Lincoln, Penn Mutual pull insurance products from New York in wake of best-interest rule

The departures follow the news that Jackson National halted sales of some products in the state.

More insurers are deciding to pull products like annuities and life insurance from the New York market as the state’s best-interest rule takes hold.

Lincoln Financial Group, the fourth-largest seller of annuities in the U.S. last year, suspended sales of fee-based annuities in New York on Aug. 1 in response to a particular consumer disclosure required by the new rule, Insurance Regulation 187.

The rule, which took effect Aug. 1 for annuity sales and is going into effect Feb. 1 for life insurance products, requires sales of these products to be in consumers’ best interests.

InvestmentNews previously reported that Jackson National Life Insurance Co. halted fee-based annuity sales in New York on Aug. 12 for a similar reason. Both insurers expect their suspension of sales to be temporary and are continuing to sell commission-based annuities.

Jackson and Lincoln are respectively the No. 3 and No. 8 insurers in New York by total annuity market share, with $1.5 billion and $1.1 billion of annuity premiums underwritten in the state at the end of 2018, according to the National Association of Insurance Commissioners. Fee-based annuities, which are sold by registered investment advisers, represent a small sliver of these totals, though the exact amount is unclear.

Meanwhile, Penn Mutual Life Insurance Co. suspended all new annuity sales after Aug. 30 and will do so for its life insurance products after Dec. 31. Those suspensions include product exchanges.

Penn Mutual is the 11th largest life insurance underwriter in New York, with $262 million of insurance premiums on its books; it’s No. 32 in terms of total annuity sales in the state, with $59 million of customer premiums, according to NAIC data.

“I think it is significant,” Barry Flagg, president and founder of Veralytic Inc., a life insurance research firm, said of the insurers exiting the New York market. “With change comes disruption.”

Insurance experts say the New York rule represents a watershed change for the industry, especially for non-variable life insurance products due to regulation that’s generally less stringent when compared with annuities.

New York’s best-interest rule is part of a movement by some states to raise sales standards for brokers and financial advisers following the death of the Department of Labor fiduciary rule, an Obama-era regulation that aimed to increase the standards for retirement accounts like 401(k)s and IRAs. The rule was overturned by an appeals court last year.

Massachusetts, New Jersey and Nevada are in various stages of rolling out their own fiduciary standards. But New York’s, which was upheld last month by the state Supreme Court, is the only one that affects life insurance sales.

Some attorneys say the language of the New York rule is on par with and may even be tougher than the DOL fiduciary rule, which the insurance and brokerage industries lobbied hard to kill.

One provision of New York’s rule requires insurers offering both fee- and commission-based products to provide consumers with a comparison showing the differences between the products.

“That’s going to upset a lot of commissionable, old-school distributors who don’t want the client to know about the fee-only products,” Mr. Flagg said.

However, Lincoln Financial believes that disclosure “may create undue confusion,” which led the insurer to temporarily suspend its fee-based annuity sales, said spokeswoman Amy Norcini.

“We are reviewing the regulation to analyze how Lincoln, our partners and advisers can best comply with disclosure requirements,” Ms. Norcini said, adding that Lincoln supports the overarching goal of New York’s rule.

Penn Mutual spokeswoman Lauren Kane said the New York best-interest rule didn’t influence the firm’s decision to leave the New York market.

“Like any business decision of this significance, we evaluated multiple factors to come to this conclusion, and we look forward to resuming sales in the future,” she said.