(Reuters) - Six U.S. life insurers have agreed to pay a total of $1.83 million for improperly causing customers to switch their existing annuities to a different type that generated less income, New York State’s financial regulator said on Tuesday.
The action is part of an industrywide investigation into some practices related to insurers’ recommendations to replace a specific type of annuity with another, the New York Department of Financial Services (NYDFS) said.
The insurers will collectively return a total of $1.15 million to New York customers and pay $673,000 in penalties, the regulator said.
At issue is a regulation that NYDFS issued last year requiring that recommendations for buying life insurance and annuities be in a consumer’s “best interest” and “appropriately address” the consumer’s insurance needs and financial objectives of the consumer at the time of the transaction.
“The Department is putting New York’s life insurers on notice: they must comply with our regulations,” said NYDFS superintendent Linda Lacewell in a statement.
In the most basic annuity, a customer gives a lump sum of cash to an insurer and receives a payment each month over a set number of years, sometimes for life.
The NYDFS case involved consumers who had bought “deferred annuities,” in which payments start at a future date, but allow consumers to earn interest on their premiums until that time. The insurers had recommended replacing them with “immediate annuities,” in which payments start after 13 months.
But the insurers did not properly disclose information to consumers about income they would receive from the two different types of annuities and whether the replacement annuity was suitable, the regulator said. The recommendation to switch could cost consumers “substantial lifetime income,” NYDFS said.
Companion Life Insurance Co, a unit of Mutual of Omaha Insurance Company [MUOMH.UL] is to return to New York consumers $462,122 of the total and pay a $186,000 penalty, the largest share of the total amount, followed by the Penn Mutual Life Insurance Company in Horsham, Pennsylvania, which agreed to return $322,584 and pay a $133,000 penalty.
The Guardian Insurance & Annuity Company Inc agreed to return $218,589 and pay a $224,000 penalty.
Other insurers are Northwestern Mutual Life Insurance Co, The Prudential Insurance Company of America [PRUXBA.UL], and The United States Life Insurance Company. Prudential Insurance Company of America is a unit of Prudential Financial Inc (PRU.N).
Representatives for Penn Mutual, Prudential, and United States Life Insurance declined to immediately comment. Representatives for the other insurers could not immediately be reached. The insurers agreed to revise their disclosure statements, the regulator said.
Reporting by Suzanne Barlyn in New York; Editing by Matthew Lewis