BILL NUMBER: S6666

SPONSOR: BRESLIN
 
TITLE OF BILL:

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

 
PURPOSE:

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

 
SUMMARY OF PROVISIONS:

Section 1. Item (iii) of subparagraph (B) of paragraph (3) of subsection
(n-1) of section 4221 of the insurance law is amended to modify the
interest rate requirement for paid up life insurance from a hard coded
four percent to an index of not less than the lesser of four percent and
the nonforfeiture interest rate per annum pursuant to paragraph ten of
subsection (k) of this section minus one percent.
              

Section 2. Subsection (H) of paragraph (2) of subsection (n-1) of
section 4221 of the insurance law is amended to modify the interest rate
requirement for the expense charge component of the life insurance mini-
mum nonforfeiture calculation from four percent to not less than the
lesser of four percent and the nonforfeiture interest rate per annum
pursuant to paragraph ten of subsection (k) of this section.

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 products. New York's
nonforfeiture law stipulates the minimum value to be received by the
policyholders upon surrender of their contract. An interest rate is
specified in the law to determine the required.minimum value.  Specif-
ically, the legislation will ensure that companies are able to offer
guarantees supported by the economic conditions in today's environment.
If it is not possible to provide the minimum guarantees required by NY
nonforfeiture law because of the economic environment, then they may not
be able to offer consumers permanent insurance products. It is worth
noting that this bill only applies to future policies and will not apply
to in-force contracts.

Sustained low interest rates have created a challenging investment envi-
ronment for life insurers who generally make conservative investments.
As a result, insurers are no longer able to guarantee minimum interest
rates of return on permanent life insurance policies that were mandated
by this statute decades ago when interest rates were substantially high-
er. Carriers may be forced to discontinue offering many life insurance
products, which includes options to protect consumers' families and save
for retirement, if the outdated guaranteed minimums continue to be
required by law (as the rate is guaranteed for the life of the policy
under current law). It should be noted that 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.  As such, when interest rates rise, life insurers will
respond and increase the rates of return they offer to ensure the prod-
uct remain an attractive option for consumers to invest in.

The current interest rate environment creates unique challenges on cred-
iting rates. In 2020, the yields for U.S. Treasuries were at historic
lows (the 10-year treasury fell to 0.52% and the 20-year fell to .96%),
making it extremely difficult to support the current 4.00% minimum guar-
anteed rate for permanent life insurance products.  A universal life
insurance policy is a multi-year commitment and requires that insurers
maintain a long-term time horizon with respect to managing contract
liabilities. Life insurers 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. As of April 2021, treasury rates remain
well below historic averages, and therefore insurers require greater
flexibility at this time to address the current environment. Greater
flexibility will promote expanded product availability to consumers and
protect the solvency of the life insurers and the reliability of the
life insurance industry as a whole.

New York is the only state which requires life insurers to guarantee an
additional minimum rate of return beyond the standard nonforfeiture
interest rate for paid-up nonforfeiture options on permanent life
products. The indexing of the statutory floor will not eliminate bene-
fits to consumers as it will allow companies to continue offering insur-
ance in low interest rate environments, such as the one we are currently
experiencing. If permanent life insurance is not available to consumers,
they are not able to help protect their families and pre-fund future
premiums in earlier years where they are young and healthy. When market
conditions improve and interest rates rebound, competitive pressures
will necessitate that insurers increase their guaranteed crediting rates
regardless of the statutory floor.

The bill amends Insurance Law § 4221 to eliminate the hard-coded four
percent interest rate requirement for paid up life insurance and
replaces it with an index of not less than the lesser of four percent
and the nonforfeiture interest rate per annum pursuant to paragraph ten
of subsection (k) of this section (currently 3.75%, which is the whole
life standard nonforfeiture rate) minus one percent. Currently, the
resulting rate would be 2.75%.

This section of the nonforfeiture law requires companies to provide a
minimum value to policyholders upon surrender of a permanent life insur-
ance 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 insur-
ance, 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 consumers.

However, to calculate the value to determine this reduced paid-up cover-
age, Insurance Law § 4221 currently requires no lower than a 4% interest
rate be used. This 4% requirement is higher than what insurance compa-
nies are able to invest in today's low interest rate environment. There-
fore, 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 and replace it with an index.

Similarly, this bill amends § 4221 to eliminate the four percent inter-
est rate requirement for the expense charge component of the minimum
nonforfeiture calculation. It also replaces the hard-coded four percent
with an indexed approach. For life insurance, this minimum value is
determined by taking into account death benefits, premiums, and expense
charges, adjusted for time value of money. When adjusting the time value
of money only for the expense charge limits, a minimum interest rate of
4% is currently required, whereas this does not apply to the remaining
items in the calculation. Again, to reflect the current low interest
rate environment, it is necessary to remove the hard-coded 4% interest
rate floor in the expense charge component of the minimum life
nonforfeiture calculation and replace it with an index. If not remedi-
ated, the expense charge component of the nonforfeiture calculation will
require an interest rate greater than what companies may earn in the
current economic environment, making it less viable for companies to
offer permanent life insurance to consumers in the future.

 
LEGISLATIVE HISTORY:

This is a new bill.

 
FISCAL IMPLICATIONS:

None.

 
EFFECTIVE DATE:
This act shall take effect immediately.