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

 

The Office of General Counsel issued the following informal opinion on July 11, 2002, representing the position of the New York State Insurance Department.

RE: Life Insurance Corporate Governance

Questions Presented:

1) What is the intent of the N.Y. Ins. Law § 1209(b) (McKinney 2000) requirement that all except four directors of a domestic mutual life insurance company be members of the corporation or officers of member corporations?

2) What is the intent of the N.Y. Ins. Law § 1202(b)(1) (McKinney 2000) requirement that not less than 1/3 of the directors of a domestic stock life insurance company, and not less than 1/3 of the members of each board of directors committee of such company, be "independent"?

3) Have there been arguments that the requirement of N.Y. Ins. Law § 1202(b)(1) should also be applicable to domestic mutual life insurance companies?

Conclusions:

1) This requirement originated with the 1906 investigation of the Armstrong Committee and is designed to assure that the board of directors of a domestic mutual insurer acts in the interest of the mutual insurer’s policyholders.

2) This requirement was instituted as a measure of good corporate governance.

3) This Office is not aware that such a proposal has been made to this Department.

Facts:

This is a general inquiry and no facts were furnished.

Analysis:

Domestic Mutual Life Insurance Companies

N.Y. Ins. Law § 1209(b) provides:

Such corporation [a domestic mutual insurer] shall have not less than thirteen directors, provided, however, a life insurance corporation satisfying the requirements of item (v) of subparagraph (B) of paragraph five of subsection (a) of section one thousand two hundred one of this article shall have not less than nine directors, and such officers as shall be provided for in its charter or by-laws. The directors, except as provided in section four thousand two hundred ten of this chapter, shall be elected at the annual meetings of the members, and all except four of the directors of such corporation, elected after the organization of the corporation is completed and it has been licensed to issue insurance policies, must be members of the corporation or officers of member corporations. At any time after the first annual meeting, the directors may be divided into not exceeding three groups as nearly equal as possible, and thereafter the directors in one group only or their successors shall be elected annually as provided in the by-laws. The board of directors of such corporation shall hold regular meetings at least four times in each calendar year. At least one of such meetings shall be held within this state and the other meetings may be held elsewhere.

The authorization for nine directors contained in N.Y. Ins. Law § 1201(a)(5)(B)(v) (McKinney 2000) is limited to life insurers with admitted assets of less than $1.5 billion. N.Y. Ins. Law § 4210 (McKinney 2000) mandates a specific procedure for the election of directors by domestic mutual life insurance companies.

In the early part of the 20th century, there were allegations of improprieties in the management and operation of large life insurance companies doing business in New York. Accordingly, the New York State Legislature established the Joint Committee to Investigate and Examine into the Business and Affairs of Life Insurance Companies Doing Business in the State of New York (commonly known as the Armstrong Committee, after its Chair State Senator Armstrong). After taking extensive testimony and reviewing numerous documents, the Armstrong Committee made a number of observations and recommendations, including:

Under existing law a mutual life insurance company without capital stock cannot be organized save for the purpose of transacting business upon the cooperative or assessment plan or upon the so-called "stipulated premium" plan or as a fraternal society. In other words, Article II of the Insurance Law, under which life insurance corporation transact business upon the ordinary level premium basis with full legal reserve, seems to be inapplicable unless the company has a capital stock. . . . We have therefore in this State, exclusive of assessment and fraternal organizations, mutual life insurance companies created by special act, mutual life insurance companies subject to the provisions of Article II through reincorporation and stock corporations either formed under the present Insurance Law or previously created; but there is no general provision or plan for the organization of mutual level premium companies.

It would appear to be an anomaly in the law that a life insurance corporation may be formed upon a purely mutual basis to transact business as a co-operative or assessment concern without adequate reserves, while a mutual company is not permitted to be formed in such a manner that a full reserve through a proper valuation of its risks may be required. . . . Without going so far as to prohibit the further organization of stock corporations it would seem to be wise not to prohibit, but rather to encourage, the formation of mutual companies upon full legal reserve basis, provided suitable guaranties are given of the bona fides and soundness of the enterprise.

The Committee therefore recommends that Article II of the Insurance Law be so amended as to permit the formation thereunder of mutual corporations without capital stock to transact the business of life insurance and for such other purposes as are authorized to be connected therewith in the case of stock corporations; . . . .

Armstrong Committee Report pp. 274-76 (1906)

Soon thereafter, the Armstrong Committee caused the introduction of a number of bills in the Legislature, one of which, Assembly Bill 996, would have, inter alia, amended then New York Insurance Law § 70 (Parker 1906) to read:

Thirteen or more persons may become a corporation for the purpose of making any of the following kinds of insurance: (1) Upon the lives or health of persons and of every insurance appertaining thereto, and to grant, purchase or dispose of annuities. (2) Against injury, disablement or death resulting from traveling or general accident, and against disablement from sickness, and every insurance appertaining thereto. . . . By making and filing in the office of the superintendent of insurance a certificate signed by each of them, stating their intentions to form a corporation for the purpose or purposes named in someone of the foregoing subdivisions specifying the subdivisions; and setting forth a copy of the charter which they propose to adopt, which shall state . . . the manner of electing its directors and officers, a majority of whom shall be citizens and residents of this state . . . A mutual company, without capital stock may be organized for the purposes, either separately or taken together, specified in the first and second subdivisions of this section. Except as above provided no such corporation shall be formed under this article for the purpose of undertaking any other kind of insurance than that specified in some one of the foregoing subdivisions . . . but a corporation other than a mutual corporation may be formed . . . .

The Armstrong Committee recommendation was enacted a few years later. 1909 N.Y. Law 302.

Subsequently, in 1913 N.Y. Laws 832, the Legislature authorized the formation of mutual employer liability corporations and mandated, N.Y. Ins. Law § 187 (Parker 1913), that all except two of the thirteen directors must be members of the corporation. Later, 1916 N.Y. Laws 13, the Legislature authorized the formation of mutual automobile casualty insurance corporations and mandated, N.Y. Ins. Law § 342 (Parker 1916), that all except four of the thirteen directors must be members of the corporation. Later, 1917 N.Y. Laws 4, the Legislature authorized the formation of mutual marine insurance corporations and mandated that all except two of the five directors must be members of the corporation.

Finally, the (then) Chair of the State Senate Insurance Committee, Senator Lockwood, submitted a bill to authorize the formation of mutual insurance companies to write those lines of insurance, which in accordance with then N.Y. Ins. Law § 70 could only be written by stock insurers. This proposal was passed by the Legislature, 1922 N.Y. Laws 659, and N.Y. Ins. Law § 71-a (Parker 1922), entitled "Mutual life, health and casualty corporations", was enacted. N.Y. Ins. Law § 71-a(8) provided:

The management of the business and affairs of such corporation shall be vested in a board of directors. Every such corporation shall have not less than thirteen directors, and such officers as shall be provided for in the certificate of incorporation or by-laws. . . . The directors shall be elected at the annual meetings of the members from among their number . . . . All except four of the directors elected after the organization of the corporation is completed, and it is authorized to issue insurance policies, must be members of the corporation. All of the officers excepting the secretary, assistant secretary, assistant treasurer and the actuary, must be members of the board of directors.

That portion of then N.Y. Ins. Law § 70 that had authorized domestic mutual life insurance companies, which had been added by 1909 N.Y. Laws 302, was repealed upon the enactment of then N.Y. Ins. Law § 71-a.

With the recodification of the New York Insurance Law, 1939 N.Y. Laws 882, then N.Y. Ins. Law § 71-a(8) became N.Y. Ins. Law § 56(2) (Baldwin 1939):

Every such corporation shall have not less than thirteen directors, and such officers as shall be provided for in its charter or by-laws. The directors of every such corporation, except as provided in section one hundred ninety-eight, shall be elected at the annual meetings of the members, and all except four of the directors of such corporation, elected after the organization of the corporation is completed and it has been licensed to issue insurance policies, must be members of the corporation or officers of member corporations. At any time after the first annual meeting, the directors may be divided into not exceeding three groups as nearly equal as possible, and thereafter the directors in one group only or their successors shall be elected annually as provided in the by-laws. The board of directors of such corporation shall hold regular meetings at least four times in each calendar year. All meetings of such board of directors shall be held within this state.

The provisions of then N.Y. Ins. Law §§ 165, 187, and 342 were subsumed into N.Y. Ins. Law § 56(2). The addition of the term "officers of member corporations" was added to recognize that a corporation could be a policyholder/member of a domestic mutual insurance company.

With the next recodification of the New York Insurance Law, 1984 N.Y. Laws 367, then N.Y. Ins. Law § 56(2) became N.Y. Ins. Law § 1209(b) without substantive change and, as respects the composition of the board of directors, has not been since modified.

N.Y. Ins. Law § 1209(b) regulates the composition of the board of directors of all domestic mutual insurance companies, not only life insurance companies. Although there is a dearth of legislative history as to how the actual number of directors of mutual insurance companies who might not be members of officers of member corporations was arrived at, the purpose of the requirement was, and continues to be, to assure that the majority of the directors, because they are members or officers of member corporations, act in the interest of the policyholder/members.

Domestic Stock Life Insurance Companies

N.Y. Ins. Law § 1202(b) provides:

(1) Subject to item (v) of subparagraph (B) of paragraph five of subsection (a) of section one thousand two hundred one of this article, not less than one-third of the directors of a domestic stock life insurance company and not less than one-third of the members of each committee of the board of directors of any domestic life insurance company shall be persons who are not officers or employees of such company or of any entity controlling, controlled by, or under common control with such company and who are not beneficial owners of a controlling interest in the voting stock of such company or any such entity. At least one such person must be included in any quorum for the transaction of business at any meeting of the board of directors or any committee thereof.

(2) The board of directors of a domestic life insurance company shall establish one or more committees comprised solely of directors who are not officers or employees of the company or of any entity controlling, controlled by, or under common control with the company and who are not beneficial owners of a controlling interest in the voting stock of the company or any such entity. Such committee or committees shall have responsibility for recommending the selection of independent certified public accountants, reviewing the company's financial condition, the scope and results of the independent audit and any internal audit, nominating candidates for director for election by shareholders or policyholders, evaluating the performance of officers deemed by such committee or committees to be principal officers of the company and recommending to the board of directors the selection and compensation of such principal officers and in the case of a domestic stock life insurance company, recommending to its board of directors any plan to issue options to its officers and employees for the purchase of shares of stock, pursuant to section one thousand two hundred seven of this article.

(3) The provisions of this subsection shall not apply to a life insurance company subsidiary if the parent company is a domestic insurance company having a board of directors and committees thereof that meet the requirements of paragraphs one and two of this subsection.

N.Y. Ins. Law § 1201(a)(5)(B)(v) requires that domestic life insurance companies with less than $1.5 billion in admitted assets, which may have nine directors, must have at least four "independent" directors.

As part of a liberalization of the investment authority of life insurance companies, 1993 N.Y. Laws 567, the Legislature made certain changes in the corporate governance of domestic stock life insurers. One of the changes was a requirement that such companies have at least 1/3 "independent" directors, N.Y. Ins. Law § 48-a (McKinney 1984). Since this change was to take effect on December 31, 1984, the recodification of the New York Insurance Law, 1984 N.Y. Laws 367, enacted this section as N.Y. Ins. Law § 1202(b) unchanged.

The allowance of some life insurance companies to have 9 instead of 13 directors, with the concomitant change in the ratio of "independent" directors was enacted subsequently, 1993 N.Y. Laws 451. A requirement that a committee composed solely of "independent" directors authorize stock options, found in N.Y. Ins. Law § 1202(b)(2), was also added at that time, 1993 N.Y. Laws 668.

The Memorandum in Support of 1993 N.Y. Laws 567, insofar as it dealt with the proposed N.Y. Ins. Law § 48-a, provided:

[This section] of the bill is intended to improve insurer accountability. The amendment, providing for strengthened corporate governance, is designed to supplement provisions of existing law. . . .The election of non-management directors is consistent with current corporate practice of publicly-held companies. It is consistent with the practice of many major insurance companies as well. Such a reform will bring further strength and objectivity to the boards of New York life insurance companies and will better enable those boards to monitor management.

Extension of N.Y. Ins. Law § 1202(b) to Domestic Mutual Life Insurers

This Office is not aware that any proposals have been made to extend the requirements of N.Y. Ins. Law § 1202(b)(1) to domestic mutual life insurance companies.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.