DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Smoker and Nonsmoker Mortality Tables
Proposed Amendment: N.J.A.C. 11:4-24.4
Authorized by: Donald Bryan, Acting Commissioner for Insurance, Department of Banking and Insurance
Authority: N.J.S.A. 17:1-8.1, 17:1-15e, 17B:19-8 and 17B:25-19.
Calendar Reference: See Summary below for explanation of exception to
Proposal Number: PRN 2001-434
Submit comments by January 18, 2002 to:
Karen Garfing, Assistant Commissioner
Department of Banking and Insurance
20 West State Street
PO Box 325
Trenton, NJ 08625-0325
Fax: (609) 292-0896
The agency's proposal follows:
N.J.A.C. 11:4-24 contains the Department of Banking and Insurance (Department) rules relating to insurer use of certain mortality tables in determining minimum reserves and nonforfeiture values for various types of life insurance policies pursuant to N.J.S.A. 17B:19-8 and 17B:25-19.
N.J.A.C. 11:4-24.4 addresses the permitted uses of "composite mortality tables" and "smoker and nonsmoker mortality tables," as those terms are defined in the rules, for "juvenile" insureds (that is, persons below age 15). N.J.A.C. 11:4-24.4(a)2 and (d) permit insurers to use the composite mortality table for juvenile issues, and change to use of a smoker and nonsmoker mortality table when the insured's attained age is a specified age between 15 and 23. The rule's current language states that "the insurer shall classify the insured as a nonsmoker upon the insured's reaching such attained age unless the insured is notified in writing of his or her option to elect smoker or nonsmoker status at least 30 days prior to the effective date of the change in mortality tables and the insured fails to elect smoker status." Election of smoker status by the insured would involve an application process, including satisfactory evidence of insurability.
An unintended result of the current language at N.J.A.C. 11:4-24.4(a)2 and (d) is that an insured who "fails to elect smoker status" by not responding to the notice at all is automatically reclassified as a nonsmoker. Thus smokers are provided incentive to fail to respond in order to receive the preferred nonsmoker classification. This improper classification of risks (that is, some smokers being incorrectly classified as nonsmokers) has resulted in inadequate premium charges and inappropriate nonforfeiture values. Rather than automatically classify as a nonsmoker an insured who failed to respond to the insurer notice, some insurers have opted not to issue insurance coverage to juvenile insureds. In order to remedy this situation, the Department is amending N.J.A.C. 11:4-24.4 to permit insurers to select a default classification (that is, either smoker or nonsmoker) that will be applied in the event an insured fails to respond to the notice. The Department is also amending N.J.A.C. 11:4-24.4 by requiring that a description of the smoker/nonsmoker option notice and election procedure be included in the policy form. The Department is also proposing to permit insurers to apply a default classification of smoker only if an insured has attained an age of at least 18. The Department believes these proposed amendments are reasonable for several reasons.
First, based on the 1999 New Jersey Youth Tobacco Survey conducted by the University of Medicine and Dentistry in New Jersey (UMDNJ) for the Department of Health and Senior Services (DHSS), the vast majority of 15 to 18 year old school students in the State are non-smokers. Second, the age at which individuals may legally be sold tobacco products in New Jersey is 18. Finally, at least two of the National Association of Insurance Commissioners (NAIC) "speed-to-market" states (Texas and Oregon) prohibit the conversion of juvenile issue policies to smoker and nonsmoker mortality tables before age 18.
The Department believes that it would be unfair to the State's nonsmoking juveniles to allow insurers to apply to them a default smoker classification for failure to respond to the insurer's notice of election of smoking status, particularly where the juvenile insured's parent or guardian, and not the insured himself or herself, is responsible for the failure to respond. The Department believes that it is more likely that an 18-year-old insured, unlike a 15-year-old, may be responsible for responding to the notice himself or herself. Accordingly, it would be a more accurate evaluation of the insurer's risk, and more reasonable to permit the insurer, to apply a default smoking status to an insured age 18 or older who fails to respond.
Accordingly, following are the Department's proposed amendments to N.J.A.C. 11:4-24.4:
N.J.A.C. 11:4-24.4(a)2 is being revised by the deletion of language requiring insurers to classify a juvenile insured as a nonsmoker upon reaching an attained age between 15 and 23 unless the insured is notified in writing of his or her option to elect smoker status.
N.J.A.C. 11:4-24.4(a)2i is being added, which requires insurers to notify insureds, when they have reached the attained age, of their option to elect either smoker or nonsmoker status.
N.J.A.C. 11:4-24.4(a)2ii requires insurers to adopt a uniform default classification of either smoker or nonsmoker to be used when an insured fails to elect a status.
N.J.A.C. 11:4-24.4(a)2iii prohibits insurers from applying a default classification of smoker unless the insured has attained an age of at least 18.
N.J.A.C. 11:4-24.4(a)2iv requires the insurer to identify the default classification it has chosen in the election notice to be provided to the insured, and to advise the insured that the default classification will be assigned for failure to elect a status.
A new provision is being proposed as N.J.A.C. 11:4-24.4(d) requiring policy forms to describe the process of notice and election of smoker/nonsmoker status described in amended subsection (a).
Current N.J.A.C. 11:4-24.4(d), which relates to fixed premium contracts, is being revised by deleting the current language requiring insurers to charge the guaranteed maximum nonsmoker premium at the attained age unless the insurer has notified the insured of his or her option to elect a status and the insured has failed to elect smoker status. N.J.A.C. 11:4-24.4(d) is being recodified as N.J.A.C. 11:4-24.4(e).
This rule proposal provides for a comment period of 60 days, and therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.
The proposed amendment should have a favorable impact on insurers and insureds. By permitting insurers to choose the default classification for those juvenile insureds who fail to respond to the insurers' notice to elect smoker or nonsmoker status, the Department anticipates that insurers will be able to classify their risk more accurately, charge the proper premium and provide the appropriate nonforfeiture values. Also, insurers' ability to evaluate risk more accurately and charge the appropriate premium will result in the proper application of the assumptions underlying the smoker status of the 1980 CSO mortality table.
Insureds will also benefit because they will be able to participate in a market from which they have been excluded by insurers choosing not to write juvenile insureds.
The proposed amendment should have a favorable economic impact on insurers. Under the current rules, some insurers have chosen not to write policies or contracts on juveniles rather than automatically classify them as nonsmokers. The proposed amendment will result in insurers opening this market to juveniles, and further allowing insurers to evaluate the risk accurately, charge the appropriate premium and provide the proper nonforfeiture values.
Insurers may be economically disadvantaged by this amendment if a 15-year-old under a juvenile issue policy is a tobacco user, but under these rules cannot be so classified until age 18. This amendment may result in insurers bearing the risk of an improper classification for an additional three years. However, the amendment also permits insurers to apply the smoking default classification if the insured fails to respond to the election notice, which the current rule prohibits.
The proposed amendment could have an unfavorable economic impact on some juvenile insureds. Under the current rules, juvenile insureds who smoke and fail to respond to the insurer's notice to elect a status are automatically reclassified as nonsmokers. Automatic reclassification as nonsmokers has resulted in an inappropriate pricing advantage for these insureds. The proposed amendment would enable insurers to reclassify these insureds as smokers, thus causing them to pay a higher premium.
Federal Standards Statement
A Federal standards analysis is not required because the Department's proposed amendment does not attempt to regulate an area already regulated by the Federal government through statutes, rules or otherwise.
The Department anticipates that there will be no impact on jobs in this State as a result of this proposed amendment.
Agriculture Industry Impact
Pursuant to the Right to Farm Act at N.J.S.A. 4:1C-10.3, and the Administrative Procedure Act at N.J.S.A. 52:14B-4(a)(2), the Department does not expect any agriculture industry impact from the proposed amendment.
Regulatory Flexibility Statement
The Department believes that this proposed amendment will apply to few, if any, "small businesses" as that term is defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. because the affected insurers do not employ fewer than 100 full-time employees. Insofar as the amendment may apply to small businesses, the Department believes that it may impose some additional costs on insurers. The amendment changes the age at which an insurer is permitted to change from use of a composite mortality table for juvenile issues to a smoker and nonsmoker mortality table. The amendment also permits an insurer to select a default classification that will be applied if an insured fails to respond to the insurer's notice that the insurer must select either smoker or nonsmoker status. The amendment additionally requires insurers to include in their policy forms a description of the smoker/nonsmoker option notice and election procedure.
While the Department does not believe that insurers will be required to hire any consultants or bear the cost of any other professional services to comply with the requirements imposed by this amendment, insurers' existing staff will be required to make the administrative and other changes necessary for compliance.
While some of the requirements of this amendment may impose additional costs on insurers (see Economic Impact above), there are no different requirements based on insurer size. The Department does not believe that any such differentiation would be appropriate or feasible in that the requirements directly affect all insureds under juvenile issue life insurance policies. Accordingly, the proposed amendment provides no differentiation in compliance requirements based on size.
Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):
11:4-24.4 Juvenile insureds
(a) Because the smoker and nonsmoker mortality tables do not extend below age 15, the Department shall permit the following uses of the composite and smoker and nonsmoker mortality tables for juvenile insureds, as hereafter provided:
1. Insurers may use the composite mortality table for juvenile issues and continue to use such table for all future attained ages; or
2. Insurers may use the composite mortality table for juvenile issues and change to use of a smoker and nonsmoker mortality table when the insured's attained age is a specified age between 15 and 23. [The insurer shall classify the insured as a nonsmoker upon the insured's reaching such attained age unless the insured is notified in writing of his or her option to elect smoker or nonsmoker status at least 30 days prior to the effective date of the change in mortality tables and the insured fails to elect smoker status.]
i. When the insured reaches the attained age, the insurer shall notify the insured in writing at least 30 days prior to the effective date of the change in mortality tables of his or her option to elect smoker or nonsmoker status.
ii. Each insurer shall adopt a uniform default classification of either smoker or nonsmoker to which the insurer shall assign an insured who fails to respond to the notice described in (a)2 i above.
iii. An insurer may only apply a default classification of smoker pursuant to ii above to an insured whose attained age is at least 18.
iv. The insurer shall identify such adopted uniform default classification in the notice described in (a)2i above and advise the insured therein that the insured shall be assigned the uniform default classification if the insured fails to respond to the notice.
3. Insurers may use a reasonable extrapolation of the smoker and nonsmoker mortality tables for ages 15 and below. The submission shall include an actuarial memorandum which describes the basis for the extrapolation.
(b) - (c) (No change.)
(d) The policy form shall accurately describe the process set forth at (a)2 above relating to insurer notification, insured election of smoker or nonsmoker status and the default classification resulting from failure to elect.
[(d)] (e) In fixed premium contracts, a change in smoker/nonsmoker classification pursuant to (a)2 above shall affect premium rates only and not the guaranteed nonforfeiture benefits. A fixed premium contract which provides for changes in smoker/nonsmoker classification pursuant to (a)2 above shall specify the guaranteed maximum smoker and nonsmoker premium [and the insurer shall charge the guaranteed maximum nonsmoker premium at the attained age unless the insurer notifies the insured of his or her option to elect smoker or nonsmoker status at least 30 days prior to the effective date of the change in classification and the insured fails to elect smoker status].