Relates to authorizing the issuance of certain annuity contracts

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 § 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 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 portfo- lio 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.