Senate Bill S5315

                                 
BILL NUMBER: S5315

SPONSOR: BAILEY
 
TITLE OF BILL:

An act to amend the insurance law, in relation to modifying the interest
rate within the standard nonforfeiture law for annuities

 
PURPOSE::

To ensure the flexibility and availability of innovative annuity options
for consumers by addressing problems associated with the sustained low-
interest rate environment and the nonforfeiture provisions of the insur-
ance law.

 
SUMMARY OF PROVISIONS::

The bill amends the relevant provision of the insurance law to reduce
the minimum nonforfeiture interest rate (i.e., the "statutory floor")
for annuities from one percent to .5 percent for annuities with premium
charges and for annuities during the surrender charge period, and to
reduce from one to .15 percent the minimum nonforfeiture interest rate
              

for annuities outside of the surrender charge period.

 
JUSTIFICATION::

This legislation is necessary to ensure that New York consumers have
continued access to a full array of annuity options. New York law
currently requires that individual deferred annuity contracts provide
the annuity owner with a guaranteed minimum value to be remitted to the
annuity owner if the owner stops making payments before the end of their
term; this is called the nonforfeiture amount. The proposed change would
only apply to future annuity contracts 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 annuities that were mandated by statute decades ago
when interest rates were substantially higher.  Carriers will be forced
to discontinue offering many annuity options, including many innovative
products that help consumers save for retirement, if the outdated guar-
anteed minimums continue to be required by law (as the rate is guaran-
teed for the life of the annuity 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 to attract consumers in the highly compet-
itive marketplace for annuities. As such, when interest rates rise, life
insurers will respond and increase the rates of return on the annuities
they offer to ensure the product remains 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 the U.S. 5-year and 10-year Treas-
uries were as low as 0.19% and 0.52%, respectively, making It extremely
difficult to support the current 1.00% minimum standard nonforfeiture
interest rate for annuities, given these historically low interest
rates. An annuity contract 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
available to credit on those assets. As of April 2021, the 5-year treas-
ury rate has still not moved above one percent, and therefore insurers
require greater flexibility 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.

Notably, the reduction of the floor for annuities would not eliminate
all benefits to consumers as it will only be triggered in low-interest
rate environments, such as the one we are currently experiencing. Compa-
nies will continue to credit non-guaranteed crediting rates, bonuses,
and other features in excess of the minimum guaranteed interest rate in
the contract in order to maintain market competitiveness and product
differentiation. When market conditions improve, competitive pressures
will necessitate that insurers increase their guaranteed crediting rates
regardless of the statutory floor. Investment managers are very educated
on which products offer the best rates of return, and it is in their
best interest to recommend those products to consumers.

This bill amends Insurance Law § 4223 to reduce the minimum nonforfei-
ture interest rate ("statutory floor") for annuities from one percent to
.5 percent for annuities with premium charges and for annuities during
the surrender charge period.

In December of 2020, the National Association of Insurance Commissioners
(NAIC) adopted a national model law which lowered the guaranteed inter-
est rate of return for annuities to .15%. The change to the interest
rate applies to all annuities during the surrender charge period, and
afterward. It shows that regulators have recognized the need to careful-
ly balance consumer benefits against company surplus concerns, and .151
produces the best outcome of product flexibility and availability while
ensuring strong company surplus positions. Notably, this bill would
provide New York consumers with a guaranteed minimum interest rate for
annuities with premium charges or during the surrender charge period
that is more than three times greater (.5% instead of .15%) than the
rate adopted by the NAIC.

In line with the NAIC model line, the bill also amends section 4223 of
the insurance law to reduce from one to .15 percent the minimum
nonforfeiture interest rate for annuities outside of the surrender
charge period. The logic for the additional reduction is simple. Once
the surrender charge period has expired, the consumer is free to move
their money wherever they chose. The money can be kept in the annuity,
moved to cash, or any other investment option that best fits the needs
of the consumer. Under the current law, traditional investments, such as
stocks or mutual funds, do not have any guaranteed minimum rate of
return. The same rationale extends to annuities once the consumer is
free to move their money without charges or penalty.

 
LEGISLATIVE HISTORY::

2023-24: Referred to Insurance

2021-22: Passed Senate

 
FISCAL IMPLICATIONS::
None.

 
EFFECTIVE DATE::

Immediately.