants with basic illustrations at the time of policy
applications: for 37 cases, the illustrations were not presented or provided; for 18 cases, the
illustrations were presented or were shown to the applicants on a computer screen but were not
provided; and for 25 cases, the illustrations were different from the policies applied for.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-3.5(a) by
failing to provide applicants with copies of the illustrations, signed by the applicants and the
Company’s authorized representatives, at the time of applications.
The Company violated Section 3209(b)(1)(A) of the New York Insurance Law by failing
to provide the applicant with a compliant Buyer’s Guide and the preliminary information that
conformed to Section 3209(d) of the New York Insurance Law at or prior to the time the
application was taken.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-3.5(b) by
accepting applications from producers when no basic illustrations were used at the time of sale for
a policy form designated as one to be marketed with an illustration, and by failing to obtain at the
time of sale either signed basic illustrations or, where the policies were applied for as other than
illustrated, certifications from the producers, signed by the applicants, that no illustrations
conforming to the policies applied for were provided.
The Company violated Insurance Regulation No. 74, 11 NYCRR Section 53-3.1(d) by
failing to provide applicants with signed illustrations at the time of applications for policies
designated as illustrated.
The examiner reviewed 80 new business files that used one of the following life application
forms that were filed with the Department using the certified process provided under Insurance
Circular Letter No. 6 (2004).: PM1143(NY) Version 10/08, PM1143 (NY)-R2,
17
PM1143 (NY)-R3, and PM1143 (NY)-R4. These application forms included three check-off
boxes for illustration acknowledgements that were used in lieu of the certification of
non-illustration required by Section 53-3.5 (b) of Regulation 74: (1) an illustration was not
presented to me, (2) an illustration was presented to me; however, the policy applied for is
different than as illustrated, or (3) an illustration was presented to me on a computer screen.
The examiner recommends that the Company discontinue the use of the illustration
acknowledgments on insurance application forms and revise any illustration acknowledgment
forms according to the requirements of Insurance Regulation No. 74.
The examiner also recommends that the Company submit revised application forms using
the prior approval process, not the certified process, to remove the illustration certification
language from the application forms.
Furthermore, the examiner recommends that the Company revise any internal
administrative illustration certification form or procedures according to the requirements of
Regulation 74.
B. Underwriting and Policy Forms
The examiner reviewed a sample of new underwriting files, both issued and declined, and
the applicable policy forms.
1. Section 3201(b)(1) of the New York Insurance Law states, in part:
“No policy form shall be delivered or issued for delivery in this state unless it has
been filed with and approved by the superintendent as conforming to the
requirements of this chapter and not inconsistent with law. . . .”
The examiner’s review of underwriting and replacement files revealed that during the
examination period unfiled life insurance endorsement, form No. SOP-01, was used to issue 462
life policies.
The Company used an unfiled variable annuity contract form, form No.VA-CS-X-1, to
issue 320 annuity contracts during the examination period. The approved version of this form
contains the statement, “Also, the Surrender Charges are higher and the Surrender Charge Period
is longer for the Contract that offers Purchase Payment Enhancements”, but the version used did
not contain this statement.
18
The Company violated Section 3201(b)(1) of the New York Insurance Law by issuing 320
annuity contracts using an unapproved version of policy form No. VA‐CS.X‐11, and by issuing
462 life insurance policies with unapproved endorsement form No. SOP‐01.
The examiner recommends that the Company cease using the unapproved versions of
policy form No. VA-CS-X-11 and endorsement form No. SOP-01 and file both forms with the
Department.
2. HIV/AIDS Test Consent Authorization
Section 2611(a) of the New York Insurance Law states:
“No insurer or its designee shall request or require an individual proposed for
insurance coverage to be the subject of an HIV related test without receiving the
written informed consent of such individual prior to such testing and without
providing general information about AIDS and the transmission of HIV infection.”
The examiner reviewed a sample of 78 life insurance underwriting policy files whereby
insurance applicants were subjected to an HIV-related test. In 44 (56.4%) of the 78 cases reviewed,
the Company failed to obtain proper written informed consent and failed to provide general
information about AIDS and the transmission of HIV-infection prior to subjecting applicants to an
HIV-related test.
The Company violated Section 2611(a) of the New York Insurance Law by failing to obtain
proper written informed consent prior to subjecting an applicant to an HIV-related test.
C. Treatment of Policyholders
The examiner reviewed a sample of various types of claims, surrenders, changes and
lapses. The examiner also reviewed the various controls involved, checked the accuracy of the
computations and traced the accounting data to the books of account.
1. Section 86.4(d) of Department Regulation No. 95 states:
“Location of warning statements and type size. The warning statements required by
subdivisions (a), (b) and (e) of this section shall be placed immediately above the
space provided for the signature of the person executing the application or claim
form and shall be printed in type which will produce a warning statement of
19
conspicuous size. On claim forms which require execution by a person other than
the claimant, or in addition to the claimant, the warning statements required by
subdivisions (a), (b) and (e) of this section shall be placed at the top of the first page
of the claim form or in the page containing instructions, either in print, by stamp or
by attachment and shall be in type size which will produce a warning statement of
conspicuous size.”
The examiner reviewed a sample of 160 claims: 25 disability claims, 85 life insurance
death claims, and 50 annuity death claims. None of the 160 claim forms had the fraud warning
statement placed immediately above the space provided for the signature of the person executing
the application or claim form; the statement was provided in a separate document. According to
the Company, the same claim form was used for all claims that were processed during the
examination period. The Company processed a total of 3,324 claims, 1,418 life claims, 635
annuity claims, and 1,351 accident and health claims, during the examination period using a non-
compliant claim form.
The company violated Insurance Regulation No. 95, 11 NYCRR Section 86.4(d) by failing
to place the required fraud warning statement immediately above the space provided for the
signature of the person executing the claim form.
2. Section 3227 of the New York Insurance Law states, in part:
“(a) Interest . . . shall be payable by life insurers . . . upon: (1) the value of policies
surrendered by policyholders for cash values, including the rollover of annuity
funds to other entities, and (2) the funds disbursed as policy loans. Such interest
payment shall be added to and be a part of the total sum paid or be paid separately
at the option of the insurer.
(b) The interest calculated on amounts described in paragraphs one and two of
subsection (a) hereof shall be calculated from the date the documentation necessary
to complete the transaction is received by the insurer and shall be payable if the
funds are not mailed or delivered by the insurer within ten working days of said
receipt.
(c) No interest need be payable pursuant to this section unless the amount of such
interest is at least twenty-five dollars or if the payment of benefits by the insurer
has been deferred pursuant to other provisions of this chapter. . . . ”
The examiner reviewed a sample of 35 life surrender benefit transactions. The examiner
noted five (14.29%) instances where the Company was required to pay interest in accordance with
Section 3227 of the New York Insurance Law. The Company failed to pay such interest in all five
instances.
20
Two of the five instances were for whole life insurance policies that were issued prior to
September 1, 1975, using whole life policy form No. L-70, which contains the provision:
“The Company may defer payment of the Net Cash Value upon surrender for a
period not exceeding six months. If payment is so deferred for a period of 30 days
or more, interest at the rate of 2.5% per year shall be paid for the deferment.”
The Company’s decision not to pay interest on the two policies was based on the exception
of Section 3214(e) of the New York Insurance Law. However, Section 3214(e) does not apply to
policies or contracts issued prior to September first, nineteen hundred seventy-five, and only
applies to life insurance and annuity death claims, not to life insurance and annuity surrender
benefits.
The Company violated Section 3227(b) of the New York Insurance law by failing to pay
interest that was at least $25 on five surrendered benefit transactions within 10 days of the insurer’s
receipt of the documentation necessary to complete the transaction.
3. Section 3211(b) of the New York Insurance Law states, in part:
“The notice required by paragraph one of subsection (a) hereof shall: . . .
(2) state the amount of such payment . . . and shall also state that unless such
payment is made on or before the date when due or within the specified grace period
thereafter, the policy shall terminate or lapse except as to the right to any cash
surrender value or non-forfeiture benefit.”
The examiner reviewed a sample of the notices of premium due for 11 whole life and 8
term life policies that lapsed during the examination period. The notices failed to include the
required statement that unless such payment is made on or before the date when due or within the
specified grace period thereafter, the policy shall terminate or lapse except as to the right to any
cash surrender value or non-forfeiture benefit. The deficient notices of premium due were mailed
to 385 whole life policyholders and 2,229 term life policyholders during the examination period.
The Company violated Section 3211(b)(2) of the New York Insurance Law by failing to
include disclosure language on notices of premium due provided to whole life insurance
policyholders informing such policyholders that unless payment is made on or before the date
when due or within the specified grace period thereafter, the policy shall terminate or lapse except
as to the right to any cash surrender value or nonforfeiture benefit.
21
The Company placed the policies that lapsed, for which a deficient notice of premium due
was provided to the policyholder, back in force for one year from the date of default pursuant to
Section 3211(a)(1) of the New York Insurance Law. For all such policies where the one-year
period has already passed, the Company determined whether the insured is still alive or has
deceased.
The Company identified three whole life policies where the insured died during the
examination period and within one year of the date of lapse and made prompt restitution to the
beneficiaries for the benefits afforded by the policies. Where the Company was unable to locate
the beneficiary after due diligence, the unclaimed life insurance proceeds were escheated to the
State of New York in accordance with applicable State law.
22
5. SUMMARY AND CONCLUSIONS
Following are the violations and recommendations contained in this report:
Item
Description
Page No(s).
A
The Company violated Insurance Regulation No. 34-A, 11 NYCRR
Section 219.4(c) by using a potentially misleading or deceptive word on
advertisements for whole life and annuity products.
7
B
The Company violated Insurance Regulation No. 34-A, 11 NYCRR
Section 219.4(e) by failing to specify the charge for the benefit or service,
or state that a charge is included in the premium for the guaranteed
coverage for deferred annuity, universal life, and variable universal life
products.
7
C
The Company violated Insurance Regulation No. 34-A, 11 NYCRR
Section 219.4(h) by using the words and phrases “low cost” or “lower
cost” on advertisements for annuity and universal life products without
substantive evidence of such use.
7
D
The Company violated Section 2112(d) of the New York Insurance Law
by failing to provide insurance providers termination for cause letters by
certified mail, return receipt requested, postage prepaid or by overnight
delivery using a nationally recognized carrier.
8
E
The Company violated Insurance Regulation No. 60 (2
nd
Amendment),
11 NYCRR Section 51.5(c)(3) and Insurance Regulation 60 (3
rd
Amendment), 11 NYCRR Section 51.5(c)(4) as well as Insurance
Regulation No. 60 (2
nd
Amendment), 11 NYCRR Section 51.6(b)(2) and
Insurance Regulation No. 60 (3rd Amendment), 11 NYCRR Section
51.6(b)(2) by failing to require with, or as part of the applications, proof
of receipt by the applicants of the “IMPORTANT Notice”.
9
F
The Company violated Insurance Regulation No. 60 (2
nd
Amendment),
11 NYCRR Section 51.6(b)(3) and Insurance Regulation No. 60 (3
nd
Amendment), 11 NYCRR Section 51.6(b)(4) by failing to examine and
ascertain that the Disclosure Statement was accurate and met the
requirements of the Regulation.
10
G
The Company violated Insurance Regulation No. 60 (2
nd
Amendment),
11 NYCRR Section 51.6(b)(4) by failing to furnish to the insurer whose
coverage is being replaced a copy of the required materials or by failing
to provide such materials within the required time frame.
10
23
Item
Description
Page No(s).
H
The Company violated Insurance Regulation No. 60 (2
nd
Amendment),
11 NYCRR Section 51.6(b)(9) and Insurance Regulation No. 60 (3
rd
Amendment), 11 NYCRR Section 51.6(b)(10) by failing to issue a
revised Disclosure Statement in cases where the life policy or annuity
contract issued differed from the policy or contract applied for.
11
I
The Company violated Insurance Regulation No. 60 (3
rd
Amendment),
11 NYCRR Section 51.6(e) by failing to date stamp replacement
documents upon receipt and by failing to designate a principal officer
specifically responsible for the monitoring and enforcement of its
replacement procedures.
11
J
The Company violated Insurance Regulation No. 152, 11 NYCRR
Section 243.2(b)(1)(iv) by failing to maintain various replacement
documents needed to complete replacements for life policies and annuity
contracts.
12
K
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-2.7 by using a life insurance buyer’s guide that did not include the
language required under this section.
13
L
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-2.8 by using a life insurance buyer’s guide that did not include the
addendum required under this.
14
M
The Company violated Insurance Regulation No. 74, 11 NYCRR
Sections 53-3.1(b) and 53-3.1(c) by using illustrations with policy forms
that were not certified to be marketed with illustrations.
14
N
The Company violated Insurance Regulation No. 74, Sections 53-
3.3(d)(1) and 53-3.3(d)(2) by failing to have the applicants and the
insurance producers or other authorized representatives sign and date the
illustrations.
15
O
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-3.3(f)(3) by failing to include the required dividend disclosure on the
illustrations for participating whole life policies.
15
P
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-3.5(a) by failing to provide applicants with copies of the illustration,
signed by both the applicants and the Company’s authorized
representative, at the time of application.
16
24
Item
Description
Page No(s).
Q
The Company violated Section 3209(b)(1)(A) of the New York Insurance
Law by failing to provide the applicant with a compliant Buyer’s Guide
and the preliminary information that conformed to Section 3209(d) of the
New York Insurance Law at or prior to the time the application was taken.
16
R
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-3.5(b) by accepting applications from producers when no basic
illustrations were used at the time of sale for a policy form designated as
one to be marketed with an illustration, and by failing to obtain at the time
of sale either signed basic illustrations or, where the policy were applied
for as other than illustrated, certifications from producers, signed by the
applicants, that no illustration conforming to the policies applied for were
provided.
16
S
The Company violated Insurance Regulation No. 74, 11 NYCRR Section
53-3.1(d) by failing to provide applicants with signed illustrations at the
time of application for policies designated as illustrated .
17
T
The examiner recommends that the Company discontinue the use of the
illustration acknowledgments on insurance application forms and revise
any illustration acknowledgment forms according to the requirements of
Insurance Regulation No. 74.
17
U
The examiner also recommends that the Company submit revised
application forms using the prior approval process, not the certified
process, to remove the illustration certification language from the
application forms.
17
V
Furthermore, the examiner recommends that the Company revise any
internal administrative illustration certification form or procedures
according to the requirements of Regulation No. 74.
17
W
The Company violated Section 3201(b)(1) of the New York Insurance
Law by issuing 320 annuity contracts using an unapproved version of
policy form No. VA‐CS.X‐11, and by issuing 462 life insurance policies
with unapproved endorsement form No. SOP‐01.
18
X
The examiner recommends that the Company cease using the unapproved
versions of policy form No. VA-CS-X-11 and endorsement form No.
SOP-01 and file both forms with the Department.
18
Y
The Company violated Section 2611(a) of the New York Insurance Law
by failing to obtain proper written informed consent prior to subjecting
an applicant to an HIV-related test.
18
25
Item
Description
Page No(s).
Z
The company violated Insurance Regulation No. 95, 11 NYCRR Section
86.4(d) by failing to place the required fraud warning statement
immediately above the space provided for the signature of the person
executing the claim form.
19
AA
The Company violated Section 3227(b) of the New York Insurance law
by failing to pay interest that was at least $25 on five surrendered benefit
transactions within 10 days of the insurer’s receipt of the documentation
necessary to complete the transaction.
20
BB
The Company violated Section 3211(b)(2) of the New York Insurance
Law by failing to include disclosure language on notices of premium due
provided to whole life insurance policyholders informing such
policyholders that unless payment is made on or before the date when due
or within the specified grace period thereafter, the policy shall terminate
or lapse except as to the right to any cash surrender value or nonforfeiture
benefit.
21
Respectfully submitted,
____________/s/__________
Flora Egbuchulam
Associate Insurance Examiner
STATE OF NEW YORK )
)SS:
COUNTY OF NEW YORK )
Flora Egbuchulam, being duly sworn, deposes and says that the foregoing report, subscribed by
her, is true to the best of her knowledge and belief.
____________/s/__________
Flora Egbuchulam
Subscribed and sworn to before me
this day of
APPOINTMENT
NO. 31436
NEW
YORK
STATE
DEPARTMENT
OF
FINANCIAL
SERVICES
I,
SHIRIN
EMAMl
. Acting Superintendent
of
Financial Services
of
the State
of
New
York,
pursuant
to
the provisions
of
the Financial Services Law and the Insurance
Law,
do
hereby appoint:
FLORA EGBUCHULAM
as a proper person to examine the affairs
of
the
PENN
MUTUAL
LIFE
INSURANCE
COMPANY
and
to make a report to me
in
writing
of
the condition
of
said
COMPANY
with such other information as she shall deem requisite.
In Witness Whereof, I have hereunto subscribed my name
and
affixed the official Seal
of
the Department
at the City
of
New York
this 22nd day of_February. 2016
SHIRIN
EMAMI
Acting Superintendent
of
Financial Services
By:
ASSISTANT CHIEF - LIFE
BUREAU
