REPORT TITLE:
Insurance; Illustrations


DESCRIPTION:
Establishes standards for life insurance policy illustrations and
for the replacement of life insurance and annuities.  Requires
consumer notices and disclosures to be provided in writing and
transmitted through non-electronic means.  (SD1)

 
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                                                        2819
THE SENATE                              S.B. NO.           S.D. 1
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 Act is to update the
 
 2 insurance code to address developing trends in life insurance
 
 3 sales.  Section 2 of this Act:
 
 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 Act:
 
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 the purchaser's
 
 7                own 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 being established in article 10D of
 
13 chapter 431, Hawaii Revised Statutes, work in concert to ensure
 
14 that consumers are accurately and sufficiently informed when
 
15 making decisions regarding life insurance planning.
 
16      SECTION 2.  Chapter 431, Hawaii Revised Statutes, is amended
 
17 by adding to a new part to article 10D to be appropriately
 
18 designated and to read as follows:
 
19          "PART .  LIFE INSURANCE POLICY ILLUSTRATIONS
 
20      §431:10D-A  Scope.  This part shall apply to all group and
 
21 individual life insurance policies and certificates except:
 
22      (1)  Variable life insurance;
 
23      (2)  Individual and group annuity contracts;
 

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

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

 
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 1      "Illustration" means a presentation or depiction that
 
 2 includes nonguaranteed elements of a policy of life insurance
 
 3 over a period of years and that is a basic illustration, a
 
 4 supplemental illustration, or an in force illustration.          
 
 5      "Illustration actuary" means an actuary meeting the
 
 6 requirements of section 431:10D-I, who certifies to illustrations
 
 7 based on the standard of practice adopted by the Actuarial
 
 8 Standards Board.
 
 9      "In force illustration" means an illustration furnished at
 
10 any time after the policy that it depicts has been in force for
 
11 one year or more.
 
12      "Lapse-supported illustration" means an illustration of a
 
13 policy form failing the test of self-supporting illustration as
 
14 defined in this part, under a modified persistency rate
 
15 assumption using persistency rates underlying the disciplined
 
16 current scale for the first five years and one hundred per cent
 
17 policy persistency thereafter.
 
18      "Minimum assumed expenses" means the minimum expenses that
 
19 may be used in the calculation of the disciplined current scale
 
20 for a policy form.  The insurer may choose to designate each year
 
21 the method of determining assumed expenses for all policy forms
 
22 from the following:
 
23      (1)  Fully allocated expenses;
 

 
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 1      (2)  Marginal expenses; and
 
 2      (3)  A generally recognized expense table based on fully
 
 3           allocated expenses representing a significant portion
 
 4           of insurance companies and approved by the
 
 5           commissioner.
 
 6 Marginal expenses may be used only if greater than a generally
 
 7 recognized expense table.  If no generally recognized expense
 
 8 table is approved, fully allocated expenses must be used.
 
 9      "Nonguaranteed elements" means the premiums, benefits,
 
10 values, credits, or charges under a policy of life insurance that
 
11 are not guaranteed or not determined at issue.
 
12      "Non-term group life" means a group policy or individual
 
13 policies of life insurance issued to members of an employer group
 
14 or other permitted group where:
 
15      (1)  Every plan of coverage was selected by the employer or
 
16           other group representative;
 
17      (2)  Some portion of the premium is paid by the group or
 
18           through payroll deduction; and
 
19      (3)  Group underwriting or simplified underwriting is used.
 
20      "Policy owner" means the owner named in the policy or the
 
21 certificate holder in the case of a group policy.
 
22      "Premium outlay" means the amount of premium assumed to be
 
23 paid by the policy owner or other premium payer out-of-pocket.
 

 
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 1      "Self-supporting illustration" means an illustration of a
 
 2 policy form for which it can be demonstrated that, when using
 
 3 experience assumptions underlying the disciplined current scale,
 
 4 for all illustrated points in time on or after the fifteenth
 
 5 policy anniversary or the twentieth policy anniversary for
 
 6 second-or-later-to-die policies (or upon policy expiration if
 
 7 sooner), the accumulated value of all policy cash flows equals or
 
 8 exceeds the total policy owner value available.  For this
 
 9 purpose, policy owner value shall include cash surrender values
 
10 and any other illustrated benefit amounts available at the policy
 
11 owner's election.
 
12      "Supplemental illustration" means an illustration furnished
 
13 in addition to a basic illustration that meets the applicable
 
14 requirements of this part, and that may be presented in a format
 
15 differing from the basic illustration, but may only depict a
 
16 scale of nonguaranteed elements that is permitted in a basic
 
17 illustration.
 
18      §431:10D-C  Policies to be illustrated.(a)  Each insurer
 
19 marketing policies to which this part is applicable shall notify
 
20 the commissioner whether a policy form is to be marketed with or
 
21 without an illustration.  For all policy forms being actively
 
22 marketed on the effective date of this part, the insurer shall
 
23 identify in writing the forms and whether or not an illustration
 

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

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

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

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

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

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

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

 
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 1      (2)  A brief description of the premium outlay or contract
 
 2           premium, as applicable, for the policy.  For a policy
 
 3           that does not require payment of a specific contract
 
 4           premium, the illustration shall show the premium outlay
 
 5           that must be paid to guarantee coverage for the term of
 
 6           the contract, subject to maximum premiums allowable to
 
 7           qualify as a life insurance policy under the applicable
 
 8           provisions of the Internal Revenue Code of 1986, as
 
 9           amended;
 
10      (3)  A brief description of any policy features, riders, or
 
11           options, guaranteed or nonguaranteed, shown in the
 
12           basic illustration and the impact they may have on the
 
13           benefits and values of the policy;
 
14      (4)  Identification and a brief definition of column
 
15           headings and key terms used in the illustration; and
 
16      (5)  A statement containing in substance the following:
 
17           "This illustration assumes that the currently
 
18           illustrated nonguaranteed elements will continue
 
19           unchanged for all years shown.  This is not likely to
 
20           occur, and actual results may be more or less favorable
 
21           than those shown."
 
22      (c)  Following the narrative summary, a basic illustration
 
23 shall include a numeric summary of the death benefits and values
 

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

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

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

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

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

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

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

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

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


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

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


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


 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.           S.D. 1
                                                        
                                                        


 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.           S.D. 1
                                                        
                                                        


 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.           S.D. 1
                                                        
                                                        


 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 article 13 of this chapter.
 
18      §431:10D-K  Authority to adopt rules.  The commissioner may
 
19 adopt rules under chapter 91 implementing this part.
 
20      §431:10D-L  Notice and disclosure; written form required.
 
21 All consumer notices and disclosures required in this part shall
 
22 be provided in written form and transmitted through
 
23 non-electronic means."
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1      SECTION 3.  Chapter 431, Hawaii Revised Statutes, is amended
 
 2 by adding a new part to article 10D to be appropriately
 
 3 designated and to read as follows:
 
 4  "PART   .  REPLACEMENT OF LIFE INSURANCE POLICIES AND ANNUITIES
 
 5      §431:10D-A  Definitions.  For the purposes of this part:
 
 6      "Direct-response solicitation" means a solicitation through
 
 7 a sponsoring or endorsing entity or individually solely through
 
 8 mails, telephone, the Internet, or other mass communication
 
 9 media.
 
10      "Existing insurer" means the insurance company whose policy
 
11 or contract is or will be changed or affected in a manner
 
12 described within the definition of replacement.
 
13      "Existing policy or contract" means an individual life
 
14 insurance policy (policy) or annuity contract (contract) in
 
15 force, including a policy under a binding or conditional receipt
 
16 or a policy or contract that is within an unconditional refund
 
17 period.
 
18      "Financed purchase" means the purchase of a new policy
 
19 involving the actual or intended use of funds obtained by the
 
20 withdrawal or surrender of, or by borrowing from values of an
 
21 existing policy to pay all or part of any premium due on the new
 
22 policy.  If a withdrawal, surrender, or borrowing involving the
 
23 policy values of an existing policy are used to pay premiums on a
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1 new policy owned by the same policyholder within thirteen months
 
 2 before or after the effective date of the new policy and is known
 
 3 by the replacing insurer, or if the withdrawal, surrender, or
 
 4 borrowing is shown on any illustration of the existing and new
 
 5 policies made available to the prospective policyowner by the
 
 6 insurer or its producers, it shall be deemed prima facie evidence
 
 7 of a financed purchase.
 
 8      "Illustration" means a presentation or depiction that
 
 9 includes non-guaranteed elements of a policy of life insurance
 
10 over a period of years as defined in part    of this article.
 
11      "In force illustration" means an illustration furnished at
 
12 any time after the policy that it depicts has been in force for
 
13 one year or more.
 
14      "Nonguaranteed elements" means the premiums, benefits,
 
15 values, credits, or charges under a policy of life insurance that
 
16 are not guaranteed or not determined at issue.
 
17      "Policy summary" for the purposes of this part:
 
18      (1)  For policies or contracts other than universal life
 
19           policies, means a written statement regarding a policy
 
20           or contract which shall contain to the extent
 
21           applicable, but need not be limited to, the following
 
22           information: current death benefit, annual contract
 
23           premium, current cash surrender value, current
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           dividend, application of current dividend, and amount
 
 2           of outstanding loan.
 
 3      (2)  For universal life policies, means a written statement
 
 4           that shall contain at least the following information:
 
 5           the beginning and end date of the current report
 
 6           period; the policy value at the end of the previous
 
 7           report period and at the end of the current report
 
 8           period; the total amounts that have been credited or
 
 9           debited to the policy value during the current report
 
10           period, identifying each by type (e.g., interest,
 
11           mortality, expense, and riders); the current death
 
12           benefit at the end of the current report period on each
 
13           life covered by the policy; the net cash surrender
 
14           value of the policy as of the end of the current report
 
15           period; and the amount of outstanding loans, if any, as
 
16           of the end of the current report period.
 
17      "Producer" means general agent, subagent, agent, solicitor,
 
18 insurance broker or brokers or any other person, firm,
 
19 association, or corporation licensed pursuant to article 9.
 
20      "Replacing insurer" means the insurance company that issues
 
21 or proposes to issue a new policy or contract that replaces an
 
22 existing policy or contract or is a financed purchase.
 
23      "Registered contract" means a variable annuity contract or
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1 variable life insurance policy subject to the prospectus delivery
 
 2 requirements of the Securities Act of 1933.
 
 3      "Replacement" means a transaction in which a new policy or
 
 4 contract is to be purchased, and it is known or should be known
 
 5 to the proposing producer, or to the proposing insurer if there
 
 6 is no producer, that by reason of the transaction, an existing
 
 7 policy or contract has been or is to be:
 
 8      (1)  Lapsed, forfeited, surrendered or partially
 
 9           surrendered, assigned to the replacing insurer, or
 
10           otherwise terminated;
 
11      (2)  Converted to reduced paid-up insurance, continued as
 
12           extended term insurance, or otherwise reduced in value
 
13           by the use of nonforfeiture benefits or other policy
 
14           values;
 
15      (3)  Amended so as to effect either a reduction in benefits
 
16           or in the term for which coverage would otherwise
 
17           remain in force or for which benefits would be paid;
 
18      (4)  Reissued with any reduction in cash value; or
 
19      (5)  Used in a financed purchase.
 
20      "Sales material" means a sales illustration and any other
 
21 written, printed, or electronically presented information
 
22 created, completed, or provided by the company or producer and
 
23 used in the presentation to the policy or contract owner related
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1 to the policy or contract purchased.
 
 2      §431:10D-B  Exemptions.(a)  Unless otherwise specifically
 
 3 included, this part shall not apply to transactions involving:
 
 4      (1)  Credit life insurance;
 
 5      (2)  Group life insurance or group annuities where there is
 
 6           no direct solicitation of individuals by an insurance
 
 7           producer.  Direct solicitation shall not include any
 
 8           group meeting held by an insurance producer solely for
 
 9           the purpose of educating or enrolling individuals.
 
10           Group life insurance or group annuity certificates
 
11           marketed through direct response solicitation shall be
 
12           subject to section 431:10D-G;
 
13      (3)  An application to the existing insurer that issued the
 
14           existing policy or contract when a contractual change
 
15           or a conversion privilege is being exercised; or, when
 
16           the existing policy or contract is being replaced by
 
17           the same insurer pursuant to a program filed with and
 
18           approved by the commissioner;
 
19      (4)  Proposed life insurance that is to replace life
 
20           insurance under a binding or conditional receipt issued
 
21           by the same company;
 
22      (5)  Policies or contracts used to fund:
 
23           (A)  An employee pension or welfare benefit plan that
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1                is covered by the Employee Retirement and Income
 
 2                Security Act (ERISA);
 
 3           (B)  A plan described by sections 401(a), 401(k) or
 
 4                403(b) of the Internal Revenue Code of 1986, as
 
 5                amended, where the plan, for purposes of ERISA, is
 
 6                established or maintained by an employer;
 
 7           (C)  A governmental or church plan defined in section
 
 8                414 of the Internal Revenue Code of 1986, as
 
 9                amended, a governmental or church welfare benefit
 
10                plan, or a deferred compensation plan of a state
 
11                or local government or tax exempt organization
 
12                under section 457 of the Internal Revenue Code of
 
13                1986, as amended; or
 
14           (D)  A nonqualified deferred compensation arrangement
 
15                established or maintained by an employer or plan
 
16                sponsor.
 
17           Notwithstanding subparagraph (A), this part shall apply
 
18           to policies or contracts used to fund any plan or
 
19           arrangement that is funded solely by contributions an
 
20           employee elects to make, whether on a pre-tax or
 
21           after-tax basis, and where the insurance company has
 
22           been notified that plan participants may choose from
 
23           among two or more annuity providers or policy providers
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           and there is a direct solicitation of an individual
 
 2           employee by an insurance producer for the purchase of a
 
 3           contract or policy.  As used in this subsection, direct
 
 4           solicitation shall not include any group meeting held
 
 5           by an insurance producer solely for the purpose of
 
 6           educating individuals about the plan or arrangement or
 
 7           enrolling individuals in the plan or arrangement;
 
 8      (6)  Where new coverage is provided under a life insurance
 
 9           policy or contract and the cost is borne wholly by the
 
10           insured's employer or by an association of which the
 
11           insured is a member; or
 
12      (7)  Existing life insurance that is a non-convertible term
 
13           life insurance policy that will expire in five years or
 
14           less and cannot be renewed.
 
15      (b)  Registered contracts shall be exempt from the
 
16 requirements of sections 431:10D-E(b) and 431:10D-F(2) with
 
17 respect to the provision of illustrations or policy summaries;
 
18 however, premium or contract contribution amounts and
 
19 identification of the appropriate prospectus or offering circular
 
20 shall be required instead.
 
21      §431:10D-C  Duties of producers.  (a)  A producer who
 
22 initiates an application shall submit to the insurer, with or as
 
23 part of the application, a statement signed by both the applicant
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1 and the producer as to whether the applicant has existing
 
 2 policies or contracts.  If the answer is "no," the producer's
 
 3 duties with respect to replacement are complete.
 
 4      (b)  If the applicant answered "yes" to the question
 
 5 regarding existing coverage referred to in subsection (a), the
 
 6 producer shall present and read to the applicant, not later than
 
 7 at the time of taking the application, a notice in a form
 
 8 approved by the commissioner.  The notice shall be signed by both
 
 9 the applicant and the producer attesting that the notice has been
 
10 read aloud by the producer or that the applicant did not wish the
 
11 notice to be read aloud (in which case the producer need not have
 
12 read the notice aloud) and the notice was left with the
 
13 applicant.
 
14      (c)  The notice shall list all life insurance policies or
 
15 annuities proposed to be replaced, properly identified by name of
 
16 insurer, the insured or annuitant, and policy or contract number
 
17 if available.  The notice shall include a statement as to whether
 
18 a policy or contract will be replaced or whether a policy will be
 
19 used as a source of financing for the new policy or contract.  If
 
20 a policy or contract number has not been issued by the existing
 
21 insurer, alternative identification, such as an application or
 
22 receipt number, shall be listed.
 
23      (d)  In connection with a replacement transaction the
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1 producer shall leave with the applicant at the time an
 
 2 application for a new policy or contract is completed the
 
 3 original or a copy of all sales material.  With respect to
 
 4 electronically presented sales material, it shall be provided to
 
 5 the policyholder in printed form no later than at the time of
 
 6 policy or contract delivery.
 
 7      (e)  Except as provided in section 431:10D-D(6), in
 
 8 connection with a replacement transaction the producer shall
 
 9 submit to the insurer to which an application for a policy or
 
10 contract is presented, a copy of each document required by this
 
11 section, a statement identifying any preprinted or electronically
 
12 presented company approved sales materials used, and copies of
 
13 any individualized sales materials, including any illustrations
 
14 used in the transaction.
 
15      §431:10D-D  Duties of all insurers that use producers.  Each
 
16 insurer shall:
 
17      (1)  Maintain a system of supervision and control to insure
 
18           compliance with the requirements of this part that
 
19           shall include at least the following:
 
20           (A)  Inform its producers of the requirements of this
 
21                part and incorporate the requirements of this part
 
22                into all relevant producer training manuals
 
23                prepared by the insurer;
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           (B)  Provide to each producer a written statement of
 
 2                the company's position with respect to the
 
 3                acceptability of replacements providing guidance
 
 4                to its producer as to the appropriateness of these
 
 5                transactions;
 
 6           (C)  A system to review the appropriateness of each
 
 7                replacement transaction that the producer does not
 
 8                indicate is in accord with paragraph (2);
 
 9           (D)  Procedures to confirm that the requirements of
 
10                this part have been met; and
 
11           (E)  Procedures to detect transactions that are
 
12                replacements of existing policies or contracts by
 
13                the existing insurer, but that have not been
 
14                identified as such by the applicant or producer.
 
15      (2)  Have the capacity to produce, upon request, and make
 
16           available to the commissioner, records of each
 
17           producer's:
 
18           (A)  Replacements, including financed purchases, as a
 
19                percentage of the producer's total annual sales
 
20                for life insurance and annuity contracts not
 
21                exempted from this part;
 
22           (B)  Number of lapses of policies and contracts by the
 
23                producer as a percentage of the producer's total
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1                annual sales for life insurance and annuity
 
 2                contracts not exempted from this part;
 
 3           (C)  Number of transactions that are unidentified
 
 4                replacements of existing policies or contracts by
 
 5                the existing insurer detected by the company's
 
 6                monitoring system as required by paragraph (1)(E);
 
 7                and
 
 8           (D)  Replacements, indexed by replacing producer and
 
 9                existing insurer.
 
10      (3)  Require with or as a part of each application for life
 
11           insurance or an annuity a signed statement by both the
 
12           applicant and the producer as to whether the applicant
 
13           has existing policies or contracts;
 
14      (4)  Require with each application for life insurance or an
 
15           annuity that indicates an existing policy or contract a
 
16           completed notice as required by section 431:10D-C(b)
 
17           regarding replacements;
 
18      (5)  When the applicant has existing policies or contracts,
 
19           retain completed and signed copies of the notice
 
20           regarding replacements in its home or regional office
 
21           for at least five years after the termination or
 
22           expiration of the proposed policy or contract;
 
23      (6)  When the applicant has existing policies or contracts,
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           obtain and retain copies of any sales material as
 
 2           required by section 431:10D-C(e), the basic
 
 3           illustration and any supplemental illustrations used in
 
 4           the sale, and the producer's and applicant's signed
 
 5           statements with respect to financing and replacement in
 
 6           its home or regional office for at least five years
 
 7           after the termination or expiration of the proposed
 
 8           policy or contract;
 
 9      (7)  Ascertain that the sales material and illustrations
 
10           used in the replacement meet the requirements of this
 
11           part and are complete and accurate for the proposed
 
12           policy or contract; and
 
13      (8)  If an application does not meet the requirements of
 
14           this part, notify the producer and applicant and
 
15           fulfill the outstanding requirements.
 
16      §431:10D-E  Duties of replacing insurers that use producers.
 
17 (a)  Where a replacement is involved in the transaction, the
 
18 replacing insurer shall:
 
19      (1)  Verify that the required forms are received and are in
 
20           compliance with this part;
 
21      (2)  Notify any other existing insurer that may be affected
 
22           by the proposed replacement within five business days
 
23           of receipt of a completed application indicating
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           replacement or when the replacement is identified if
 
 2           not indicated on the application, and mail a copy of
 
 3           the available illustration or policy summary for the
 
 4           proposed policy or available disclosure document for
 
 5           the proposed contract within five business days of a
 
 6           request from an existing insurer;
 
 7      (3)  Retain copies of the notification regarding replacement
 
 8           required in section 431:10D-C(b), indexed by producer,
 
 9           in its home or regional office for at least five years
 
10           or until the next regular examination by the insurance
 
11           department of a company's state of domicile, whichever
 
12           is later; and
 
13      (4)  Provide to the policy or contract owner notice of the
 
14           right to return the policy or contract within thirty
 
15           days of the delivery of the contract and receive an
 
16           unconditional full refund of all premiums or
 
17           considerations paid on it, including any policy fees or
 
18           charges or, in the case of a variable or market value
 
19           adjustment policy or contract, a payment of the cash
 
20           surrender value provided under the policy or contract
 
21           plus the fees and other charges deducted from the gross
 
22           premiums or considerations or imposed under the policy
 
23           or contract.
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1      (b)  In transactions where the replacing insurer and the
 
 2 existing insurer are the same or subsidiaries or affiliates under
 
 3 common ownership or control allow credit for the period of time
 
 4 that has elapsed under the replaced policy's or contract's
 
 5 incontestability and suicide period up to the face amount of the
 
 6 existing policy or contract.  With regard to financed purchases
 
 7 the credit may be limited to the amount the face amount of the
 
 8 existing policy is reduced by the use of existing policy values
 
 9 to fund the new policy or contract.
 
10      (c)  If an insurer prohibits the use of sales material other
 
11 than that approved by the company, as an alternative to the
 
12 requirements of section 431:10D-D, the insurer may:
 
13      (1)  Require with each application a statement signed by the
 
14           producer that:
 
15           (A)  Represents that the producer used only
 
16                company-approved sales material;
 
17           (B)  Lists, by identifying number or other descriptive
 
18                language, the sales material that was used; and
 
19           (C)  States that copies of all sales material were left
 
20                with the applicant in accordance with section
 
21                431:10D-C(d); and
 
22      (2)  Within ten days of the issuance of the policy or
 
23           contract:
 

 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        


 1           (A)  Notify the applicant by sending a letter or by
 
 2                verbal communication with the applicant by a
 
 3                person whose duties are separate from the
 
 4                marketing area of the insurer, that the producer
 
 5                has represented that copies of all sales material
 
 6                have been left with the applicant in accordance
 
 7                with section 431:10D-C(d);
 
 8           (B)  Provide the applicant with a toll free number to
 
 9                contact company personnel involved in the
 
10                compliance function if such is not the case; and
 
11           (C)  Stress the importance of retaining copies of the
 
12                sales material for future reference; and
 
13      (3)  Keep a copy of the letter or other verification in the
 
14           policy file at the home or regional office for at least
 
15           five years after the termination or expiration of the
 
16           policy or 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.           S.D. 1
                                                        
                                                        


 1           notifying it of the replacement for at least five years
 
 2           or until the conclusion of the next regular examination
 
 3           conducted by the insurance department of its state of
 
 4           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 business
 
10           days of receipt of a notice that an existing policy or
 
11           contract is being replaced.  The information shall be
 
12           provided within five business days of receipt of the
 
13           request from the policy or contract owner; and
 
14      (3)  Upon receipt of a request to borrow, surrender, or
 
15           withdraw any policy or contract values, send to the
 
16           applicant a notice, advising the policy or contract
 
17           owner of the effect release of policy or contract
 
18           values will have on the non-guaranteed elements, face
 
19           amount or surrender value of the policy or contract
 
20           from which the values are released.  The notice shall
 
21           be sent separate from the check if the check is sent to
 
22           anyone other than the policy or contract owner.  In the
 
23           case of consecutive automatic premium loans or
 

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

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

 
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 1           431:10D-E(a)(2), if the applicant furnishes the names
 
 2           of the existing insurers, and the requirements of
 
 3           sections 431:10D-E(a)(3), 431:10D-E(a)(4), and
 
 4           431:10D-E(b).
 
 5      §431:10D-H  Violations and penalties.  (a)  Any failure to
 
 6 comply with this part shall be considered a violation of article
 
 7 13 of this chapter.  Examples of violations include:
 
 8      (1)  Any deceptive or misleading information set forth in
 
 9           sales material;
 
10      (2)  Failing to ask the applicant in completing the
 
11           application the pertinent questions regarding the
 
12           possibility of financing or replacement;
 
13      (3)  The intentional incorrect recording of an answer;
 
14      (4)  Advising an applicant to respond negatively to any
 
15           question regarding replacement in order to prevent
 
16           notice to the existing insurer; or
 
17      (5)  Advising a policy or contract owner to write directly
 
18           to the company in such a way as to attempt to obscure
 
19           the identity of the replacing producer or company.
 
20      (b)  Policy and contract owners have the right to replace
 
21 existing life insurance policies or annuity contracts after
 
22 indicating in or as a part of applications for new coverage that
 
23 replacement is not their intention; however, patterns of such
 

 
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 1 action by policy or contract owners of the same producer shall be
 
 2 deemed prima facie evidence of the producer's knowledge that
 
 3 replacement was intended in connection with the identified
 
 4 transactions, and these patterns of action shall be deemed prima
 
 5 facie evidence of the producer's intent to violate this part.
 
 6      (c)  Where it is determined that the requirements of this
 
 7 part have not been met the replacing insurer shall provide to the
 
 8 policy owner an in force illustration if available or policy
 
 9 summary for the replacement policy or available disclosure
 
10 document for the replacement contract and the notice regarding
 
11 replacements required under section 431:10D-C(b).
 
12      (d)  Violations of this part shall subject the violators to
 
13 penalties that may include the revocation or suspension of a
 
14 producer's or company's license, monetary fines and the
 
15 forfeiture of any commissions or compensation paid to a producer
 
16 as a result of the transaction in connection with which the
 
17 violations occurred.  In addition, where the commissioner has
 
18 determined that the violations were material to the sale, the
 
19 insurer may be required to make restitution, restore policy or
 
20 contract values, and pay appropriate interest on the amount
 
21 refunded in cash.
 
22      §431:10D-I  Authority to adopt rules.  The commissioner may
 
23 adopt rules under chapter 91 implementing this part.
 

 
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 1      §431:10D-J  Notice and disclosure; written form required.
 
 2 All consumer notices and disclosures required in this part shall
 
 3 be provided in written form and transmitted through
 
 4 non-electronic means."
 
 5      SECTION 4.  In codifying the new sections of the new parts
 
 6 added to article 10D of chapter 431, Hawaii Revised Statutes, by
 
 7 section 2 and section 3 of this Act, the revisor of statutes
 
 8 shall substitute appropriate section numbers for the letters in
 
 9 the designations of those new sections in this Act.  All
 
10 references to specific citations refer to those citations in the
 
11 same section of this Act, except that the revisor of statutes
 
12 shall substitute the appropriate part number assigned to Section
 
13 2 of this Act for the blank in Section 3 at section 431:10D-A in
 
14 the definition of the term "illustration".
 
15      SECTION 5.  This Act shall take effect on July 1, 2005.
 

 
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