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

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on May 23, 2003, representing the position of the New York State Insurance Department.

Re: Stock Risk Management Product

Question Presented:

May ABC Inc., which is not a New York authorized insurer, sell a risk management product (the "Product") that reduces the risk of its purchasers’ individual stock investments by pooling an amount of such purchasers’ contributions, and, after a specified period of time, distributing such pooled contributions to those purchasers whose stocks performed the worst over such period) in New York?

Conclusion:

No. ABC Inc. may not sell the Product in New York because such activity would constitute doing an insurance business without a license in violation of the New York Insurance Law.

Facts:

ABC Inc., which is not a New York authorized insurer, broker or agent, plans to market and administer a risk management product (the "Product") that reduces the risk of its purchasers’ ("Purchasers") individual stock investments. ABC Inc. is planning to form a risk-sharing group ("Risk Group") of twenty-five Purchasers. Each Purchaser owns a different specific stock, and pays ABC Inc. a percentage of the asset value of its stock as the purchase price for the Product ("Fee"). Individual Purchasers will not be able to decide the other stocks that comprise the Risk Group. After forming the Risk Group, ABC Inc. combines those Purchasers’ Fees to form a reserve pool ("Reserve Pool") designated specifically for the Risk Group. ABC Inc. then invests the Reserve Pool’s assets in inflation-protected securities. ABC Inc. derives its compensation from the income (the annual real rate of return) and capital appreciation generated by such investment of the Reserve Pool.

At the end of the protection period, which is five years in length, ABC Inc. distributes the assets of the Reserve Pool to those Purchasers whose stocks suffered a loss greater than a certain threshold, which is calculated by ABC Inc. after the protection period is over. Any and all distributions used to reduce the Purchasers’ stock market losses are limited to the assets of the Reserve Pool. The Product does not offer its Purchasers guaranteed protection against all stock investment market loss, but will reduce the market value loss of those Purchasers whose stocks perform the worst over a specified period of time.

ABC Inc. states that it does not assume any underwriting risk through the Product because: (1) all potential losses are borne by the Purchasers; and (2) any and all distributions used to reduce such losses, should they materialize, are limited to the Reserve Pool’s assets.

Analysis:

N.Y. Ins. Law § 1102(a) (McKinney 2000) states that "[n]o person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter."

N.Y. Ins. Law § 1101(b)(1) (McKinney Supp. 2003) provides the definition of doing an insurance business, in pertinent part, as follows:

[A]ny of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:

(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts . . . .

N.Y. Ins. Law § 1101(a)(1) (McKinney Supp. 2003) provides the definition of an insurance contract as follows:

"Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.

N.Y. Ins. Law § 1101(a)(2) (McKinney Supp. 2003) defines a fortuitous event as "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party."

Under the facts presented, ABC Inc. plans to sell and administer a risk management product, the Product, that creates a Reserve Pool whose assets will be distributed to reduce the decline in market value of Purchaser stock investments.

With regard to § 1101(a)(1)’s definition of an insurance contract, ABC Inc. is obligated to confer benefit of pecuniary value (the payment of money from the Reserve Pool) upon other parties, the insureds (those Purchasers whose stock investments suffered the worst decline in market value), dependent upon the happening of a fortuitous event (the decline in the Purchasers’ stock investments) in which the insureds have material interests that will be adversely affected by the happening of such event. Further, the activities of ABC Inc. do not fall under any of the exceptions to § 1101(a).

Accordingly, it is the position of the New York State Insurance Department that the Product is an insurance contract under the New York Insurance Law. Therefore, ABC Inc. may not sell its Product in New York because such activity would constitute doing an insurance business by ABC Inc. without a license in violation of the New York Insurance Law.

For further information you may contact Senior Attorney Kristian Earl Lynch at the New York City Office.