United States: NY DFS To Impose New Limits On Variable Products

Insurers writing variable annuities in New York will want to focus on newly proposed requirements from the New York Department of Financial Services (DFS) on separate account contracts. In guidance published on March 16 (Fourth Amendment to Regulation 47, 11 NYCRR 50, available here), DFS has proposed new rules for such products issued on or after Sept. 1, 2022 (referred to in this alert as New Issuances). With some key exceptions, the rules for New Issuances closely resemble existing DFS rules for separate account annuities; such existing rules, going forward, would apply only to contracts issued prior to Sept. 1, 2022 (Legacy Issuances).

The amendment would rename Regulation 47 "Separate Account and Separate Account Contracts," changing the last word from the existing "Annuities," and explain in a new "scope" provision that funding agreements also fall under the regulation. The new guidance also addresses nonguaranteed index benefits (such as adjustments to value based on a rating agency index or similar measure, where an investor may lose principal as a result); Legacy Issuances will continue to not be subject to these types of provisions. A comment period is open through May 16, 2022, with regard to the proposed amendment. The key differences include the ones listed below.

• For New Issuances, the amount of separate account assets insulated from the insurer's other liabilities may not exceed (1) the assets purchased with considerations allocated to the separate account by the contractholder, minus (2) benefits paid, minus (3) any charges taken from such assets, minus (4) any contractholder-initiated transfers of such assets out of the separate account, plus (5) the net investment returns earned. For Legacy Issuances, the portion of the assets of the separate account not exceeding the reserves and other contract liabilities will be so insulated.
• Some separate account products provide, as an incidental benefit, a benefit in the event of death prior to annuity commencement. In the existing regulation, which would now apply only to Legacy Issuances, this benefit is capped at the greater of the accumulated value of the contract and the aggregated amount of stipulated payments made under the contract prior to death. Under the proposed guidance for New Issuances:
• • A separate account contract providing variable benefits (meaning, in this context, credited amounts reflecting investment performance, whether or not subject to a guaranteed minimum benefit) must, with respect to such variable benefits, provide, as an incidental benefit, a death benefit in the event of death prior to annuity commencement.
  • The amount of the benefit is capped at the greatest of (1) the accumulated value of the contract on the date the death benefit is determined; (2) the highest accumulated value at specified anniversaries occurring not more frequently than annually plus premium contributions since such anniversary, less withdrawals since the anniversary; and (3) the aggregate amount of contractholder contributions less withdrawals of the contributions made prior to the time of death.
  • There is a new minimum for such death benefit - the benefit may not be less than the accumulated value of the contract on the date the death benefit is determined.
• For both Legacy Issuances and New Issuances, a separate account annuity contract may provide that, at the time the annuity becomes payable, the insurer may, at its option, in lieu of commencing annuity payments, cancel the annuity and pay the contractholder its accumulated value, if such accumulated value is de minimis (as set out in the regulation). However, for New Issuances only, the insurer may not exercise this option where doing so will result in forfeiture of guaranteed benefits (other than guaranteed annuity purchase rates), unless the present value of the guaranteed benefits is less than the accumulated value.
• A provision applicable to Legacy Issuances in the existing regulation - on reserving methodology, and specifying the mortality tables to be used in reserving for individual variable annuities - does not appear in the amendment for New Issuances.
• For separate account annuity contracts issued prior to Sept. 1, 2023 (departing from the Sept. 1, 2022, effective date for other provisions), surrender charges must be "reasonable." For such products issued on or after Sept. 1, 2023, surrender charges are capped at a percentage (presumably of surrender value), starting at 8% for surrenders in the first year and declining over time according to a schedule to 0% for surrenders in year eight and later.
• New Issuances providing nonguaranteed index benefits must contain, with respect to such index benefits, the provisions required by law for general account products, with certain exceptions and modifications. These are as follows:
• • Certain values as specified in the insurance law for annuities must be based upon the nonguaranteed index value.
  • The nonguaranteed index value on the maturity date of the index crediting period is the actual accumulation amount, with specified adjustments reflecting the performance of the index. The formula may provide for a buffer or a floor protecting against downward movement in the index.
  • The nonguaranteed index value on any date other than the maturity date of the index crediting period must equal at least either (1) the current fair market value of the maturity date guarantees of the segment or (2) any other method of calculation that, in the opinion of the New York Superintendent of Financial Services (Superintendent), provides "reasonable equity to terminating and continuing contractholders and to the insurer."
  • Nonguaranteed index crediting periods may not exceed six years in duration, and the cap on the index credit may not decrease during the index crediting period.
  • The minimum cap, net of fees, on the index credit may not be less than as set forth on a schedule included in the regulation.
  • The minimum participation rate may not be less than 100%.
  • If the index formula provides a step credit subject to a buffer or floor, the minimum step credit rate may not be less than as set forth on a schedule included in the regulation.
  • The contract may permit the insurer to temporarily suspend the availability of renewal index options if, due to yield on investments or the availability or cost of hedging, the insurer is unable to support the minimum guarantees required by the regulation. However, the contract must offer, as an alternative to the unavailable index options, an account crediting non-market value adjusted fixed benefits or a money market account.
• The regulation prescribes certain cautionary disclosures to be included in New Issuance contract forms concerning the risk of loss of principal and explaining certain key terms such as buffers, floors and step credits.
• For a New Issuance providing index benefits, the index used in the index crediting must be an independent, external, publicly available index such as the Standard & Poor's 500 Composite Stock Price Index, Dow Jones Industrial Average, NYSE Composite Index, Russell 2000 Index and EURO STOXX 50 Index. Proprietary indices and indices based on portfolios designed to replicate a publicly available index, such as exchange traded funds (ETFs), are prohibited.
• A New Issuance providing guaranteed withdrawal benefits that would extend beyond the scheduled annuity commencement date in the contract, such as guaranteed lifetime withdrawals, must include a provision that preserves the withdrawal guarantee by (1) permitting the contractholder to further defer the annuity payment commencement date; (2) providing that the amount of the annuity payments will not be less than the amount of the guaranteed withdrawals, under the same payment option; or (3) any other method found acceptable to the Superintendent.
• A New Issuance providing guaranteed lifetime withdrawal benefits that are determined by applying withdrawal rates (percentages) to a defined income base must comply with all of the following:
• • Withdrawal rates may vary by attained age or by age grouping, provided that an age grouping may not span more than five years (except for age 95 and older).
  • Withdrawal rates must increase by age at least as rapidly as shown in a table set forth in the regulation or pursuant to any other approach approved by the Superintendent upon a determination of fairness to contractholders. For benefits covering joint lives, the age of the younger life would be used.
  • Withdrawal rates may not decrease due to reduction or depletion of the contract's accumulated value, and the amount of the withdrawal benefit may not decrease due to reduction or depletion of the contract's accumulated value except: (1) for an annuity providing only fixed benefits, reduction of the accumulated value by the contractholder prior to commencement of guaranteed withdrawal payments may result in reduction of the withdrawal benefit; (2) after commencement of guaranteed withdrawal payments, the contract may provide for a proportionate reduction of the withdrawal benefit for withdrawals in excess of guaranteed withdrawals; and (3) in such other instances as approved by the Superintendent upon finding that the decrease is not misleading and is fair to contractholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.