NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A9962
SPONSOR: Rules (Lavine) 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 issu-
ance in New York.
Section 2 of the bill would add a new Subsection (g) to § 4240 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 alter-
native 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 ate
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
deferred annuities from being considered as financial guaranty insur-
ance.
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 certif-
icate that obligates the insurer to pay the annuitant a specified guar-
anteed minimum amount for life if: (1) the annuitant manages the under-
lying 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 portfolio 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 last-
ing, 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)
lum:jwww.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 longev-
ity 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/09419007.pdf
http://www.irs.gov/pub/irs-wd/0919036.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 invest-
ment 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 jurisdic-
tions. 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 Insur-
ance to allow it to examine both product design and the risk management
strategies employed by insurers to support the guarantees in the contin-
gent 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:
S 3365 of 2011-12
FISCAL IMPLICATIONS:
None.
EFFECTIVE DATE:
Immediately.
