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The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, is helping to resolve long-standing challenges in the insurance industry’s 1035 exchange process with the launch of enhancements to its Settlement Processing for InsuranceSM (STL) functionality.
Millions of investors in the United States transfer money between insurance products each year, benefiting from tax advantages, lower fees and new features. Known as 1035 exchanges, or replacements, these transfers allow investors to move funds from one life insurance, annuity or endowment to another, without bearing an immediate tax obligation.
1035 exchange transactions often create an operational burden for insurance carriers, requiring firms to send and receive money and surrender contracts on a frequent basis. Currently, carriers administer manual, costly and potentially error-prone processes, including the issuance of checks and wire transfers, which can create misrouted money risk. Industry representatives approached DTCC in mid-2014 for an automated 1035 exchange transaction solution to lower the costs and risks associated with manual processes.
To address this challenge, DTCC’s Insurance & Retirement Services (I&RS) led an industry working group including members of the Insured Retirement Institute’s Replacement Automation work group. The result of their analysis was the “Settlement for Replacements” expansion. The new enhancement automates the 1035 exchange process, allowing settlement to take place within one day.
“Processing 1035 transactions in a manual environment is a huge challenge to our business. It is extremely onerous and expensive, and it is not scalable for continued business growth. Given DTCC’s solid track record and trusted infrastructure, it made sense to work with them on an industry-wide solution,” said Susan Fiengo, Senior Vice President of Annuity New Business Operations, Forethought Life Insurance Company, a Global Atlantic subsidiary.
“STL streamlines the settlement of funding activities between carriers and distributors and, now, between carriers for 1035 exchanges,” said Kevin Lewis, Vice President and Head of I&RS. “This expansion is something our clients have been asking for. In addition to driving efficiencies and mitigating risk in the money settlement process, STL contains highly targeted data content in its file, which can be leveraged in the Settlement for Replacements enhancement.”
STL automates settlement processing for the movement of life insurance premiums, systemic withdrawals, full and partial surrenders, and mandatory distributions within the suite of Insurance and Retirement Processing Services of National Securities Clearing Corporation, a DTCC subsidiary.
