Senate Bill S4331

                                
 
BILL NUMBER: S4331

SPONSOR: BRESLIN
 
TITLE OF BILL:

An act to amend the insurance law, in relation to modifying certain
interest rates for annuities and life insurance within the standard
nonforfeiture law

 
PURPOSE:

To ensure the availability and flexibility of annuity and life insurance
products by addressing problems associated with the sustained low inter-
est rate environment and the nonforfeiture provisions of the insurance
law.

 
SUMMARY OF PROVISIONS:

Section 1. Item (iii) of subparagraph (F) of paragraph (2) of subsection
(c) of section 4223 of the insurance law is amended to reduce from one
to .15 percent the minimum nonforfeiture interest rate for annuities.
              

Section 2. Item (iii) of subparagraph (B) of paragraph (3) of subsection
(n-1) of section 4221 of the insurance law is amended to eliminate the
four percent interest rate requirement for paid up life insurance

Section 3. Effective Date

 
JUSTIFICATION:

This legislation is necessary to ensure that New York consumers have
continued access to a full array of life insurance and annuity products.
Sustained low interest rates have created a challenging investment envi-
ronment for life insurers. As a result, they are no longer able to guar-
antee minimum interest rates of return that were required by statute in
the past. Carriers will be forced to no longer offer many permanent life
insurance products and annuities if the guaranteed minimums continue to
be required by law, as the rate is guaranteed for the life of the poli-
cy. Life insurers will continue to have a strong incentive to offer the
best rate of return possible as a means to attract consumers in the
highly competitive marketplace for life insurance products and annui-
ties.

This bill amends Insurance Law § 4223 to reduce the minimum nonforfei-
ture interest rate ("statutory floor") for annuities from one percent to
.15 percent. This reduction is consistent with what the National Associ-
ation of Insurance Commissioners (NAIC) adopted in late 2020. The change
recognizes that regulators must carefully balance consumer benefits
against company surplus concerns, and .15% produces the best outcome of
product flexibility and availability while ensuring strong company
surplus positions.  The current interest rate environment creates unique
challenges on crediting rates. In 2020, the yields for the U.S. 5-year
and 10-year Treasuries was as low as 0.19% and 0.52%, respectively,
making It extremely difficult to support the current 1.00% minimum guar-
anteed rate for annuities, given these historically low interest rates.
An annuity contract is a long-term commitment and requires that insurers
maintain a long-term time horizon with respect to managing contract
liabilities. Companies invest in long-duration assets to achieve a
consistent yield for the duration of the policy. New premiums are
invested at current rates which limits both the return and amount avail-
able to credit on those assets. Companies require greater flexibility at
this time to address the current environment. Greater flexibility will
help promote expanded product availability to consumers.

The reduction of the floor to .15% would not eliminate benefits to
consumers as it will only be triggered in low interest rate environ-
ments, such as the one we are currently experiencing.  Companies will
continue to use non-guaranteed crediting rates, bonuses, and other
features in order to maintain market competitiveness and product differ-
entiation. If, and when, market conditions improve, competitive pres-
sures will necessitate that insurers increase both their current and
guaranteed crediting rates regardless of the statutory floor.

The bill also amends Insurance Law § 4221 to eliminate the four percent
interest rate requirement for paid up life insurance. Nonforfeiture law
requires companies to provide a minimum value to policyholders upon
surrender of a permanent life insurance policy. This includes a lump-sum
cash surrender value and extended term insurance, among others. One of
the options required by New York State in Insurance Law § 4221 is to
provide reduced paid-up life insurance, in which the coverage is kept
for life at a reduced face amount, funded by the nonforfeiture value of
the policy, without requiring any future premium payments from consum-
ers.

However, to calculate the value to determine this reduced paid-up cover-
age, Insurance Law § 4221 requires no lower than a 4% interest rate be
used. This 4% requirement is higher than what insurance companies are
able to invest in today's low interest rate environment. Therefore, if
consumers begin electing this benefit as low interest rates persist,
carriers will be in a situation where they can no longer afford to offer
permanent life insurance products to consumers in New York State,
despite market and consumer needs.  Therefore, it is necessary to remove
the 4% minimum interest rate floor for reduced paid-up value calculation
in Insurance Law § 4221, as the interest rate used in the calculation is
still subject to a floor set equal to the interest rate guaranteed in
the contract.

 
LEGISLATIVE HISTORY:

This is a new bill.

 
FISCAL IMPLICATIONS:

None.

 
EFFECTIVE DATE:
This act shall take effect immediately.