BILL NUMBER:S1171

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)(I)
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
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
deferred 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 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
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/irswc1/0949036.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:  S.2893 of 2013-14; S.3365 of 2011-12

FISCAL IMPLICATIONS: None

EFFECTIVE DATE: Immediately