NY DFS Quietly Implements Yet Another Major Obstacle to Electronic Applications

This new obstacle did not come from a law. It did not come from a regulation. It did not even come from a Circular Letter. Instead, it came in an update to an outline, crafted inside DFS, with no public comment or debate. If the most recent outline posted by DFS is any indication, fewer New Yorkers will be able to apply for life insurance or annuities electronically in the future because it is so hard to satisfy all the rules DFS imposes on even super-simple electronic signatures using technology such as DocuSign.

With each successive outline update, more obstacles are put in place, and it becomes more challenging to get electronic applications and processes approved. In the new November 18, 2021, revision to the Individual Life Insurance Outline[1], there is a major new obstacle for insurance carriers (and their distribution partners) who want to give consumers the option to apply for insurance electronically.[2]

The most recent example of this extremely disheartening trend is related to the several references to Regulation 152, NY’s record-retention rules. This is what appears to be a “gotcha” approach to regulation. If your company is a LICONY member and attended the LICONY/DFS Compliance Seminar in August, you heard NY articulate the incredible new position that Reg 152 requires that all individually completed screens must be maintained as screenshots, not just the blank ones they require for approval purposes. These individual screenshots must show what was entered on each separate screen by each applicant during each application process. Those individualized screenshots must be retained with the policy file for Reg 152 compliance. The attorney presenting this position referred to 11 NYCRR 243.2(b)(1)(iv) as the regulatory basis for this new position. That subparagraph states that the policy file for retention purposes includes “other information necessary for reconstructing the solicitation, rating, and underwriting of the contract or policy.” 

It seems to us that finding these individualized screenshots to be necessary records has the effect of being an arbitrary regulatory action, given that documentation of all the myriad ways that information gets entered onto the “paper” version of an application is not required. Up until now, the applicant’s review of the application prior to signing it has been sufficient, along with marketing materials, illustrations, etc., to reconstruct the solicitation, rating, and underwriting of the contract or policy. What is DFS afraid of with electronic applications that is so disproportionate to their concerns with paper applications? To the best of our knowledge, that has never been publicly articulated. Are there examples where complaints have indicated that information was incorrectly entered from an online screen to the final PDF of the application? Have there never been any complaints about paper applications that did not accurately reflect what an applicant told an agent or entered on an intake form in the agent’s office? What accounts for so much regulatory attention to the application process when it is electronic and hardly any when it is in person? 

Going way back to 1999, DFS published Circular Letter 11 (1999), which is still effective and states: “the Department will be working to increase efficiencies in the regulatory process through greater use of the Internet and electronic commerce. As part of this process, we will be helping to conduct a detailed review of state legislation and regulations in an effort to identify potential obstacles to electronic commerce. It is vital that we then work through these obstacles as insurers and other financial services companies expand into the world of E-commerce and access the Internet as an additional marketing and distribution channel. The Department must keep pace with these technological changes and, where necessary, alter our regulatory scope to address these issues, such as processes for electronic signatures and payments so that the industry and consumers can take full advantage of opportunities afforded by E-commerce”.

Since then, the policy forms review process has made it almost impossible to apply an electronic signature to a “paper” application, let alone apply for life insurance or annuities online. It seems clear that the Superintendent did not intend for the regulatory review of the process for electronic signatures to become the major obstacle! But nonetheless, today, companies are faced with the likelihood that they will have to purchase a service to track applicant’s keystrokes on screens to meet this brand new administrative mandate in the policy forms approval process, stemming from the equally brand new interpretation of record retention regulation, that applies only to electronic applications and not to paper ones. This distinction will likely expose consumers’ personally identifiable information (PII) in new and challenging ways. After all, new electronic records will have to be created showing the applicant’s keystrokes, and the screens containing that information must be maintained with all the personal financial and medical information, presumably unredacted, or what purpose could it serve in the “reconstruction.” Because this is not technology that insurers currently have in-house, that information may end up being collected and housed outside the insurer's control. The risk to consumers seems to be increased by this new position, yet DFS has offered no justification for it. 

This outline revision's “gotcha” element is that DFS does not put this specific interpretative mandate in writing. Instead, they have added a submission requirement that companies explicitly state that they comply with Reg 152. Unless you heard this new far-reaching position at the August seminar, you might not realize how DFS will interpret that statement. You might not realize that you are making a statement that you reasonably believe to be true but nevertheless exposes your company to regulatory risk. Unless your company is doing this capturing, which we believe no company is doing now or can reasonably do, you would be stating something inaccurate that DFS appears to intend to use against companies like yours in the future. 

We recommend that when you indicate in a submission how you comply with 243.2(b)(1)(iv), that you believe what you include in the policy file includes all information necessary for reconstructing the solicitation, rating, and underwriting of the contract or policy. We also recommend that you specifically state that information collected online via individually completed screenshots is NOT necessary for that purpose because the keystrokes are actually entered onto the application as the application’s screenshots are completed. The application that is attached to and made a part of the policy and which is used to contest does not receive any editing when the entry occurs, and the consumer reviews the information prior to signing the application, electronically or otherwise. We hope that will make it clear that your company has a reasonable basis to believe that the required information is a part of the policy record and makes it harder for DFS, on exam, to impose this new interpretation of the long-standing record retention regulation. 

We believe regulation is most effective when it is clearly written and consistently applied. That has not been the case with the many desk-drawer rules and interpretations that DFS attorneys apply to their review of electronic applications for life insurance and annuities. It would be one thing if they drew a straight line between complaints, litigation, or even documented concerns and the increasingly restrictive positions they are taking, but they have not done so. What is the justification for these draconian mandates for new technology when there are clear parallels in the “paper” world and no such restrictions? We don’t know. What we do know is that the most difficult and lengthy policy form filings in NY are not complex products or new and innovative benefits. The most difficult filings in NY are electronic signature filings. DFS was willing in 1999 to think in new ways and to support innovation. What happened? It continues to be the case that they are not willing to do so in 2021. 

Stay tuned…no doubt we will have more to come on this topic.

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[1] Despite the title, which the Department could easily amend with any revision, DFS applies this outline to annuity applications, as well as to life insurance applications.

[2] Even their terminology refuses to acknowledge the ubiquitous reality of electronic business transactions and the country’s dramatic move away from a paper-based work environment. Even though their own Reg 195 requires that virtually all policy form submissions are made via SERFF, an electronic platform, the outlines continually refer to the approval of paper applications. DFS never sees paper applications – they see and approve the same PDFs that they don’t allow electronic signatures on without extensive bureaucratic mandates.