New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel has issued the following opinion on May 30 representing the position of the New York State Insurance Department.

Financial Guaranty Insurance

Questions Presented:

1. Can the insurance policy on a called bond be modified orally to allow a refund immediately before it is cancelled in connection with the call?

2. What are the rules governing pricing of policies, in particular, discounts, rebates, refunds and return of premiums?

3. How should the insurer account for the cancellation of policies governing called bonds and the issuance of refunding bond policies at a reduced premium?

4. What are the reserve requirements for policies issued at a reduced premium?

May we review N’s filings with the Department of Insurance?

Conclusions:

1. It is generally permissible to modify a contract orally. However, an oral modification to an insurance contract that would result in a change in the premium charged will not be allowed.

2. The rules governing the pricing of policies, particularly discounts, rebates, refunds and returns of premiums are discussed below.

3. In accounting for a cancelled policy, an insurer must return unearned premium and comply with the provisions regarding such a situation as are set forth in the rate filing or the policy itself. There is no accounting provision for the issuance of policies at a "reduced premium" in that issuing policies at a "reduced premium" is not permitted.

4. With respect to the establishment of reserves, all such reserves must be set at a level which is actuarially sound based upon past experience.

5. The rate and form filings of insurers are open to public inspection, as are their Annual Statements.

Facts

N is a financial guaranty insurer. The following information is intended as an aid in understanding of the regulatory environment in which N operates.

Analysis

Modification

As a general rule, contracts, including insurance contracts, may be orally modified. N.Y. Jur 2d Insurance § 818 (West 1988). In the case of a modification of price, however, such a change must be documented in the policy or other writing. This is because the insurance law requires that the contract of insurance must be consistent with the policy or written contract issued as evidence thereof. N.Y. Ins. Law § 2324(a) (McKinney 1985). That section provides, in pertinent part, as follows:

(a) No authorized insurer, no licensed agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof,…

The above-quoted statute, which applies to most insurance contracts other than life, accident or health insurance, requires that the terms of the agreement be expressly documented. This would preclude an oral modification of price.

Pricing of Policies

The pricing of premiums for financial guaranty insurance is addressed by § 6905 of the insurance law, which provides, in pertinent part, as follows:

(b) Rates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition, detrimental to the solvency of the insurer, or otherwise unreasonable. In determining whether rates comply with the foregoing standards, the superintendent shall include all income earned by such insurer. Criteria and guidelines utilized by insurers in establishing rating categories and ranges of rates to be utilized shall be filed with the superintendent for information prior to their use by the insurer if not otherwise filed prior to the effective date of this article.

N.Y. Ins. Law § 6905(b) (McKinney Supp. 2000). As indicated by the governing statutory provision, the rates charged do not require the prior approval of the superintendent, but are subject to his supervision.

With respect to discounts and rebates, such practices are limited by the provisions of Insurance Law §§ 2324 and 6905 cited above. Such being the case, any proposed "discounts" or "rebates" must be expressly set forth in the policy or other contractual documents and must not be unfairly discriminatory or cause the premium charged to be detrimental to the insurer’s solvency, destructive to competition, or unreasonable in any other manner.

With respect to refunds and return of premiums, no specific guidance or rules apply solely to financial guaranty insurance. However, the following general rules apply. In the event that a policy is cancelled and a refund or return of a premium is to be made, the provisions of N.Y. Ins. Law § 3428 (McKinney 1985) apply. That section provides, in relevant part, as follows:

(a) Except as provided in subsection (d) of this section, [relating to policies involving premium financing], whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

Under the above-quoted provision, the return of premium is governed either by the rate filings of the insurer or the terms of the policy itself. N’s policy forms expressly provide that policies are non-cancellable and that premiums are non-refundable.

Accounting for Cancelled Policies

When an insurance policy is cancelled, an insurer is required to return unearned premiums to the insured. See N.Y. Ins. Law § 3428, discussed above.

In many instances involving called bonds, premium amounts previously paid and remaining in the insurer’s unearned premium reserve have been applied (credited) to the premium charged for the refunding bond. The use of this credit mechanism does not equate to issuance of a policy at a "reduced premium". Rather, the premium charged is determined in accordance with filed rates and is satisfied by the cash payment combined with the credited amount.

Reserve Requirements

New York Ins. Law § 6903(c) (McKinney Supp. 2000) requires financial quaranty insurers to establish and maintain an unearned premium reserve. That section provides as follows:

(c) Unearned premium reserve. An unearned premium reserve shall be established and maintained net of reinsurance with respect to all financial guaranty premiums. Where financial guaranty insurance premiums are paid on an installment basis, an unearned premium reserve shall be established and maintained, net of reinsurance, computed on a daily or monthly pro rata basis. All other financial guaranty insurance premiums written shall be earned in proportion with the expiration of exposure, or by such other method as may be prescribed by the superintendent.

As with the establishment of all reserves, it must be actuarially sound and based upon past experience.

As to reserve requirements for "reduced premium" policies, it should be noted that policies are not properly issued at reduced premiums. Financial guaranty insurers must adhere to their filed rates. As provided in § 6903(c), the unearned premium reserve is reduced (and premiums are, accordingly, earned) pro rata with the expiration of risk of exposure. N’s practice of applying amounts from the unearned premium reserve attributable to the called bond to the refunding bond is not in violation of the requirements of Article 69.

Public Review of Filings

In accordance with New York State’s Freedom of Information Law ("FOIL"), N.Y. Pub. Off. Law §§ 84 – 90 (McKinney 1985 and Interim Supp. 1999-2000), the filings of insurers are open to public inspection. This includes the insurer’s annual statement as well as its rate and form filings.

For further information you may contact Senior Attorney Michael Campanelli of the Department’s New York Office.