Replacement (ri-'plas-ment): Noun. The action or process of replacing.

Carla Strauch, MBA, AIRC, FLMIDirector, Insurance ComplianceThrivent Financial for Lutherans

2009 ACLI Legal & Compliance Sections Meeting, Boston, MA

Replacement Model Form Adoption

2

4, 20%

1, 5%

3, 15%

12, 60%

Model States Only Model and Unregulated StatesModel, Unregulated and Some Nonmodel Other

Comments Noted on Survey:

“Model States Only”: We use each of the models, depending upon which one has been adopted by the states. For those states that have adopted something different (e.g., UT), we use what they have enacted.

Replacement Model Definition Adoption

3

5, 25%

5, 25%

10, 50%

Model States Only Model and Unregulated StatesModel, Unregulated and Some Nonmodel

Comments Noted on Survey:

“NAIC Definition in Model States Only:” As noted above, we use whatever each individual state has enacted.

Board/Senior Management Reporting

4

14

6

0

2

4

6

8

10

12

14

Yes No

Yes No

Comments Noted on Survey:

“No:” Senior management only.

Trending to Field Supervisors

5

8

10

0

1

2

3

4

5

6

7

8

9

10

Yes No

Yes No

Comments Noted on Survey:

“Yes:” As wholesale Broker/Dealer, provide to Distribution Management. “No:” Managers receive report. Not field supervisors. “No:” On the life side - exclusively independent distribution.

Source of Benchmark Data

6

13, 69%

1, 5% 5, 26%

0, 0%

Market Conduct Statement Report Card LIMRA/LOMA White Paper or ReportPast Company Experience Other

Comments Noted on Survey:

“Other:” LIMRA CAP Survey.

Willingness to Share Tools/Checklists

7

3

15

0

2

4

6

8

10

12

14

16

Yes No

Yes No

Comments Noted on Survey:

“Yes:” We view "replacement" as one factor under the "suitability" umbrella. We have a suitability form (enclosed), replacement forms in those states that require such (newer Model form enclosed) as well as replacement and suitability sign-offs on our application forms (have enclosed one deferred annuity application form for example purposes).

“Yes:” We don't have company specific forms, we utilize the forms required by the states. “No:” Independent sales force. Suitability done at producer level.

Use of Internally Created Comparison Forms

8

5, 26%

14, 74%

Yes No

Comments Noted on Survey:

“Yes:” For annuities only. “No:” We audit our new business files to ensure that we’ve received the suitability form together with the application form.

Tools to Detect Unreported Replacements

9

Comments Noted on Survey:

“Other”: Life is more difficult; letter sent to the insured to verify. Done an a random basis.

8

15

5

13

1 1

0

2

4

6

8

10

12

14

16

CustomerSurveys

CustomerComplaints

AnalysisBefore Issue

AnalysisPost Issue

No CurrentMonitoring

Other

Customer Surveys Customer Complaints Analysis Before IssueAnalysis Post Issue No Current Monitoring Other

Internal Replacements as a Percent of New Sales

10

7-8%, 1

5-6%, 5

1-2%, 3

3-4%, 1

<1%, 114% (annuity line),

2

<1% 1-2% 3-4% 5-6% 7-8% 14% (annuity line)

Comments Regarding Survey Responses:

A few insurers provided separate numbers for life and annuity.

11

External Replacements as a Percent of New Sales

41-50%, 0

31-40%, 1

11-20%, 2

21-30%, 3

0-10%, 351-60%, 161-70%, 1

0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70%

Comments Regarding Survey Responses:

A few insurers provided separate numbers for life and annuity.

12

61-70%, 1

51-60%, 0

0-10%, 2

21-30%, 3

11-20%, 3

31-40%, 0

41-50%, 1

0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70%

Total Replacements (Internal and External) as a Percent of New Sales

Top Challenges: Most Votes by Category

13

14 14

10 10

87

5

43

2

0

2

4

6

8

10

12

14 Top Five Challenges# Votes

Efficiently identifying unreported replacements 14

Managing state variations (understanding differences, multiple forms, etc.) 14

Having the data to see producer and company trends 10

Having the resources to get the job done 10

Field supervision of individual producers 8

Ensuring quality replacement reviews 7

Having effective compliance oversight 5

Having appropriate controls to manage work delegated to third parties. 4

Other (Producer compliance, forms completion, etc.) 3

Effective Senior Management/ Board reporting 2

Comments Noted on Survey:

“Other”: Producer compliance; completing forms properly.

Top Challenges: Based on #1 Vote

14

Top Five Challenges# Votes

Managing state variations (understanding differences, multiple forms, etc.) 7

Efficiently identifying unreported replacements 3

Field supervision of individual producers 2

Ensuring quality replacement reviews 2

Having the resources to get the job done 1

Having effective compliance oversight 1

Having appropriate controls to manage work delegated to third parties. 1

Effective Senior Management/ Board reporting 1

Having the data to see producer and company trends 0

Other (Producer compliance, forms completion, etc.) 0

7

3

2 2

1 1 1 1

0 0

0

1

2

3

4

5

6

7

Compensation Differs for Internal Replacements

15

0

2

4

6

8

10

12

Yes No Other

Captive Independent

Comments Noted on Survey for Other Category:

Depends on the specific situation. Not for Life. Annuities, yes if during surrender charge period. Generally, the answer is "no". There is only one exception for internal term-to-term replacements. If the replaced term insurance coverage is within its first contract year, compensation is prorated for the number of months each contract was

in force during the "first year". The "first year" begins with the issue date of the replaced contract. During years 2 through 4, normal compensation will be paid only on any increased in face amount. Normal compensation will be paid on the new contract, if the original contract has been in force at least 4 years.

Compensation Differs for External Replacements

16

0

2

4

6

8

10

12

14

16

Yes No

Captive Independent

Percent of Replacements Receiving a Suitability Review

17

0

1

2

3

4

5

6

7

8

9

10

0-24% 25-49% 50-74% 75-100% Other

Captive Independent

Comments Regarding Survey Responses:

A few insurers provided separate numbers for life and annuity (captive and independent) We require the distributors to review and maintain suitability information (independent). Handled by unaffiliated broker/dealers (independent). Review performed at producer level (independent). Suitability review is delegated to outside firm. We only conduct a suitability review for 1 firm that informed us that they would not be conducting

a fixed annuity suitability review (independent).

Area Responsible for Suitability Reviews

18

0

1

2

3

4

5

6

Captive 5 6 4 3 1 0

Independent 4 5 1 1 2 6

Operations/Home Office

Law or Cpls.Staff

Field Supervisor

Automated

Suitability

No Suit. Done Auto.

Other

Comments Noted on Survey for “Other Category” (Independent Distribution):

As noted in the Model, suitability determination is a requirement of the producer, and our oversight is to ensure we received signed copies of our suitability form as well as signatures on our applications that each includes replacement and suitability questions/attestations.

We require the distributors to review and maintain suitability information. Review performed at producer level. Retail Broker Dealer. Underwriters, third party for select bank annuity sales.

Questions?

19

Reminder: See program binder/notebook for samples of forms and tools shared by survey respondents.

2009 ACLI Legal and Compliance Sections Meeting, Boston, MA