2819
THE SENATE                              S.B. NO.           
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO INSURANCE.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The purpose of this measure is to update the
 
 2 insurance code to address developing trends in life insurance
 
 3 sales.  Section 2 of this measure:
 
 4      (1)  Establishes standards for life insurance policy
 
 5           illustrations that will protect consumers and foster
 
 6           consumer education;
 
 7      (2)  Provides illustration formats;
 
 8      (3)  Prescribes standards to be followed when illustrations
 
 9           are used; and
 
10      (4)  Specifies the disclosures that are required in
 
11           connection with illustrations.
 
12 Section 2 seeks to ensure that illustrations do not mislead
 
13 purchasers of life insurance.  Standardization of sales
 
14 illustrations will also allow consumers to more accurately
 
15 compare competing products.
 
16      Section 3 of this measure:
 
17      (1)  Regulates the activities of insurers and producers with
 
18           respect to the replacement of existing life insurance
 
19           and annuities; and
 

 
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 1      (2)  Protects the interests of life insurance and annuity
 
 2           purchasers by establishing minimum standards of conduct
 
 3           to be observed in replacement or financed purchase
 
 4           transactions by:
 
 5           (A)  Assuring that purchasers receive information with
 
 6                which a decision can be made in his or her own
 
 7                best interest;
 
 8           (B)  Reducing the opportunity for misrepresentation and
 
 9                incomplete disclosure; and
 
10           (C)  Establishing penalties for failure to comply with
 
11                requirements of this regulation.
 
12      The two new parts work in concert to ensure that consumers
 
13 are accurately and sufficiently informed when making decisions
 
14 regarding life insurance planning.
 
15      SECTION 2.  Chapter 431, Hawaii Revised Statutes, is amended
 
16 by adding to article 10D a new part to be appropriately
 
17 designated, and to read as follows:
 
18          "PART ___  LIFE INSURANCE POLICY ILLUSTRATIONS
 
19      §431:10D-A  Scope.  This part shall apply to all group and
 
20 individual life insurance policies and certificates except:
 
21      (1)  Variable life insurance;
 
22      (2)  Individual and group annuity contracts;
 
23      (3)  Credit life insurance; and
 

 
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 1      (4)  Life insurance policies with no illustrated death
 
 2           benefits for any individual exceeding $10,000.
 
 3      §431:10D-B  Definitions.  For the purposes of this part:
 
 4      "Actuarial Standards Board" means the board established by
 
 5 the American Academy of Actuaries to develop and promulgate
 
 6 standards of actuarial practice.
 
 7      "Contract premium" means the gross premium that is required
 
 8 to be paid under a fixed premium policy, including the premium
 
 9 for a rider for which benefits are shown in the illustration.
 
10      "Currently payable scale" means a scale of nonguaranteed
 
11 elements in effect for a policy form as of the preparation date
 
12 of the illustration or declared to become effective within the
 
13 next ninety-five days.
 
14      "Disciplined current scale" means a scale of nonguaranteed
 
15 elements constituting a limit on illustrations currently being
 
16 illustrated by an insurer that is reasonably based on actual
 
17 recent historical experience, as certified annually by an
 
18 illustration actuary designated by the insurer.  Further guidance
 
19 in determining the disciplined current scale as contained in
 
20 standards established by the Actuarial Standards Board may be
 
21 relied upon if the standards:
 
22      (1)  Are consistent with all provisions of this part;
 
23      (2)  Limit a disciplined current scale to reflect only
 

 
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 1           actions that have already been taken or events that
 
 2           have already occurred;
 
 3      (3)  Do not permit a disciplined current scale to include
 
 4           any projected trends of improvements in experience or
 
 5           any assumed improvements in experience beyond the
 
 6           illustration date; and
 
 7      (4)  Do not permit assumed expenses to be less than minimum
 
 8           assumed expenses.
 
 9      "Generic name" means a short title descriptive of the policy
 
10 being illustrated such as "whole life", "term life", or "flexible
 
11 premium adjustable life."
 
12      "Guaranteed elements" and "nonguaranteed elements:
 
13      (1)  "Guaranteed elements" means the premiums, benefits,
 
14           values, credits, or charges under a policy of life
 
15           insurance that are guaranteed and determined at issue.
 
16      (2)  "Nonguaranteed elements" means the premiums, benefits,
 
17           values, credits, or charges under a policy of life
 
18           insurance that are not guaranteed or not determined at
 
19           issue.
 
20      "Illustrated scale" means a scale of nonguaranteed elements
 
21 currently being illustrated that is not more favorable to the
 
22 policy owner than the lesser of:
 
23      (1)  The disciplined current scale; or
 

 
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 1      (2)  The currently payable scale.
 
 2      "Illustration" means a presentation or depiction that
 
 3 includes nonguaranteed elements of a policy of life insurance
 
 4 over a period of years and that is one of the three types defined
 
 5 below:
 
 6      (1)  "Basic illustration" means a ledger or proposal used in
 
 7           the sale of a life insurance policy that shows both
 
 8           guaranteed and nonguaranteed elements;
 
 9      (2)  "Supplemental illustration" means an illustration
 
10           furnished in addition to a basic illustration that
 
11           meets the applicable requirements of this part, and
 
12           that may be presented in a format differing from the
 
13           basic illustration, but may only depict a scale of
 
14           nonguaranteed elements that is permitted in a basic
 
15           illustration; and
 
16      (3)  "In force illustration" means an illustration furnished
 
17           at any time after the policy that it depicts has been
 
18           in force for one year or more.
 
19      "Illustration actuary" means an actuary meeting the
 
20 requirements of section 431:10D-I, who certifies to illustrations
 
21 based on the standard of practice promulgated by the Actuarial
 
22 Standards Board.
 
23      "Lapse-supported illustration" means an illustration of a
 

 
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 1 policy form failing the test of Self-supporting illustration as
 
 2 defined in this part, under a modified persistency rate
 
 3 assumption using persistency rates underlying the disciplined
 
 4 current scale for the first five years and 100 per cent policy
 
 5 persistency thereafter.
 
 6      "Minimum assumed expenses" means the minimum expenses that
 
 7 may be used in the calculation of the disciplined current scale
 
 8 for a policy form.  The insurer may choose to designate each year
 
 9 the method of determining assumed expenses for all policy forms
 
10 from the following:
 
11      (1)  Fully allocated expenses;
 
12      (2)  Marginal expenses; and
 
13      (3)  A generally recognized expense table based on fully
 
14           allocated expenses representing a significant portion
 
15           of insurance companies and approved by the
 
16           commissioner.
 
17 Marginal expenses may be used only if greater than a generally
 
18 recognized expense table.  If no generally recognized expense
 
19 table is approved, fully allocated expenses must be used.
 
20      "Non-term group life" means a group policy or individual
 
21 policies of life insurance issued to members of an employer group
 
22 or other permitted group where:
 
23      (1)  Every plan of coverage was selected by the employer or
 

 
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 1           other group representative;
 
 2      (2)  Some portion of the premium is paid by the group or
 
 3           through payroll deduction; and
 
 4      (3)  Group underwriting or simplified underwriting is used.
 
 5      "Policy owner" means the owner named in the policy or the
 
 6 certificate holder in the case of a group policy.
 
 7      "Premium outlay" means the amount of premium assumed to be
 
 8 paid by the policy owner or other premium payer out-of-pocket.
 
 9      "Self-supporting illustration" means an illustration of a
 
10 policy form for which it can be demonstrated that, when using
 
11 experience assumptions underlying the disciplined current scale,
 
12 for all illustrated points in time on or after the fifteenth
 
13 policy anniversary or the twentieth policy anniversary for
 
14 second-or-later-to-die policies (or upon policy expiration if
 
15 sooner), the accumulated value of all policy cash flows equals or
 
16 exceeds the total policy owner value available.  For this
 
17 purpose, policy owner value will include cash surrender values
 
18 and any other illustrated benefit amounts available at the policy
 
19 owner's election.
 
20      §431:10D-C  Policies to be illustrated.(a)  Each insurer
 
21 marketing policies to which this part is applicable shall notify
 
22 the commissioner whether a policy form is to be marketed with or
 
23 without an illustration.  For all policy forms being actively
 

 
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 1 marketed on the effective date of this part, the insurer shall
 
 2 identify in writing those forms and whether or not an
 
 3 illustration will be used with them.  For policy forms filed
 
 4 after the effective date of this part, the identification shall
 
 5 be made at the time of filing.  Any previous identification may
 
 6 be changed by notice to the commissioner.
 
 7      (b)  If the insurer identifies a policy form as one to be
 
 8 marketed without an illustration, any use of an illustration for
 
 9 any policy using that form prior to the first policy anniversary
 
10 is prohibited.
 
11      (c)  If a policy form is identified by the insurer as one to
 
12 be marketed with an illustration, a basic illustration prepared
 
13 and delivered in accordance with this part is required, except
 
14 that a basic illustration need not be provided to individual
 
15 members of a group or to individuals insured under multiple lives
 
16 coverage issued to a single applicant unless the coverage is
 
17 marketed to these individuals.  The illustration furnished an
 
18 applicant for a group life insurance policy or policies issued to
 
19 a single applicant on multiple lives may be either an individual
 
20 or composite illustration representative of the coverage on the
 
21 lives of members of the group or the multiple lives covered.
 
22      (d)  Potential enrollees of non-term group life subject to
 
23 this part shall be furnished a quotation with the enrollment
 

 
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 1 materials.  The quotation shall show potential policy values for
 
 2 sample ages and policy years on a guaranteed and nonguaranteed
 
 3 basis appropriate to the group and the coverage.  This quotation
 
 4 shall not be considered an illustration for purposes of this
 
 5 part, but all information provided shall be consistent with the
 
 6 illustrated scale.  A basic illustration shall be provided at
 
 7 delivery of the certificate to enrollees for non-term group life
 
 8 who enroll for more than the minimum premium necessary to provide
 
 9 pure death benefit protection.  In addition, the insurer shall
 
10 make a basic illustration available to any non-term group life
 
11 enrollee who requests it.
 
12      §431:10D-D  General requirements and prohibitions.(a)  An
 
13 illustration used in the sale of a life insurance policy shall
 
14 satisfy the applicable requirements of this part, be clearly
 
15 labeled "life insurance illustration", and contain the following
 
16 basic information:
 
17      (1)  Name of insurer;
 
18      (2)  Name and business address of producer and insurer's
 
19           authorized representative, if any;
 
20      (3)  Name, age, and sex of proposed insured, except where a
 
21           composite illustration is permitted under this part;
 
22      (4)  Underwriting or rating classification upon which the
 
23           illustration is based;
 

 
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 1      (5)  Generic name of policy, the company product name, if
 
 2           different, and form number;
 
 3      (6)  Initial death benefit; and
 
 4      (7)  Dividend option election or application of non-
 
 5           guaranteed elements, if applicable.
 
 6      (b)  When using an illustration in the sale of a life
 
 7 insurance policy, an insurer, its producers, or other authorized
 
 8 representatives shall not:
 
 9      (1)  Represent the policy as anything other than a life
 
10           insurance policy;
 
11      (2)  Use or describe nonguaranteed elements in a manner that
 
12           is misleading or has the capacity or tendency to
 
13           mislead;
 
14      (3)  State or imply that the payment or amount of
 
15           nonguaranteed elements is guaranteed;
 
16      (4)  Use an illustration that does not comply with the
 
17           requirements of this part;
 
18      (5)  Use an illustration that at any policy duration depicts
 
19           policy performance more favorable to the policy owner
 
20           than that produced by the illustrated scale of the
 
21           insurer whose policy is being illustrated;
 
22      (6)  Provide an applicant with an incomplete illustration;
 
23      (7)  Represent in any way that premium payments will not be
 

 
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 1           required for each year of the policy in order to
 
 2           maintain the illustrated death benefits, unless that is
 
 3           the fact;
 
 4      (8)  Use the term "vanish" or "vanishing premium," or a
 
 5           similar term that implies the policy becomes paid up,
 
 6           to describe a plan for using nonguaranteed elements to
 
 7           pay a portion of future premiums;
 
 8      (9)  Except for policies that can never develop
 
 9           nonforfeiture values, use an illustration that is
 
10           "lapse-supported"; or
 
11     (10)  Use an illustration that is not "self-supporting."
 
12      (c)  If an interest rate used to determine the illustrated
 
13 nonguaranteed elements is shown, it shall not be greater than the
 
14 earned interest rate underlying the disciplined current scale.
 
15      §431:10D-E  Standards for basic illustrations.(a)  The
 
16 format of a basic illustration shall conform with the following
 
17 requirements:
 
18      (1)  The illustration shall be labeled with the date on
 
19           which it was prepared;
 
20      (2)  Each page, including any explanatory notes or pages,
 
21           shall be numbered and show its relationship to the
 
22           total number of pages in the illustration (e.g., the
 
23           fourth page of a seven page illustration shall be
 

 
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 1           labeled "page 4 of 7 pages");
 
 2      (3)  The assumed dates of payment receipt and benefit pay
 
 3           out within a policy year shall be clearly identified;
 
 4      (4)  If the age of the proposed insured is shown as a
 
 5           component of the tabular detail, the age shown shall be
 
 6           the age of the insured at the time the policy is issued
 
 7           plus the numbers of years the policy is assumed to have
 
 8           been in force;
 
 9      (5)  The assumed payments on which the illustrated benefits
 
10           and values are based shall be identified as premium
 
11           outlay or contract premium, as applicable.  For
 
12           policies that do not require a specific contract
 
13           premium, the illustrated payments shall be identified
 
14           as premium outlay;
 
15      (6)  Guaranteed death benefits and values available upon
 
16           surrender, if any, for the illustrated premium outlay
 
17           or contract premium shall be shown and clearly labeled
 
18           guaranteed;
 
19      (7)  If the illustration shows any nonguaranteed elements,
 
20           they cannot be based on a scale more favorable to the
 
21           policy owner than the insurer's illustrated scale at
 
22           any duration.  These elements shall be clearly labeled
 
23           nonguaranteed;
 

 
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 1      (8)  The guaranteed elements, if any, shall be shown before
 
 2           corresponding nonguaranteed elements and shall be
 
 3           specifically referred to on any page of an illustration
 
 4           that shows or describes only the nonguaranteed elements
 
 5           (e.g., "see page one for guaranteed elements");
 
 6      (9)  The account or accumulation value of a policy, if
 
 7           shown, shall be identified by the name this value is
 
 8           given in the policy being illustrated and shown in
 
 9           close proximity to the corresponding value available
 
10           upon surrender;
 
11     (10)  The value available upon surrender shall be identified
 
12           by the name this value is given in the policy being
 
13           illustrated and shall be the amount available to the
 
14           policy owner in a lump sum after deduction of surrender
 
15           charges, policy loans, and policy loan interest, as
 
16           applicable;
 
17     (11)  Illustrations may show policy benefits and values in
 
18           graphic or chart form in addition to the tabular form;
 
19     (12)  Any illustration of nonguaranteed elements shall be
 
20           accompanied by a statement indicating that:
 
21           (A)  The benefits and values are not guaranteed;
 
22           (B)  The assumptions on which they are based are
 
23                subject to change by the insurer; and
 

 
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 1           (C)  Actual results may be more or less favorable;
 
 2     (13)  If the illustration shows that the premium payer may
 
 3           have the option to allow policy charges to be paid
 
 4           using nonguaranteed values, the illustration must
 
 5           clearly disclose that a charge continues to be required
 
 6           and that, depending on actual results, the premium
 
 7           payer may need to continue or resume premium outlays.
 
 8           Similar disclosure shall be made for premium outlay of
 
 9           lesser amounts or shorter durations than the contract
 
10           premium.  If a contract premium is due, the premium
 
11           outlay display shall not be left blank or show zero
 
12           unless accompanied by an asterisk or similar mark to
 
13           draw attention to the fact that the policy is not paid
 
14           up; and
 
15     (14)  If the applicant plans to use dividends or policy
 
16           values, guaranteed or nonguaranteed, to pay all or a
 
17           portion of the contract premium or policy charges, or
 
18           for any other purpose, the illustration may reflect
 
19           those plans and the impact on future policy benefits
 
20           and values.
 
21      (b)  A basic illustration shall include a narrative summary
 
22 which shall include the following:
 
23      (1)  A brief description of the policy being illustrated,
 

 
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 1           including a statement that it is a life insurance
 
 2           policy;
 
 3      (2)  A brief description of the premium outlay or contract
 
 4           premium, as applicable, for the policy.  For a policy
 
 5           that does not require payment of a specific contract
 
 6           premium, the illustration shall show the premium outlay
 
 7           that must be paid to guarantee coverage for the term of
 
 8           the contract, subject to maximum premiums allowable to
 
 9           qualify as a life insurance policy under the applicable
 
10           provisions of the Internal Revenue Code;
 
11      (3)  A brief description of any policy features, riders, or
 
12           options, guaranteed or nonguaranteed, shown in the
 
13           basic illustration and the impact they may have on the
 
14           benefits and values of the policy;
 
15      (4)  Identification and a brief definition of column
 
16           headings and key terms used in the illustration; and
 
17      (5)  A statement containing in substance the following:
 
18           "This illustration assumes that the currently
 
19           illustrated nonguaranteed elements will continue
 
20           unchanged for all years shown.  This is not likely to
 
21           occur, and actual results may be more or less favorable
 
22           than those shown."
 
23      (c)  Following the narrative summary, a basic illustration
 

 
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 1 shall include a numeric summary of the death benefits and values
 
 2 and the premium outlay and contract premium, as applicable,
 
 3 provided that;
 
 4      (1)  For a policy that provides for a contract premium, the
 
 5           guaranteed death benefits and values shall be based on
 
 6           the contract premium.  This summary shall be shown for
 
 7           at least policy years five, ten, and twenty and at age
 
 8           seventy, if applicable, on the three bases shown below.
 
 9           For multiple life policies the summary shall show
 
10           policy years five, ten, twenty, and thirty.  The
 
11           illustration shall include:
 
12           (A)  Policy guarantees;
 
13           (B)  Insurer's illustrated scale;
 
14           (C)  Insurer's illustrated scale used but with the
 
15                nonguaranteed elements reduced as follows:
 
16                (i)  Dividends at fifty per cent of the dividends
 
17                     contained in the illustrated scale used;
 
18               (ii)  Nonguaranteed credited interest at rates that
 
19                     are the average of the guaranteed rates and
 
20                     the rates contained in the illustrated scale
 
21                     used; and
 
22              (iii)  All nonguaranteed charges, including but not
 
23                     limited to, term insurance charges, mortality
 

 
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 1                     and expense charges, at rates that are the
 
 2                     average of the guaranteed rates, and the
 
 3                     rates contained in the illustrated scale
 
 4                     used; and
 
 5      (2)  In addition, if coverage would cease prior to policy
 
 6           maturity or age one hundred, the year in which coverage
 
 7           ceases shall be identified for each of the three bases.
 
 8      (d)  The following statements shall be included on the same
 
 9 page as the numeric summary and signed by the applicant, or the
 
10 policy owner in the case of an illustration provided at time of
 
11 delivery, as required in this part:
 
12      (1)  A statement to be signed and dated by the applicant or
 
13           policy owner reading as follows: "I have received a
 
14           copy of this illustration and understand that any
 
15           nonguaranteed elements illustrated are subject to
 
16           change and could be either higher or lower.  The agent
 
17           has told me they are not guaranteed."; and
 
18      (2)  A statement to be signed and dated by the insurance
 
19           producer or other authorized representative of the
 
20           insurer reading as follows:  "I certify that this
 
21           illustration has been presented to the applicant and
 
22           that I have explained that any nonguaranteed elements
 
23           illustrated are subject to change.  I have made no
 

 
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 1           statements that are inconsistent with the
 
 2           illustration.".
 
 3      (e)  A basic illustration shall include the following
 
 4 details:
 
 5      (1)  For at least each policy year from one to ten and for
 
 6           every fifth policy year thereafter ending at age one
 
 7           hundred, policy maturity or final expiration; and
 
 8           except for term insurance beyond the twentieth year,
 
 9           for any year in which the premium outlay and contract
 
10           premium, if applicable, is to change:
 
11           (A)  The premium outlay and mode the applicant plans to
 
12                pay and the contract premium, as applicable;
 
13           (B)  The corresponding guaranteed death benefit, as
 
14                provided in the policy; and
 
15           (C)  The corresponding guaranteed value available upon
 
16                surrender, as provided in the policy;
 
17      (2)  For a policy that provides for a contract premium, the
 
18           guaranteed death benefit and value available upon
 
19           surrender shall correspond to the contract premium; and
 
20      (3)  Nonguaranteed elements may be shown if described in the
 
21           contract.  In the case of an illustration for a policy
 
22           on which the insurer intends to credit terminal
 
23           dividends, they may be shown if the insurer's current
 

 
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 1           practice is to pay terminal dividends, provided that:
 
 2           (A)  If any nonguaranteed elements are shown they must
 
 3                be shown at the same durations as the
 
 4                corresponding guaranteed elements, if any; and
 
 5           (B)  If no guaranteed benefit or value is available at
 
 6                any duration for which a nonguaranteed benefit or
 
 7                value is shown, a zero shall be displayed in the
 
 8                guaranteed column.
 
 9      §431:10D-F  Standards for supplemental illustrations.(a)
 
10 A supplemental illustration may be provided so long as:
 
11      (1)  It is appended to, accompanied by, or preceded by a
 
12           basic illustration that complies with this part;
 
13      (2)  The nonguaranteed elements shown are not more favorable
 
14           to the policy owner than the corresponding elements
 
15           based on the scale used in the basic illustration;
 
16      (3)  It contains the same statement required of a basic
 
17           illustration that nonguaranteed elements are not
 
18           guaranteed; and
 
19      (4)  For a policy that has a contract premium, the contract
 
20           premium underlying the supplemental illustration is
 
21           equal to the contract premium shown in the basic
 
22           illustration.  For policies that do not require a
 
23           contract premium, the premium outlay underlying the
 

 
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 1           supplemental illustration shall be equal to the premium
 
 2           outlay shown in the basic illustration.
 
 3      (b)  The supplemental illustration shall include a notice
 
 4 referring to the basic illustration for guaranteed elements and
 
 5 other important information.
 
 6      §431:10D-G  Delivery of illustration and record retention.
 
 7 (a)  If a basic illustration is used by an insurance producer or
 
 8 other authorized representative of the insurer in the sale of a
 
 9 life insurance policy and the policy is applied for as
 
10 illustrated, a copy of that illustration, signed in accordance
 
11 with this part, shall be submitted to the insurer at the time of
 
12 policy application.  A copy also shall be provided to the
 
13 applicant.
 
14      (b)  If the policy is issued other than as applied for, a
 
15 revised basic illustration conforming to the policy as issued
 
16 shall be sent with the policy.  The revised illustration shall:
 
17      (1)  Conform to the requirements of this part;
 
18      (2)  Be labeled "Revised Illustration"; and
 
19      (3)  Be signed and dated by the applicant or policy owner
 
20           and producer or other authorized representative of the
 
21           insurer no later than the time the policy is delivered.
 
22 A copy of the revised illustration shall be provided to the
 
23 insurer and the policy owner.
 

 
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 1      (c)  If the policy is identified as one to be marketed with
 
 2 an illustration, and no illustration is used by an insurance
 
 3 producer or other authorized representative in the sale of a life
 
 4 insurance policy or if the policy is applied for other than as
 
 5 illustrated, the producer or representative shall certify to that
 
 6 effect in writing on a form provided by the insurer; provided
 
 7 that:
 
 8      (1)  On the same form the applicant shall acknowledge that
 
 9           no illustration conforming to the policy applied for
 
10           was provided and shall further acknowledge an
 
11           understanding that an illustration conforming to the
 
12           policy as issued will be provided no later than at the
 
13           time of policy delivery.  This form shall be submitted
 
14           to the insurer at the time of policy application;
 
15      (2)  If the policy is issued, a basic illustration
 
16           conforming to the policy as issued shall be sent with
 
17           the policy and signed no later than the time the policy
 
18           is delivered; and
 
19      (3)  A copy shall be provided to the insurer and the policy
 
20           owner.
 
21      (d)  If the basic illustration or revised illustration is
 
22 sent to the applicant or policy owner by mail from the insurer,
 
23 it shall include instructions for the applicant or policy owner
 

 
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 1 to sign the duplicate copy of the numeric summary page of the
 
 2 illustration for the policy issued and return the signed copy to
 
 3 the insurer.  The insurer's obligation under this subsection
 
 4 shall be satisfied if it can demonstrate that it has made a
 
 5 diligent effort to secure a signed copy of the numeric summary
 
 6 page.  The requirement to make a diligent effort shall be deemed
 
 7 satisfied if the insurer includes in the mailing a self-addressed
 
 8 postage prepaid envelope with instructions for the return of the
 
 9 signed numeric summary page.
 
10      (e)  A copy of the basic illustration and a revised basic
 
11 illustration, if any, signed as applicable, along with any
 
12 certification that either no illustration was used or that the
 
13 policy was applied for other than as illustrated, shall be
 
14 retained by the insurer until three years after the policy is no
 
15 longer in force.  A copy need not be retained if no policy is
 
16 issued.
 
17      §431:10D-H  Annual reports and notice to policy owners.  (a)
 
18 In the case of a policy designated as one for which illustrations
 
19 will be used, the insurer shall provide each policy owner with an
 
20 annual report on the status of the policy that shall contain at
 
21 least the following information:
 
22      (1)  For universal life policies, the report shall include
 
23           the following:
 

 
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 1           (A)  The beginning and end date of the current report
 
 2                period;
 
 3           (B)  The policy value at the end of the previous report
 
 4                period and at the end of the current report
 
 5                period;
 
 6           (C)  The total amounts that have been credited or
 
 7                debited to the policy value during the current
 
 8                report period, identifying each by type (e.g.,
 
 9                interest, mortality, expense, and riders);
 
10           (D)  The current death benefit at the end of the
 
11                current report period on each life covered by the
 
12                policy;
 
13           (E)  The net cash surrender value of the policy as of
 
14                the end of the current report period;
 
15           (F)  The amount of outstanding loans, if any, as of the
 
16                end of the current report period; and
 
17      (2)  For fixed premium policies: if assuming guaranteed
 
18           interest, mortality, and expense loads, and continued
 
19           scheduled premium payments, the policy's net cash
 
20           surrender value is such that it would not maintain
 
21           insurance in force until the end of the next reporting
 
22           period, a notice to this effect shall be included in
 
23           the report; or
 

 
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 1      (3)  For flexible premium policies: if, assuming guaranteed
 
 2           interest, mortality, and expense loads, the policy's
 
 3           net cash surrender value will not maintain insurance in
 
 4           force until the end of the next reporting period unless
 
 5           further premium payments are made, a notice to this
 
 6           effect shall be included in the report;
 
 7      (4)  For all other policies, where applicable:
 
 8           (A)  Current death benefit;
 
 9           (B)  Annual contract premium;
 
10           (C)  Current cash surrender value;
 
11           (D)  Current dividend;
 
12           (E)  Application of current dividend; and
 
13           (F)  Amount of outstanding loan;
 
14           and
 
15      (5)  Insurers writing life insurance policies that do not
 
16           build nonforfeiture values shall only be required to
 
17           provide an annual report with respect to these policies
 
18           for those years when a change has been made to
 
19           nonguaranteed policy elements by the insurer.
 
20      (b)  If the annual report does not include an in-force
 
21 illustration, it shall contain the following notice displayed
 
22 prominently: "IMPORTANT POLICY OWNER NOTICE:  You should consider
 
23 requesting more detailed information about your policy to
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1 understand how it may perform in the future.  You should not
 
 2 consider replacement of your policy or make changes in your
 
 3 coverage without requesting a current illustration.  You may
 
 4 annually request, without charge, such an illustration by calling
 
 5 [insurer's phone number], writing to [insurer's name] at
 
 6 [insurer's address], or contacting your agent.  If you do not
 
 7 receive a current illustration of your policy within thirty days
 
 8 from your request, you should contact your state insurance
 
 9 department."
 
10      (c)  Upon the request of the policy owner, the insurer shall
 
11 furnish an in-force illustration of current and future benefits
 
12 and values based on the insurer's present illustrated scale.
 
13 This illustration shall comply with the requirements of sections
 
14 431:10D-D(a), 431:10D-D(b), 431:10D-E(a), and 431:10D-E(e).  No
 
15 signature or other acknowledgment of receipt of this illustration
 
16 shall be required.
 
17      (d)  If an adverse change in nonguaranteed elements that
 
18 could affect the policy has been made by the insurer since the
 
19 last annual report, the annual report shall contain a notice of
 
20 that fact and the nature of the change prominently displayed.
 
21      §431:10D-I  Annual certifications.(a)  The board of
 
22 directors of each insurer shall appoint one or more illustration
 
23 actuaries.
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1      (b)  The illustration actuary shall certify that the
 
 2 disciplined current scale used in illustrations is in conformity
 
 3 with the Actuarial Standard of Practice for Compliance with the
 
 4 National Association of Insurance Commissioners Model Regulation
 
 5 on Life Insurance Illustrations promulgated by the Actuarial
 
 6 Standards Board, and that the illustrated scales used in insurer-
 
 7 authorized illustrations meet the requirements of this part.
 
 8      (c)  The illustration actuary shall:
 
 9      (1)  Be a member in good standing of the American Academy of
 
10           Actuaries;
 
11      (2)  Be familiar with the standard of practice regarding
 
12           life insurance policy illustrations;
 
13      (3)  Not have been found by the commissioner, following
 
14           appropriate notice and hearing, to have:
 
15           (A)  Violated any provision of, or any obligation
 
16                imposed by, the insurance law or other law in the
 
17                course of acting as an illustration actuary;
 
18           (B)  Been found guilty of fraudulent or dishonest
 
19                practices;
 
20           (C)  Demonstrated incompetence, lack of cooperation, or
 
21                untrustworthiness to act as an illustration
 
22                actuary; or
 
23           (D)  Resigned or been removed as an illustration
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                actuary within the past five years as a result of
 
 2                acts or omissions indicated in any adverse report
 
 3                on examination or as a result of a failure to
 
 4                adhere to generally acceptable actuarial
 
 5                standards;
 
 6      (4)  Not fail to notify the commissioner of any action taken
 
 7           by a commissioner of another state similar to that
 
 8           under paragraph (3);
 
 9      (5)  Disclose in the annual certification whether, since the
 
10           last certification, a currently payable scale
 
11           applicable for business issued within the previous five
 
12           years and within the scope of the certification has
 
13           been reduced for reasons other than changes in the
 
14           experience factors underlying the disciplined current
 
15           scale.  If nonguaranteed elements illustrated for new
 
16           policies are not consistent with those illustrated for
 
17           similar in-force policies, this must be disclosed in
 
18           the annual certification.  If nonguaranteed elements
 
19           illustrated for both new and in-force policies are not
 
20           consistent with the nonguaranteed elements actually
 
21           being paid, charged, or credited to the same or similar
 
22           forms, this must be disclosed in the annual
 
23           certification; and
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1      (6)  Disclose in the annual certification the method used to
 
 2           allocate overhead expenses for all illustrations:
 
 3           (A)  Fully allocated expenses;
 
 4           (B)  Marginal expenses; or
 
 5           (C)  A generally recognized expense table based on
 
 6                fully allocated expenses representing a
 
 7                significant portion of insurance companies and
 
 8                approved by the commissioner.
 
 9      (d)  The illustration actuary shall file a certification
 
10 with the board and with the commissioner:
 
11      (1)  Annually for all policy forms for which illustrations
 
12           are used; and
 
13      (2)  Before a new policy form is illustrated.
 
14      (e)  If an error in a previous certification is discovered,
 
15 the illustration actuary shall immediately notify the board of
 
16 directors of the insurer and the commissioner.
 
17      (f)  If an illustration actuary is unable to certify the
 
18 scale for any policy form illustration the insurer intends to
 
19 use, the actuary shall immediately notify the board of directors
 
20 of the insurer and the commissioner of the inability to certify.
 
21      (g)  A responsible officer of the insurer, other than the
 
22 illustration actuary, shall certify annually:
 
23      (1)  That the illustration formats meet the requirements of
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           this part and that the scales used in insurer-
 
 2           authorized illustrations are those scales certified by
 
 3           the illustration actuary; and
 
 4      (2)  That the company has provided its agents with
 
 5           information about the expense allocation method used by
 
 6           the company in its illustrations and disclosed as
 
 7           required in subsection (c)(6).
 
 8      (h)  The annual certifications shall be provided to the
 
 9 commissioner each year by a date determined by the insurer.
 
10      (i)  If an insurer changes the illustration actuary
 
11 responsible for all or a portion of the company's policy forms,
 
12 the insurer shall notify the commissioner of that fact promptly
 
13 and disclose the reason for the change.
 
14      §431:10D-J  Penalties.  In addition to any other penalties
 
15 provided by the laws of this State, an insurer or producer that
 
16 violates a requirement of this part shall be guilty of unfair
 
17 trade practice in violation of chapter article 13.
 
18      §431:10D-K  Authority to adopt rules.  The Commissioner
 
19 shall have the authority to adopt rules implementing this part."
 
20      SECTION 3.  Chapter 431, Hawaii Revised Statutes, is amended
 
21 by adding to article 10D a new part to be appropriately
 
22 designated, and to read as follows:
 
23  "PART ___ REPLACEMENT OF LIFE INSURANCE POLICIES AND ANNUITIES
 

 
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 1      §431:10D-A.  Definitions.  For the purposes of this part:
 
 2      "Direct-response solicitation" means a solicitation through
 
 3 a sponsoring or endorsing entity or individually solely through
 
 4 mails, telephone, the Internet or other mass communication media.
 
 5      "Existing insurer" means the insurance company whose policy
 
 6 or contract is or will be changed or affected in a manner
 
 7 described within the definition of "replacement."
 
 8      "Existing policy or contract" means an individual life
 
 9 insurance policy (policy) or annuity contract (contract) in
 
10 force, including a policy under a binding or conditional receipt
 
11 or a policy or contract that is within an unconditional refund
 
12 period.
 
13      "Financed purchase" means the purchase of a new policy
 
14 involving the actual or intended use of funds obtained by the
 
15 withdrawal or surrender of, or by borrowing from values of an
 
16 existing policy to pay all or part of any premium due on the new
 
17 policy. If a withdrawal, surrender,or borrowing involving the
 
18 policy values of an existing policy are used to pay premiums on a
 
19 new policy owned by the same policyholder within thirteen (13)
 
20 months before or after the effective date of the new policy and
 
21 is known by the replacing insurer, or if the withdrawal,
 
22 surrender, or borrowing is shown on any illustration of the
 
23 existing and new policies made available to the prospective
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1 policyowner by the insurer or its producers, it will be deemed
 
 2 prima facie evidence of a financed purchase.
 
 3      "Illustration" means a presentation or depiction that
 
 4 includes non-guaranteed elements of a policy of life insurance
 
 5 over a period of years as defined in part ___ of this article.
 
 6      "Policy summary," for the purposes of this regulation;
 
 7      (1)  For policies or contracts other than universal life
 
 8           policies, means a written statement regarding a policy
 
 9           or contract which shall contain to the extent
 
10           applicable, but need not be limited to, the following
 
11           information: current death benefit; annual contract
 
12           premium; current cash surrender value; current
 
13           dividend; application of current dividend; and amount
 
14           of outstanding loan.
 
15      (2)  For universal life policies, means a written statement
 
16           that shall contain at least the following information:
 
17           the beginning and end date of the current report
 
18           period; the policy value at the end of the previous
 
19           report period and at the end of the current report
 
20           period; the total amounts that have been credited or
 
21           debited to the policy value during the current report
 
22           period, identifying each by type (e.g., interest,
 
23           mortality, expense and riders); the current death
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           benefit at the end of the current report period on each
 
 2           life covered by the policy; the net cash surrender
 
 3           value of the policy as of the end of the current report
 
 4           period; and the amount of outstanding loans, if any, as
 
 5           of the end of the current report period.
 
 6      "Producer," means general agent, subagent, agent, solicitor,
 
 7 insurance broker or brokers or any other person, firm
 
 8 association, or corporationlicensed pursuat to article 9.
 
 9      "Replacing insurer" means the insurance company that issues
 
10 or proposes to issue a new policy or contract that replaces an
 
11 existing policy or contract or is a financed purchase.
 
12      "Registered contract" means a variable annuity contract or
 
13 variable life insurance policy subject to the prospectus delivery
 
14 requirements of the Securities Act of 1933.
 
15      "Replacement" means a transaction in which a new policy or
 
16 contract is to be purchased, and it is known or should be known
 
17 to the proposing producer, or to the proposing insurer if there
 
18 is no producer, that by reason of the transaction, an existing
 
19 policy or contract has been or is to be:
 
20           (1)  Lapsed, forfeited, surrendered or partially
 
21                surrendered, assigned to the replacing insurer or
 
22                otherwise terminated;
 
23           (2)  Converted to reduced paid-up insurance, continued
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                as extended term insurance, or otherwise reduced
 
 2                in value by the use of nonforfeiture benefits or
 
 3                other policy values;
 
 4           (3)  Amended so as to effect either a reduction in
 
 5                benefits or in the term for which coverage would
 
 6                otherwise remain in force or for which benefits
 
 7                would be paid;
 
 8           (4)  Reissued with any reduction in cash value; or
 
 9           (5)  Used in a financed purchase.
 
10      "Sales material" means a sales illustration and any other
 
11 written, printed or electronically presented information created,
 
12 or completed or provided by the company or producer and used in
 
13 the presentation to the policy or contract owner related to the
 
14 policy or contract purchased.
 
15      §431:10D-B.  Exemptions.(a)  Unless otherwise specifically
 
16 included, this regulation shall not apply to transactions
 
17 involving:
 
18           (1)  Credit life insurance;
 
19           (2)  Group life insurance or group annuities where
 
20                there is no direct solicitation of individuals by
 
21                an insurance producer. Direct solicitation shall
 
22                not include any group meeting held by an insurance
 
23                producer solely for the purpose of educating or
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                enrolling individuals. Group life insurance or
 
 2                group annuity certificates marketed through direct
 
 3                response solicitation shall be subject to the
 
 4                provisions of Section 8;
 
 5           (3)  An application to the existing insurer that issued
 
 6                the existing policy or contract when a contractual
 
 7                change or a conversion privilege is being
 
 8                exercised; or, when the existing policy or
 
 9                contract is being replaced by the same insurer
 
10                pursuant to a program filed with and approved by
 
11                the commissioner;
 
12           (4)  Proposed life insurance that is to replace life
 
13                insurance under a binding or conditional receipt
 
14                issued by the same company;
 
15           (5)  Policies or contracts used to fund:
 
16                (A)  An employee pension or welfare benefit plan
 
17                     that is covered by the Employee Retirement
 
18                     and Income Security Act (ERISA);
 
19                (B)  A plan described by Sections 401(a), 401(k)
 
20                     or 403(b) of the Internal Revenue Code, where
 
21                     the plan, for purposes of ERISA, is
 
22                     established or maintained by an employer;
 
23                (C)  A governmental or church plan defined in
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                     Section 414, a governmental or church welfare
 
 2                     benefit plan, or a deferred compensation plan
 
 3                     of a state or local government or tax exempt
 
 4                     organization under Section 457 of the
 
 5                     Internal Revenue Code; or
 
 6                (D)  A nonqualified deferred compensation
 
 7                     arrangement established or maintained by an
 
 8                     employer or plan sponsor.
 
 9                Notwithstanding Subparagraph (a), this regulation
 
10                shall apply to policies or contracts used to fund
 
11                any plan or arrangement that is funded solely by
 
12                contributions an employee elects to make, whether
 
13                on a pre-tax or after-tax basis, and where the
 
14                insurance company has been notified that plan
 
15                participants may choose from among two (2) or more
 
16                annuity providers or policy providers and there is
 
17                a direct solicitation of an individual employee by
 
18                an insurance producer for the purchase of a
 
19                contract or policy. As used in this subsection,
 
20                direct solicitation shall not include any group
 
21                meeting held by an insurance producer solely for
 
22                the purpose of educating individuals about the
 
23                plan or arrangement or enrolling individuals in
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                the plan or arrangement;
 
 2           (6)  Where new coverage is provided under a life
 
 3                insurance policy or contract and the cost is borne
 
 4                wholly by the insured's employer or by an
 
 5                association of which the insured is a member; or
 
 6           (7)  Existing life insurance that is a non-convertible
 
 7                term life insurance policy that will expire in
 
 8                five (5) years or less and cannot be renewed.
 
 9      (b)  Registered contracts shall be exempt from the
 
10 requirements of Sections 431:10D-E(b) and 431:10D-F(2) with
 
11 respect to the provision of illustrations or policy summaries;
 
12 however, premium or contract contribution amounts and
 
13 identification of the appropriate prospectus or offering circular
 
14 shall be required instead.
 
15      §431:10D-C.  Duties of producers.  (a)  A producer who
 
16 initiates an application shall submit to the insurer, with or as
 
17 part of the application, a statement signed by both the applicant
 
18 and the producer as to whether the applicant has existing
 
19 policies or contracts. If the answer is "no," the producer's
 
20 duties with respect to replacement are complete.
 
21      (b)  If the applicant answered "yes" to the question
 
22 regarding existing coverage referred to in Subsection A, the
 
23 producer shall present and read to the applicant, not later than
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1 at the time of taking the application, a notice in a form as
 
 2 approved by the commissioner. The notice shall be signed by both
 
 3 the applicant and the producer attesting that the notice has been
 
 4 read aloud by the producer or that the applicant did not wish the
 
 5 notice to be read aloud (in which case the producer need not have
 
 6 read the notice aloud) and left with the applicant.
 
 7      (c)  The notice shall list all life insurance policies or
 
 8 annuities proposed to be replaced, properly identified by name of
 
 9 insurer, the insured or annuitant, and policy or contract number
 
10 if available; and shall include a statement as to whether each
 
11 policy or contract will be replaced or whether a policy will be
 
12 used as a source of financing for the new policy or contract. If
 
13 a policy or contract number has not been issued by the existing
 
14 insurer, alternative identification, such as an application or
 
15 receipt number, shall be listed.
 
16      (d)  In connection with a replacement transaction the
 
17 producer shall leave with the applicant at the time an
 
18 application for a new policy or contract is completed the
 
19 original or a copy of all sales material. With respect to
 
20 electronically presented sales material, it shall be provided to
 
21 the policyholder in printed form no later than at the time of
 
22 policy or contract delivery.
 
23      (e)  Except as provided in Section 431:10D-D(6), in
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1 connection with a replacement transaction the producer shall
 
 2 submit to the insurer to which an application for a policy or
 
 3 contract is presented, a copy of each document required by this
 
 4 section, a statement identifying any preprinted or electronically
 
 5 presented company approved sales materials used, and copies of
 
 6 any individualized sales materials, including any illustrations
 
 7 used in the transaction.
 
 8      §431:10D-D.  Duties of all insurers that use producers.
 
 9 Each insurer shall:
 
10      (1)  Maintain a system of supervision and control to insure
 
11           compliance with the requirements of this regulation
 
12           that shall include at least the following:
 
13           (A)  Inform its producers of the requirements of this
 
14                regulation and incorporate the requirements of
 
15                this regulation into all relevant producer
 
16                training manuals prepared by the insurer;
 
17           (B)  Provide to each producer a written statement of
 
18                the company's position with respect to the
 
19                acceptability of replacements providing guidance
 
20                to its producer as to the appropriateness of these
 
21                transactions;
 
22           (C)  A system to review the appropriateness of each
 
23                replacement transaction that the producer does not
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                indicate is in accord with Paragraph (2) above;
 
 2           (D)  Procedures to confirm that the requirements of
 
 3                this regulation have been met; and
 
 4           (E)  Procedures to detect transactions that are
 
 5                replacements of existing policies or contracts by
 
 6                the existing insurer, but that have not been
 
 7                identified as such by the applicant or producer.
 
 8      (2)  Have the capacity to produce, upon request, and make
 
 9           available to the Insurance Department, records of each
 
10           producer's:
 
11           (A)  Replacements, including financed purchases, as a
 
12                percentage of the producer's total annual sales
 
13                for life insurance and annuity contracts not
 
14                exempted from this regulation;
 
15           (B)  Number of lapses of policies and contracts by the
 
16                producer as a percentage of the producer's total
 
17                annual sales for life insurance and annuity
 
18                contracts not exempted from this regulation;
 
19           (C)  Number of transactions that are unidentified
 
20                replacements of existing policies or contracts by
 
21                the existing insurer detected by the company's
 
22                monitoring system as required by Subsection 1(E)
 
23                of this section; and
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           (D)  Replacements, indexed by replacing producer and
 
 2                existing insurer.
 
 3      (3)  Require with or as a part of each application for life
 
 4           insurance or an annuity a signed statement by both the
 
 5           applicant and the producer as to whether the applicant
 
 6           has existing policies or contracts;
 
 7      (4)  Require with each application for life insurance or an
 
 8           annuity that indicates an existing policy or contract a
 
 9           completed notice as required by Section 431:10D-C(b)
 
10           regarding replacements;
 
11      (5)  When the applicant has existing policies or contracts,
 
12           retain completed and signed copies of the notice
 
13           regarding replacements in its home or regional office
 
14           for at least five (5) years after the termination or
 
15           expiration of the proposed policy or contract;
 
16      (6)  When the applicant has existing policies or contracts,
 
17           obtain and retain copies of any sales material as
 
18           required by Section 431:10D-C(e), the basic
 
19           illustration and any supplemental illustrations used in
 
20           the sale and the producer's and applicant's signed
 
21           statements with respect to financing and replacement in
 
22           its home or regional office for at least five (5) years
 
23           after the termination or expiration of the proposed
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           policy or contract;
 
 2      (7)  Ascertain that the sales material and illustrations
 
 3           used in the replacement meet the requirements of this
 
 4           regulation and are complete and accurate for the
 
 5           proposed policy or contract; and
 
 6      (8)  If an application does not meet the requirements of
 
 7           this regulation, notify the producer and applicant and
 
 8           fulfill the outstanding requirements.
 
 9      §431:10D-E.  Duties of replacing insurers that use
 
10 producers.(a)  Where a replacement is involved in the
 
11 transaction, the replacing insurer shall:
 
12           (1)  Verify that the required forms are received and
 
13                are in compliance with this regulation;
 
14           (2)  Notify any other existing insurer that may be
 
15                affected by the proposed replacement within five
 
16                (5) business days of receipt of a completed
 
17                application indicating replacement or when the
 
18                replacement is identified if not indicated on the
 
19                application, and mail a copy of the available
 
20                illustration or policy summary for the proposed
 
21                policy or available disclosure document for the
 
22                proposed contract within five (5) business days of
 
23                a request from an existing insurer;
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           (3)  Retain copies of the notification regarding
 
 2                replacement required in Section 431:10D-C(b),
 
 3                indexed by producer, in its home or regional
 
 4                office for at least five (5) years or until the
 
 5                next regular examination by the insurance
 
 6                department of a company's state of domicile,
 
 7                whichever is later; and
 
 8           (4)  Provide to the policy or contract owner notice of
 
 9                the right to return the policy or contract within
 
10                thirty (30) days of the delivery of the contract
 
11                and receive an unconditional full refund of all
 
12                premiums or considerations paid on it, including
 
13                any policy fees or charges or, in the case of a
 
14                variable or market value adjustment policy or
 
15                contract, a payment of the cash surrender value
 
16                provided under the policy or contract plus the
 
17                fees and other charges deducted from the gross
 
18                premiums or considerations or imposed under such
 
19                policy or contract.
 
20      (b)  In transactions where the replacing insurer and the
 
21 existing insurer are the same or subsidiaries or affiliates under
 
22 common ownership or control allow credit for the period of time
 
23 that has elapsed under the replaced policy's or contract's
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1 incontestability and suicide period up to the face amount of the
 
 2 existing policy or contract. With regard to financed purchases
 
 3 the credit may be limited to the amount the face amount of the
 
 4 existing policy is reduced by the use of existing policy values
 
 5 to fund the new policy or contract.
 
 6      (c)  If an insurer prohibits the use of sales material other
 
 7 than that approved by the company, as an alternative to the
 
 8 requirements of Section 4E the insurer may:
 
 9           (1)  Require with each application a statement signed
 
10                by the producer that:
 
11                (A)  Represents that the producer used only
 
12                     company-approved sales material;
 
13                (B)  Lists, by identifying number or other
 
14                     descriptive language, the sales material that
 
15                     was used; and
 
16                (C)  States that copies of all sales material were
 
17                     left with the applicant in accordance with
 
18                     Section 431:10D-C(d); and
 
19           (2)  Within ten (10) days of the issuance of the policy
 
20                or contract:
 
21                (A)  Notify the applicant by sending a letter or
 
22                     by verbal communication with the applicant by
 
23                     a person whose duties are separate from the
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1                     marketing area of the insurer, that the
 
 2                     producer has represented that copies of all
 
 3                     sales material have been left with the
 
 4                     applicant in accordance with Section 431:10D-
 
 5                     C(d);
 
 6                (B)  Provide the applicant with a toll free number
 
 7                     to contact company personnel involved in the
 
 8                     compliance function if such is not the case;
 
 9                     and
 
10                (C)  Stress the importance of retaining copies of
 
11                     the sales material for future reference; and
 
12           (3)       Keep a copy of the letter or other
 
13                verification in the policy file at the home or
 
14                regional office for at least five (5) years after
 
15                the termination or expiration of the policy or
 
16                contract.
 
17      §431:10D-F.  Duties of the existing insurer.  Where a
 
18 replacement is involved in the transaction, the existing insurer
 
19 shall:
 
20      (1)  Upon notice that its existing policy or contract may be
 
21           replaced or a policy may be part of a financed
 
22           purchase, retain copies of the notification in its home
 
23           or regional office, indexed by replacing insurer,
 

 
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                                     S.B. NO.           
                                                        
                                                        


 1           notifying it of the replacement for at least five (5)
 
 2           years or until the conclusion of the next regular
 
 3           examination conducted by the Insurance Department of
 
 4           its state of domicile, whichever is later;
 
 5      (2)  Send a letter to the policy or contract owner of the
 
 6           right to receive information regarding the existing
 
 7           policy or contract values including, if available, an
 
 8           in force illustration or policy summary if an in force
 
 9           illustration cannot be produced within five (5)
 
10           business days of receipt of a notice that an existing
 
11           policy or contract is being replaced. The information
 
12           shall be provided within five (5) business days of
 
13           receipt of the request from the policy or contract
 
14           owner; and
 
15      (3)  Upon receipt of a request to borrow, surrender or
 
16           withdraw any policy or contract values, send to the
 
17           applicant a notice, advising the policy or contract
 
18           owner of the effect release of policy or contract
 
19           values will have on the non-guaranteed elements, face
 
20           amount or surrender value of the policy or contract
 
21           from which the values are released. The notice shall be
 
22           sent separate from the check if the check is sent to
 
23           anyone other than the policy or contract owner. In the
 

 
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 1           case of consecutive automatic premium loans or
 
 2           systematic withdrawals from a contract, the insurer is
 
 3           only required to send the notice at the time of the
 
 4           first loan or withdrawal.
 
 5      §431:10D-G.  Duties of insurers with respect to direct
 
 6 response solicitations.(a)  In the case of an application that
 
 7 is initiated as a result of a direct response solicitation, the
 
 8 insurer shall require, with or as part of each completed
 
 9 application for a policy or contract, a statement asking whether
 
10 the applicant, by applying for the proposed policy or contract,
 
11 intends to replace, discontinue or change an existing policy or
 
12 contract. If the applicant indicates a replacement or change is
 
13 not intended or if the applicant fails to respond to the
 
14 statement, the insurer shall send the applicant, with the policy
 
15 or contract, a notice in a form approved by the commissioner,
 
16 which shall state the following:
 
17 "NOTICE REGARDING REPLACEMENT
 
18 REPLACING YOUR LIFE INSURANCE POLICY OR ANNUITY
 
19      "Are you thinking about buying a new life insurance policy
 
20 or annuity and discontinuing or changing an existing one? If you
 
21 are, your decision could be a good one-or a mistake. You will not
 
22 know for sure unless you make a careful comparison of your
 
23 existing benefits and the proposed policy or contract's benefits.
 

 
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 1      "Make sure you understand the facts.  You should ask the
 
 2 company or agent that sold you your existing policy or contract
 
 3 to give you information about it.
 
 4      "Hear both sides before you decide. This way you can be sure
 
 5 you are making a decision that is in your best interest."
 
 6      (b)  If the insurer has proposed the replacement or if the
 
 7 applicant indicates a replacement is intended and the insurer
 
 8 continues with the replacement, the insurer shall:
 
 9           (1)  Provide to applicants or prospective applicants
 
10                with the policy or contract a notice, in a form
 
11                similar to that required by section 431:10D-C(b).
 
12                In these instances the insurer may delete the
 
13                references to the producer, including the
 
14                producer's signature, without having to obtain
 
15                approval of the form from the commissioner. The
 
16                insurer's obligation to obtain the applicant's
 
17                signature shall be satisfied if it can demonstrate
 
18                that it has made a diligent effort to secure a
 
19                signed copy of the notice referred to in this
 
20                paragraph. The requirement to make a diligent
 
21                effort shall be deemed satisfied if the insurer
 
22                includes in the mailing a self-addressed postage
 
23                prepaid envelope with instructions for the return
 

 
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 1                of the signed notice referred to in this section;
 
 2                and
 
 3           (2)  Comply with the requirements of Section 431:10D-
 
 4                E(a)(2), if the applicant furnishes the names of
 
 5                the existing insurers, and the requirements of
 
 6                Sections 431:10D-E(a)(3), 431:10D-E(a)(4) and
 
 7                431:10D-E(b).
 
 8      §431:10D-H.  Violations and penalties.  (a)  Any failure to
 
 9 comply with this regulation shall be considered a violation of
 
10 article 13 of this code. Examples of violations include:
 
11           (1)  Any deceptive or misleading information set forth
 
12                in sales material;
 
13           (2)  Failing to ask the applicant in completing the
 
14                application the pertinent questions regarding the
 
15                possibility of financing or replacement;
 
16           (3)  The intentional incorrect recording of an answer;
 
17           (4)  Advising an applicant to respond negatively to any
 
18                question regarding replacement in order to prevent
 
19                notice to the existing insurer; or
 
20           (5)  Advising a policy or contract owner to write
 
21                directly to the company in such a way as to
 
22                attempt to obscure the identity of the replacing
 
23                producer or company.
 

 
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 1      (b)  Policy and contract owners have the right to replace
 
 2 existing life insurance policies or annuity contracts after
 
 3 indicating in or as a part of applications for new coverage that
 
 4 replacement is not their intention; however, patterns of such
 
 5 action by policy or contract owners of the same producer shall be
 
 6 deemed prima facie evidence of the producer's knowledge that
 
 7 replacement was intended in connection with the identified
 
 8 transactions, and these patterns of action shall be deemed prima
 
 9 facie evidence of the producer's intent to violate this
 
10 regulation.
 
11      (c)  Where it is determined that the requirements of this
 
12 regulation have not been met the replacing insurer shall provide
 
13 to the policy owner an in force illustration if available or
 
14 policy summary for the replacement policy or available disclosure
 
15 document for the replacement contract and the notice regarding
 
16 replacements in Appendix A.
 
17      (d)  Violations of this regulation shall subject the
 
18 violators to penalties that may include the revocation or
 
19 suspension of a producer's or company's license, monetary fines
 
20 and the forfeiture of any commissions or compensation paid to a
 
21 producer as a result of the transaction in connection with which
 
22 the violations occurred. In addition, where the commissioner has
 
23 determined that the violations were material to the sale, the
 

 
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 1 insurer may be required to make restitution, restore policy or
 
 2 contract values and pay appropriate interest on the amount
 
 3 refunded in cash.
 
 4      §431:10D-I.  Authority to adopt rules.  The Commissioner
 
 5 shall have the authority to adopt rules implementing this part.
 
 6      SECTION 4.  In codifying the new sections of the new parts
 
 7 added to article 10D of chapter 431, Hawaii Revised Statutes, by
 
 8 section 2 and section 4 of this Act, the revisor of statutes
 
 9 shall substitute appropriate section numbers for the letters in
 
10 the designations of those new sections in this Act.  All
 
11 references to specific citations refer to those citations in the
 
12 same section of this act, except that the revisor of statutes
 
13 shall substitute the appropriate part number assigned to Section
 
14 2 of this act for the blank in Section 3 at section 431:10D-A in
 
15 the definition of the term "Illustration".
 
16      SECTION 5.  This Act shall take effect upon its approval.
 
17 
 
18                           INTRODUCED BY:  _______________________
 

 
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