BILL NUMBER:S3365

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.