Authorizes the issuance of certain annuity contracts involving alternative accounts.
TITLE OF BILL: An act to amend the insurance law, in relation to authorizing the issuance of certain annuity contracts
PURPOSE: To authorize the sale, issuance and delivery of contingent deferred annuity contracts or certificates in the state.
SUMMARY OF PROVISIONS: Section 1 of the bill would amend §4223(b)(1) of the Insurance Law (standard nonforfeiture law for annuities) to clarify that contingent deferred annuity contracts or certificates may be authorized for issuance in New York.
Section 2 of the bill would add a new Subsection (g) to §4140 of the Insurance Law (separate accounts) to allow domestic or authorized life insurers to issue group or individual contingent deferred annuity contracts and certificates in the state, that provide benefits based upon the value or decline in value of assets held in or relating to an alternative account as defined therein. In no instance shall such alternative accounts be deemed separate accounts or be subject to regulation as such. The Superintendent of Insurance would be empowered to require that such domestic or authorized life insurers issuing such annuities establish adequate systems of control and reporting to ensure that the underlying assets held in or related to an alternative account are authorized and approved by such insurer.
Section 3 of the bill would amend §6901(a)(2) of the Insurance Law (financial guaranty insurance) to specifically exclude contingent deterred annuities from being considered as financial guaranty insurance.
Section 4 of the bill would provide for an immediate effective date.
JUSTIFICATION: In exchange for a periodic premium under a contingent deferred annuity arrangement, a life insurance company would issue a contract or certificate that obligates the insurer to pay the annuitant a specified guaranteed minimum amount for life if: (1) the annuitant manages the underlying securities investments in the alternative account in accordance with a prescribed investment strategy approved by such insurer; and (2) the value of the alternative account is exhausted through a prescribed series of periodic withdrawals while the annuitant is still living. These contingent deferred annuity arrangements are similar to guaranteed minimum or lifetime withdrawal benefits offered by insurers in variable annuities, but are linked to an investment p0l1folio in an
alternative account owned and controlled by the annuitant, rather than to assets held in an insurer's separate account
Protection of existing principal assets is a critical component of current retirement investment strategies, especially for Baby Boomers nearing retirement The value of the conservation of capital has been taught by the recent market downturns As such, New York consumers need the option of purchasing contingent deferred annuities to ensure a lasting, safe retirement income stream.
This legislation is necessitated because the New York State Department of Insurance has opined that contingent deferred annuity contract or certificate may not be sold, issued or delivered in the state because they constitute an impermissible form of financial guaranty insurance (see Office of General Counsel (OGC) Opinion 09-06-11 (June 25, 2009) http://www.ins.state.ny.us/ogco2009/rg090611.htm) because it purports to provide indemnification for "financial loss... as a result of...changes in the value of specific assets." However, such contingent deferred annuities are meant to provide the annuitants protection against longevity risk, with only incidental market risk protection due to volatility in the securities markets
In two private letter rulings, http:./www.irs.gov/pub/irs-wd/0949007.pdf http://www.irs.gov/pub/irs-wd/0949036.pdf the Internal Revenue Service (IRS) has opined that contingent deferred annuities that commence payments upon the occurrence of an event, e.g., the total depletion of the underlying securities investments held in the alternative account, but not as financial guaranty reimbursement for market losses incurred in such investment account, shall be treated as an "annuity contract" for tax purposes under the provisions of Internal Revenue Code (IRC) §72 and applicable Treasury regulations. Moreover, the issuance of such contingent deferred annuity contracts or certificates do not adversely affect certain tax consequences of the underlying investment securities held in the alternative account, including the ability to deduct losses on such securities, nor diminish the risk of loss on investment assets for purposes of determining eligibility for the reduced tax rate on qualified dividends under IRC § 1(h)(11), nor does it trigger "straddle rules" which could result in deferral of losses realized on an investment account asset under IRC § 1092.
Over 30 other states have approved the sale, issuance and delivery of contingent deferred annuity contracts or certificates in their jurisdictions. This bill would authorize such annuities in New York, allowing consumers to purchase longevity protection (insuring consumers who may outlive their own investment assets), increase opportunities to access lifetime income guarantees, maintain full liquidity of underlying investment assets in the alternative account, and obtain protection for changing retirement income needs without
incurring penalties. The bill would also authorize an approval process within the Department of Insurance to allow it to examine both product design and the risk management strategies employed by insurers to support the guarantees in the contingent deferred annuity contract or certificate. The Department can review insurers' internal investment risk limits, including concentration limits, economic exposure limits and solvency limits. It is contemplated that the Department would periodically review and monitor insurers' risk limits governance, risk management and hedging performance, and adequacy of reserves and surplus.
LEGISLATIVE HISTORY: New bill.
FISCAL IMPLICATIONS: None.
EFFECTIVE DATE: Immediately.
STATE OF NEW YORK ________________________________________________________________________ 3365 2011-2012 Regular Sessions IN SENATE February 17, 2011 ___________Introduced by Sen. SEWARD -- read twice and ordered printed, and when printed to be committed to the Committee on Insurance AN ACT to amend the insurance law, in relation to authorizing the issu- ance of certain annuity contracts THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Subparagraph (H) of paragraph 1 of subsection (b) of section 4223 of the insurance law is relettered subparagraph (I) and a new subparagraph (H) is added to read as follows: (H) GROUP OR INDIVIDUAL ANNUITY CONTRACT OR CERTIFICATE AUTHORIZED BY SUBSECTION (G) OF SECTION FOUR THOUSAND TWO HUNDRED FORTY OF THIS ARTI- CLE. S 2. Section 4240 of the insurance law is amended by adding a new subsection (g) to read as follows: (G) A DOMESTIC OR AUTHORIZED LIFE INSURER MAY ISSUE GROUP OR INDIVID- UAL ANNUITY CONTRACTS AND CERTIFICATES THAT PROVIDE BENEFITS BASED UPON THE VALUE OR DECLINE IN VALUE OF ASSETS HELD IN OR RELATING TO AN ALTER- NATIVE ACCOUNT AT ANY TIME THE CONTRACT OR CERTIFICATE IS OUTSTANDING. FOR PURPOSES OF THIS ARTICLE, "ALTERNATIVE ACCOUNT" MEANS A TRUST ACCOUNT, CUSTODIAL ACCOUNT, SECURITIES BROKERAGE ACCOUNT, MANAGED ACCOUNT, ACTUAL OR SYNTHETIC INVESTMENT PORTFOLIO, OR, IF APPROVED BY THE SUPERINTENDENT, ANY OTHER ACCOUNT OR INVESTMENT ARRANGEMENT, THE INVESTMENTS IN OR RELATED TO WHICH SHALL BE AS AUTHORIZED OR APPROVED BY THE DOMESTIC OR AUTHORIZED LIFE INSURER ISSUING SUCH CONTRACT OR CERTIF- ICATE. FOR PURPOSES OF THIS SUBSECTION, "ACTUAL OR SYNTHETIC INVESTMENT PORTFOLIO" SHALL MEAN A PORTFOLIO OF INVESTED ASSETS LEGALLY OR BENEFI- CIALLY OWNED BY THE OWNER OR BENEFICIARY OF SUCH CONTRACT OR CERTIF- ICATE, OR A NOTIONAL PORTFOLIO OF INVESTED ASSETS THAT NEED NOT BE OWNED BY THE OWNER OR BENEFICIARY OF SUCH CONTRACT OR CERTIFICATE BUT THE ADDITION OR REMOVAL OF ASSETS FROM SUCH NOTIONAL PORTFOLIO ARE SUBJECT TO THE CONTROL OF THE OWNER OR BENEFICIARY OF SUCH CONTRACT OR CERTIF-EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD08908-01-1 S. 3365 2
ICATE. ALTERNATIVE ACCOUNTS SHALL NOT BE DEEMED SEPARATE ACCOUNTS OR SUBJECT TO REGULATIONS APPLYING TO SEPARATE ACCOUNTS AND THE GROUP AND INDIVIDUAL ANNUITY CONTRACTS AND CERTIFICATES DESCRIBED IN THIS SUBSECTION SHALL NOT BE SUBJECT TO REGULATIONS CONCERNING SEPARATE ACCOUNT PRODUCTS. THE SUPERINTENDENT MAY PROMULGATE REGULATIONS TO: (1) DEFINE TERMS USED IN THIS SUBSECTION THAT ARE NOT OTHERWISE DEFINED; (2) REQUIRE THAT THE DOMESTIC OR AUTHORIZED LIFE INSURER ESTABLISH ADEQUATE SYSTEMS OF CONTROL AND REPORTING TO ENSURE THAT THE ASSETS HELD IN OR RELATED TO AN ALTERNATIVE ACCOUNT ARE AUTHORIZED OR APPROVED BY SUCH INSURER, AND THAT A SUMMARY OF SUCH SYSTEMS BE FILED WITH THE SUPERINTENDENT, AND UPON FILING SHALL BE DEEMED APPROVED UNLESS WITHIN THIRTY CALENDAR DAYS AFTER FILING THE SUPERINTENDENT DISAPPROVES SUCH SUMMARY AND PROVIDES TO THE FILING INSURER A DETAILED EXPLANATION OF THE BASIS FOR SUCH DISAPPROVAL; AND (3) THE PROVISIONS OF THIS SUBSECTION SHALL NOT BE DEEMED TO AUTHORIZE THE SUPERINTENDENT TO PROMULGATE ANY RULE OR REGULATION, CIRCULAR LETTER OR DIRECTIVE, THAT IN ANY WAY EXPANDS THE SUPERINTENDENT'S AUTHORITY TO (I) APPROVE OR REGULATE THE INSURER'S ENTIRE INVESTMENT PORTFOLIO OR INVESTMENT STRATEGY OR THE ASSETS HELD IN OR RELATED TO THE ALTERNATIVE ACCOUNT, OR (II) IMPOSE STANDARDS ON CORPORATE GOVERNANCE THAT ARE EITHER STRICTER OR CONTRARY TO THE PROVISIONS CONTAINED IN THIS ARTICLE OR THE BUSINESS CORPORATION LAW. S 3. Clause (V) of item (ii) of subparagraph (J) of paragraph 2 of subsection (a) of section 6901 of the insurance law, as added by chapter 605 of the laws of 2004, is amended to read as follows: (V) the financial guaranty insurance policies provide that if, prior to payment by the insurer under the financial guaranty insurance poli- cies, the guaranty fund has paid a claim under such contracts for an amount that, when added to the amount payable under the financial guar- anty insurance policies, would exceed the amount owed under such contracts, then the financial guaranty insurer shall pay the portion of the amount payable in excess of the contract amounts to the guaranty fund instead of to the beneficiary under such contracts;
[or]S 4. Subparagraph (K) of paragraph 2 of subsection (a) of section 6901 of the insurance law, as relettered by chapter 605 of the laws of 2004, is relettered subparagraph (L) and a new subparagraph (K) is added to read as follows: (K) GROUP OR INDIVIDUAL ANNUITY CONTRACTS OR CERTIFICATES AUTHORIZED BY SUBSECTION (G) OF SECTION FOUR THOUSAND TWO HUNDRED FORTY OF THIS CHAPTER; OR S 5. This act shall take effect immediately.