BILL NUMBER:S2893

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 § 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.