Insurance - Replacements Processing (Replacements Advisory Group) White Paper This document is subject to Regulatory approval. October 2004 Depository Trust & Clearing Corporation 1
This White Paper was created with the help of the following Replacements Working Group firms who graciously gave of their time and professional expertise to participate and collectively work to document this process. Special thanks are given to: ACORD Aegon / TransAmerica Allstate / Lincoln Benefit Life Ameritas Investment Corporation Blue Frog Edward Jones Finetre Corporation Harford Life ING Jackson National Life Insurance Jefferson Pilot Financial Lincoln Life Manu Life Mass Mutual Merrill Lynch Merrill Lynch Insurance Corp Met Life NFP Pacific Life Protective Life Prudential Insurance Safeco Sun Life of Canada Wachovia Wells Fargo Depository Trust & Clearing Corporation 2
Replacements Processing Table of Contents Executive Summary... 4 Goal of the IPS Initiative... 4 Assumptions... 4 Current Environment... 5 Who uses replacements... 6 In-coming Replacement Flow Diagram... 6 Out-going Replacement Flow Diagram... 7 What service will IPS bring to the process... 9 Proposed (New) Environment... 9 Recommendation for IPS Replacements Processing... 10 Future Enhancements... 10 List of potential messages IPS will send and receive from carriers... 12 List of Potential Attachments... 12 Replacement Process... 12 Benefits (Value Added) of Participating in the New Process... 16 Glossary of Terms... 16 Next Steps... 17 Appendix A Sample ACORD 951 Replacement Form... 18 Depository Trust & Clearing Corporation 3
Executive Summary DTCC s Insurance Processing Services (IPS) provides an automated, centralized system that electronically links and networks insurance carriers and distributors for the exchange of information and money settlement during the sale and processing of fixed annuities, variable annuities and life insurance. Several industry leaders have approached IPS to expand its processing, leveraging its broker/carrier network, to automate the message routing and money settlement in support of replacements and 1035 transfers. ACORD, a leader in defining insurance message standards, has led an insurance industryworking group to define replacements-processing messaging. To facilitate the automation and standardization of replacement processing between insurance carriers, the industry has requested IPS include the usage of the ACORD message format standard with its goal for replacements automation and money transfer processes. This White Paper will begin identifying the concept for the automation and standardization of replacement processing. The automation of the replacement process is first and foremost intended to keep integrity in the industry and carry out the client s request for a contract replacement in an efficient, structured manner. The automation of the replacement process begins after these events have completed: 1. Solicitation and distributor suitability approvals have been completed. 2. Distributor application request has been submitted to the receiving carrier. 3. Documentation is determined to be In-Good-Order. Goal of the IPS Initiative To expedite the customer s replacement request and integrate the IPS network in the replacements process. Provide automation and standardization among the carriers for efficiency in notification, money exchange settlement and case status while still maintaining State regulation. Assumptions 1. Distributors can communicate with the receiving carrier through an ACORD New Business Submission message or through the IPS APP/SUB functionality or another means. This process is out of scope for this project. 2. All replacements processing messages will interface with receiving and delivering carriers using the ACORD message standard when available. The NSCC Money Settlement Detail (MSD) message will be an option to transmit money settlement information to the carriers. Depository Trust & Clearing Corporation 4
3. The automation of money settlement is within the project s scope. DTCC s Money Settlement system will facilitate the movement between the delivering and receiving carriers. 4. Conservation protocol is carrier specific. 5. Carriers may include attachments containing required forms. This includes images of signed forms. 6. Processing of electronic and/or digital signatures is out of scope for this project and will be defined in a future phase. 7. Failure to deliver the cost basis information to the receiving carrier will not stop the replacements process from successfully completing. However, it is strongly suggested to include this information in the data flow. 8. Additional NY State replacement requirements as outlined in NY State regulation 60 are out of scope for the initial phase. 9. Carriers who utilize this service will need to participate as both receiving and delivering carriers. 10. Both carriers (delivering and receiving) of this service must be DTCC / IPS members. Current Environment In today s insurance processing environment, the business of replacements is a very manually intensive procedure between the in-coming (receiving) and out-going (delivering) carriers. Information is shared and processed among counterpart carriers through mail, fax and phone conversations. The replacement procedure has proven to be inefficient and costly because of the time-consuming practice of processing hard copy forms between delivering and receiving carriers and distributors. In order to execute the client s replacement wishes, the current process generally takes over 30 days. The forms are not standardized among the carriers and their distributors. Information on the forms is left to interpretation, which leads to inconsistency in data collection. This has caused carrier specific required information to be missing and forms to be rejected for processing. Forms are continuously being returned for correction among carriers. In addition, actual authorized signatures are required from various parties representing the owner, the annuitant and the receiving carrier s officer. These requirements may vary by State and carrier. Extensive delays in completing the replacement process are expected and generally the norm. Forms are processed and reprocessed until all information is completed to carry out the replacement transaction at Depository Trust & Clearing Corporation 5
both the delivering and receiving carrier. The process is highly regulated and audited by internal Legal and Compliance departments at the carrier, distributor and State Regulator levels. An example of the annuity replacement process between carriers works as follows. The receiving carrier begins the process of product replacement after they receive the appropriate transfer forms, such as the ACORD 951-1035 Exchange / Rollover / Transfer form from the distributor. Once all required forms are received from the distributor, the receiving carrier submits the transfer forms and all State specific replacements paperwork to the delivering carrier for processing. Assuming all forms have been completed and submitted successfully by the receiving carrier, the delivering carrier may begin a conservation period. During this time, the delivering carrier may contact the contract owner in an effort to conserve the business and ultimately stop the replacements process. The timeframe of the conservation period varies among carriers, products and dollar amount. Upon expiration of the conservation period and once the forms have been completed successfully between the delivering and receiving carriers, the delivering carrier will send the current cash value or requested amount in the case of a partial transfer to the receiving carrier. The receiving carrier will use the funds received from the delivering carrier to purchase the new product for the insurer s portfolio and the distributor is notified of the successful replacement. If the delivering carrier is successful during their conservation period and has conserved their customer business, the replacement order is cancelled between the receiving and delivering carrier. Who uses replacements Replacements are performed among insurance carriers allowing their customer base to exchange or transfer Life Insurance policies to Annuity contracts, Life Insurance polices to other Life Insurance policies or transfer Annuity contracts to other Annuity contracts to better serve the customer needs. These transfers can occur between carriers or in some cases within the same carrier family. In-coming Replacement Flow Diagram Below is a sample of the current manual process flow representing a carrier who is acting on the receiving carrier side (in-coming replacement) of the transaction: Depository Trust & Clearing Corporation 6
In-coming Replacements (current process) August 11, 2004 The receiving carrier representative will verify: Distributor (agent) sends: Application with 1035 Exchange or Qualified Plan Transfer Form received by receiving carrier. 1. The Application and Transfer Forms are in good order. 2. For a 1035 exchange, the registration must be a 'like for like' exchange. 3. The owner s name and SS# are correct on the Transfer Form. The delivering carrier's contract number and address are listed on the Transfer Form. 4. The Transfer Form references the type of plan it is coming from and the type of plan it is going in to. 5. For a partial 1035 exchange, the rep will need to check if the delivering carrier allows partial transfers. 6. The amount of the transfer will meet the minimum for the product. 7. That all state required replacement forms have been received. 8. Validate agent's State and carrier appointment information. te: TOA requirements will vary by State. Send TOA and Replacement Forms to delivering carrier. Will this case go to Underwriting? Was the paperwork in good order? NIGO : t In Good Order Place in TOA System to followup with delivering carrier until money is received. tify delivering carrier of possible Replacement. Rep will notify the agent to clarify NIGO information. Is the Life replacement approved by Underwriting? NO Was rep able to obtain information to make paperwork IGO? Contact the delivering carrier to determine if everything is IGO and to determine an estimated time frame for the exchange. Has money been received? Policy is issued and contract is sent out. Exchange is complete. Exchange is canceled. tify delivering carrier for cost basis information (x) times. Stop followup contacts. Exchange is closed out. Has cost basis information been received? Cost basis information is recorded by receving carrier. Was the paperwork IGO at the delivering carrier? tify the agent to inform them of outstanding requirements or issues at the delivering carrier. Update agent with the status of the transfer Continue to follow up until money and cost basis information is received. Update agent with status. IGO : In Good Order Out-going Replacement Flow Diagram Below is a sample of the current manual process flow representing a carrier who is acting on the delivering carrier side (out-going replacement) of the transaction: Depository Trust & Clearing Corporation 7
Out-going Replacements (current process) August 11, 2004 The delivering carrier representative will verify: Receiving carrier sends: Exchange paperwork is received at the delivering carrier's office The request must be in writing on the ACORD 951 (1035 Exchange/Rollover/ Transfer Form) or on the company's 1035 Exchange/Transfer Form. Information included on the Form: Current and proposed plan type. If a full 1035 transfer - a "complete and absolute assignment". If a partial 1035 or qualified plan transfer - indicate the amount or percentage being surrendered. Proper signature requirements from client based on delivering carrier rules (some require signature guarantee based on dollar amount). Proper signature requirements from receiving carrier (letter of acceptance). For full 1035 exchange or qualified plan transfer, lost policy statement or original contract returned. For 1035 exchange, the registration must be a 'like for like' exchange. Special date instructions. Delivering carrier notifies client of their right to receive current contract values. Is the paperwork in good order? Does delivering carrier participate in Conservation? Delivering carrier initiates the Conservation Period NIGO : t In Good Order Contact receiving carrier to inform them of NIGO information. Was Conservation offer successful? Was requested information received? Process the check to the receiving carrier with cost basis information. Send check to receiving carrier with cost basis information. Exchange is complete. - tify Distributor of disbursement by a confirm or other means. Exchange is canceled. Depository Trust & Clearing Corporation 8
What service will IPS bring to the process Message Distribution Hub In conjunction with ACORD messaging, IPS can facilitate replacements processing. Carriers can leverage the existing IPS network infrastructure to communicate replacement information in an automated and standardized fashion. IPS would streamline the existing manual replacement process and create an electronic automated and standardized environment that would allow carriers to transmit ACORD XML replacement messages, case status messages and money settlement messages through IPS. IPS would act as the replacement network hub to validate, edit and securely distribute replacement information to the counterpart carrier. IPS will support the money settlement between carriers within the replacement process. IPS would debit and credit the carrier cash accounts based upon the carrier s notification of a successful replacement and the agreed money settlement amount. Distributors will continue to communicate case status information on the replacement process by their current method of communicating directly with the receiving carrier. Information Repository IPS will also provide a centralized repository of carrier key information to facilitate the replacement process. Data may include carrier contact information (name and address), carrier specific forms requirements and signature guarantee requirements i.e. medallion signature requirements. For those carriers who have an existing website containing their replacement contacts and requirements, IPS will review if they can legally provide a link to the external carrier specific website. Proposed (New) Environment The Replacements Working Group has reviewed the current process for replacements between carriers. IPS can bring enhanced efficiencies to the insurance market place for the replacements process by automating the manual processing with message-based activity to IPS. IPS can act as the hub for validating replacement activity and passing on accurate replacement message activity between the receiving and delivering carriers. In addition, the final money settlement transfer between the delivering and receiving carriers based on a successful replacement transaction can be automated through DTCC s money settlement system to debit the delivering carrier and credit the receiving carrier s cash accounts. The full automation and standardization of replacement processing may need to be phased-in over time to allow carriers to adjust to the new processing methodology. In Depository Trust & Clearing Corporation 9
addition the carrier community may decide to limit or expand the IPS role in automating replacement processing. And lastly, IPS will provide the carrier and distributor community a: 1. Vehicle to store carrier specific replacement requirements Carriers will enter their replacement requirement information data, such as required forms, contact names, policy addresses, etc into a data repository. Other carriers (and distributors) will have query access to this information. This will provide receiving carriers and distributors access to State and delivering carrier replacement requirements. 2. Query tool to allow for NAIC information retrieval - The NAIC retrieval will allow carriers to query the DTCC database and lookup, for example, the following information: CUSIP per NSCC number CUSIP per NAIC number NSCC # to product names NAIC # to product names Recommendation for IPS Replacements Processing The Replacements Working Group has agreed that the automation of carrier to carrier replacements incorporate ACORD messaging. These messages will include validated data and attached required replacement forms. In addition, information distribution between carriers will leverage DTCC s money settlement functionality. Benefits Applies complement of ACORD messages Includes all attachment documents within the ACORD messages Utilizes DTCC s money settlement system to automate settlement between carriers Most efficient and automated proposal Future Enhancements Depository Trust & Clearing Corporation 10
The following is out of scope for this project but may be considered as a future phase enhancement to the automation of replacements processing: 1. A replacement message-matching hub whereby each carrier sends their replacement message information to IPS and IPS matches each message with a carrier counterpart. This process would remove all wet signatures and paperwork from the replacement process. The initial transaction from the distributor and all subsequent transactions to complete the transfer would be automated. Below is a sample information flow of this process: Initial 1035 or Qualified Transfer request sent to IPS (APP transaction) from the distributor to the receiving carrier Receiving carrier sends a replacement request to the IPS IPS would validate the request, remove pre-defined sensitive data and route the request to the delivering carrier Delivering carrier would send IPS a validation request inclusive of the pre-defined sensitive data IPS would match the data received from the delivering carrier against the data received from the receiving carrier If the matching data process is successful in IPS, the replacement process continues and money settlement takes place in DTCC between the carriers If the matching data process is unsuccessful, the replacement transaction would be rejected back to the receiving and delivering carriers identifying the mismatched data fields Potential issues with this option: 1. Authorization from the carrier s legal and compliance departments for proper customer consent. 2. Certain State Regulators may audit for signatures. 2. A Pending Case Status message (ACORD TXLife # 125) facilitating a 2-way status inquiry between the distributor and the receiving carrier. Initially, a request message from the distributor to the receiving carrier inquiring about the status of the replacement transaction. The receiving carrier will respond back (via the message format) to the distributor with the latest status on the inquired replacement transaction. Depository Trust & Clearing Corporation 11
List of potential messages IPS will send and receive from carriers 1. ACORD Replacement tification (TXLife # 126) applies for Life Insurance replacements only 2. ACORD Replacement Request (TXLife # 127) applies for Annuity or Life Insurance Replacement 3. ACORD Replacement Process Inquiry (TXLife # 1128) applies for carrier to carrier replacement transaction status updates 4. ACORD Money Settlement (TXLife # 140) applies for carrier notification of money settlement (alternate to MSD record) 5. Money Settlement Detail (MSD) applies for carrier notification of money settlement List of Potential Attachments 1. Attachment of ACORD 951 Exchange/Transfer/Rollover form 2. Attachment of State specific replacement form 3. Attachment of Authorized Signatures document 4. Attachment of Comparative Information tice Replacement Process Precondition to the automation of the replacement process: The distributor has a choice to initiate the replacements process. The distributor can: send a replacement application through DTCC s APP service to the receiving carrier. send a New Business Submission transaction (ACORD TxLife # 103) directly to the receiving carrier. mail, email or fax paperwork directly to the receiving carrier. Once the receiving carrier confirms the documentation is found to be in good order, the replacement automation process begins. 1. The receiving carrier sends a Replacement tification (TXLife #126) to the delivering carrier (via IPS) to notify them a Life Insurance replacement policy has been applied for. Or Depository Trust & Clearing Corporation 12
The receiving carrier sends a Replacement Transaction Request (TXLife # 127) to the delivering carrier (via IPS) to notify them a Life or Annuity replacement policy has been applied for. 2. IPS will validate the format of the TxLife 126 or TXLife 127 message based on the pre-defined business rules. Mal formed messages will be transmitted back to the original sender-receiving carrier for correction. Messages passing the IPS business rules process, will be transmitted to the delivering carrier for further processing. 3. The delivering carrier will be required to update the receiving carrier on the current status to the replacement transaction. Throughout the life of the replacement transaction, as the transaction status changes, the delivering carrier will send the TxLife 1128 message to IPS. 4. IPS will validate the format of the TxLife 1128 message based on the pre-defined business rules. Mal formed messages will be transmitted back to the original sender-delivering carrier for correction. Messages passing the IPS business rules process, will be transmitted to the receiving carrier for their transaction status update and any further processing. 5. Carriers will still be independently responsible for their own conservation procedures, and will determine when funds will be released to the requesting carrier for settlement. Upon completion of the conservation period or at the time of the delivering carrier s agreement to surrender the client contact to the receiving carrier, the delivering carrier will send to IPS a TXLife 1128 message with an indication for money settlement. 6. IPS will respond to the settlement TxLife 1128 message by interfacing with the NSCC Money Settlement system to debit and credit the carrier accounts accordingly. IPS will notify both the receiving and delivering carrier of the money settlement by transmitting a TxLife 140 message or Money Settlement Detail (MSD) message. Below is a sample proposed process flow representing Insurance Service automated solution for the replacement transaction: Depository Trust & Clearing Corporation 13
Replacement Processing Automation Precondition: Solicitation and distributor suitability approvals are completed. Distributor application request has been submitted to the receiving carrier. Documentation is determined to be 'In-Good-Order'. Distributor Receiving Carrier IPS Delivering Carrier <Replacement Money Settlement> Replacement Request or tification Settlement information received in this message will trigger IPS to process money settlement TXLife 126 / 127 Response (Reject) TXLife 126 / 127 TXLife 1128 Response (Reject) TXLife 1128 Post Conservation Period TXLife 1128 Response (Reject) TXLife 140 / MSD TXLife 140 / MSD Depository Trust & Clearing Corporation 14
Replacement Processing Automation Precondition: Solicitation and distributor suitability approvals are completed. Distributor application request has been submitted to the receiving carrier. Documentation is determined to be 'In-Good-Order'. Distributor Receiving Carrier IPS Delivering Carrier <Replacement Status Update> Replacement Request or tification Sent intermittently as the replacement transaction status changes. The receiving carrier is notified. TXLife 126 / 127 Response (Reject) TXLife 1128 TXLife 1128 TXLife 126 / 127 TXLife 1128 Response (Reject) TXLife 1128 Response (Reject) Distributors can contact the receiving carrier for the latest status of the replacement transaction. Depository Trust & Clearing Corporation 15
Benefits (Value Added) of Participating in the New Process 1. Prompt and efficient fulfillment of client intention to replace contract. 2. Reduce processing costs at the carrier by reducing the manual, labor-intensive process of sending fax, phone and mail responses between carriers. 3. Increase process standardization and data integrity by introducing standardized ACORD messages. 4. Maintain the maximum conservation period or state mandated waiting time, while anticipating a reduction in replacements processing time thereafter. 5. Reduce information being sent to the wrong carrier at the wrong address by using IPS as a routing message hub. 6. Allow for prompt notification and confirmation between carriers. 7. Automate the money settlement of the replacement transaction between the receiving and delivering carriers using the DTCC money settlement service, eliminating manual check writing and wire processing. 8. Improved audit trail capabilities. 9. Processing transparency to distributors. 10. Reduction in follow-ups between carriers due to current transaction status availability. Glossary of Terms Receiving carrier - This carrier will receive new business if the replacement process is carried out. Delivering carrier This carrier will remove the product from the client s portfolio and deliver the cash and cost basis information of the product if the replacement process is carried out. Depository Trust & Clearing Corporation 16
Conservation period The period of time during which the delivering carrier has to communicate with their client in an effort to conserve the business. Client The person, persons (co-owner) or entity that has the legal rights to a contract. Distributor The entity who is authorized to have their representatives sell insurance products and services in a particular State or States. 1035 Exchange A service that allows the contract owner to move non-qualified assets between similar or like-for like contracts during the accumulation phase as well as during the payout period. Qualified Transfer/Rollover The transfer of funds from one qualified plan to another qualified plan without incurring any tax liability. Next Steps User community approval and commitment to the automation and standardization of replacements processing Analyze anticipated weekly/monthly volume for replacements automation Finalize the role of IPS in the automation and standardization of the replacements processing Determine preliminary pricing structure of replacements processing Agree on a timeframe for IPS and carrier development and testing of automated replacements processing Gain legal and compliance approval of automated process as defined in this document. o Inclusive of a Repository and carrier-to-carrier information sharing. Finalize attachment storage or linkage forms Amend IPS rules (if needed) Ascertain ACORD position on form distribution Review of ACORD messages Depository Trust & Clearing Corporation 17
Document IPS implementation under separate cover document Appendix A Sample ACORD 951 Replacement Form See attached PDF file named: Replacements transfer form.pdf Depository Trust & Clearing Corporation 18