Last month, the New York Insurance Department’s Office of General Counsel issued Opinion No. 09-06-11 (the “Opinion”) which prohibits contingent annuity contracts on the grounds that such contracts constitute an impermissible form of financial guaranty insurance.
The Opinion comes in response an inquiry submitted to the New York Insurance Department (“NYID”). The inquiry reports that several life insurance companies (the “Companies”, or each a “Company”) submitted various forms of a contingent annuity contract (the “Contract”) structured as a group or individual annuity for NYID approval. A typical Contract would provide periodic payments based on a percentage of funds deposited in a mutual fund or brokerage account (the “Account”) of another financial institution and owned by the investor (“Investor”). The Investor will be the certificate holder, although the actual covered life may be another person (the “Payee”). Distributions from the annuity during the life of the Payee will be funded by income earned in the Account or sales of assets within the Account. In the event that the Account is exhausted or reduced below a certain level (e.g. due to distributions or poor market performance), the remaining balance in the Account will be transferred to the Company, which will continue to make payments to the Investor or Payee. If the Account is not exhausted or does not fall below a certain level (e.g. because of good investment experience or because the Investor dies before the predicted life expectancy), the Company will not make any further periodic payments.
The Opinion cites New York Insurance Law (the “Insurance Law”) Section 6901(a) in finding that the Contract as described above constitutes financial guaranty insurance in that it provides indemnification for “financial loss” resulting from “changes in the value of specific assets.” A decline in the value of holdings in the Investor’s Account will be indemnified by the continuation of payments that begin only when and if such decline occurs. Furthermore, the Opinion states that financial guaranty insurance can be issued only by a financial guaranty insurer licensed for that purpose, and only to the extent permitted by Insurance Law Section 6904(b), which does not contemplate the type of insurance proposed here. As such, although the Contract constitutes financial guaranty insurance, it is not of a type permitted in New York, and, therefore, is deficient as a matter of law.