Marketplace competition has encouraged insurance companies to become more creative in their product design. However, to get to the marketplace with these new ideas, the product must successfully pass through the regulatory process.

This process can be a sophisticated obstacle course. For instance, the marketing and actuarial departments first design the product specifications. Then, the compliance department points out the regulatory cliffs and pitfalls. Next, suggestions will be made to avoid those cliffs and pitfalls, and it appears that the potential problems have been solved - often by developing several variations for use in different states.

But even then, as developers explore this new solution, a new set of cliffs and pitfalls appears, and the process goes on - until a workable strategy is achieved. Clearly, this can be a frustrating process.

Let’s look at how this regulatory obstacle course can work itself out. We'll use the following broad product specifications.

• Variable life insurance or variable annuity products.
• Separate account and a fixed account with a market value adjustment:

For this product, the compliance evaluation might go this way:

In most states, the fixed account must meet the requirements of the Standard Nonforfeiture Law for Life Insurance of the Standard Nonforfeiture Law for Deferred Annuities, whichever the case may be. These laws require that the cash value available on surrender meet certain minimum standards.

A market value adjustment, however, can increase or decrease the cash value, depending upon the interest environments on the first day of the guarantee period for the fixed account and on the date of surrender.

Products with the full market value adjustment are called Modified Guaranteed Annuities or Modified Guaranteed Life; the National Association of Insurance Commissioners has adopted model regulations for both.

However, only a handful of states have adopted these models or something similar. They are: Arkansas, California, Connecticut, Michigan, Minnesota, Missouri, New York, Rhode Island, Virginia and Wisconsin for annuities; and Connecticut, New York and Wisconsin for life insurance.

In the states that have not adopted the model regulations, the market value adjustment must be limited on the downward side, so that the minimum cash value requirements discussed above are not violated. However, to give the consumer a better return, the company may want to assess or credit the full market value adjustment to the cash value.

A possible solution to this problem is to use a discretionary group product (one that targets a specific affinity group).

Since many states do not apply the Standard Nonforfeiture Law for either life or deferred annuities to group insurance, this would seem to be a viable solution. However, it is not a totally successful solution, because its introduction makes other regulatory cliffs and pitfalls appear.

As you may know, a discretionary group is one that does not fit into the traditional definition of true group as defined in the laws and regulations of the various states. Discretionary groups are often made up of customers of a financial institution, holders of a particular credit card and other affinity groups.

The first cliff to appear is that several states will not allow discretionary group life, or annuity, or both products to be solicited in their states. The next pitfall is that even if the states will allow the discretionary group, they still impose the requirements of the Standard Nonforfeiture Laws. Therefore, in those states, we are back to square one.

This solution will not work in those states where solicitation of discretionary group certificates is not permitted: Maine, Minnesota, Michigan, Oregon, South Dakota and Vermont for both life and annuities; Maryland, North Carolina and Nevada for annuities; Idaho, Kansas, South Carolina, Utah and Washington review the nature of the discretionary group on a case by case basis before determining if the group will be permitted.

How can this obstacle course be traversed successfully? Some companies choose to issue group certificates, where permitted, and an individual policy, in the states where group is not permitted.

This complicates the administration of the product, and a company should consider the cost / benefit ratio of modifying the product to gain approval in all states where the company operates.

The cost of the modifications to the company’s administration system must be balanced with the success of the product design in terms of sales to be sure that the company’s projected profit margin will be achieved.

As you can see, when a new product idea comes up, it is not easy to develop a single product chassis that will work in all state and market situations. But, with good compliance analysis, you can come up with modifications that let you market everywhere.

The process requires a lot of flexibility, but, if the cost / benefit analysis is positive, going through the obstacle course is worth the effort.