The Office of General Counsel issued the following opinion on December 8, 2005, representing the position of the New York State Insurance Department.
Re: Purchase of Commercial Annuities by Charitable Annuity Societies.
Pursuant to the New York Insurance Law, may a charitable annuity society purchase a commercial annuity from a New York authorized life insurer to fund its income obligations to a donor?
While a charitable annuity society may purchase an annuity from a New York authorized life insurer, this is not considered reinsurance for the purposes of reducing reserves.
The inquirer states that his client is a non-profit charity under Section 501(c)(3) of the Internal Revenue Code (26 U.S.C § 501(c)(3)) and is contemplating applying for a permit to issue annuities in New York. The inquirer states that in other states it is a common practice for a smaller to medium size non-profit organization to purchase a commercial annuity contract from a life insurance company to fulfill its obligation to provide lifetime income to the donor under a charitable gift annuity contract. He further states that this is a form of reinsurance and also relieves the charitable annuity society from the administrative task of providing income checks to the donor because the insurer pays the check directly to the annuitant who is the donor.
Pursuant to N.Y. Ins. Law 1108(a) (McKinney Supp. 2005), a charitable annuity society is exempt from licensing and other provisions of the New York Insurance Law, provided that it complies with the requirements of N.Y. Ins. Law § 1110 (McKinney Supp. 2005). Section 1110(a) provides a mechanism for the issuance of a special permit to an eligible charitable organization and states, in relevant part, that:
(a) The superintendent may, in his discretion, issue a special permit to make annuity agreements with donors to any duly organized domestic or foreign non-stock corporation or association conducted without profit and engaged in active operation for at least ten years prior thereto solely in bona fide charitable, religious, missionary, educational or philanthropic activities. The permit shall authorize such corporation or association to receive gifts of cash and other property conditioned upon, or in return for, its agreement to pay an annuity to the donor, or his nominee, and to make and carry out such annuity agreement. . . . 1
N.Y. Ins. Law § 1110(b) (McKinney Supp. 2005) contains the admitted asset and investment requirements applicable to charitable annuity societies and provides as follows:
(b) Every such domestic corporation or association shall maintain admitted assets at least equal to the greater of (i) the sum of its reserves on its outstanding agreements, calculated in accordance with section four thousand two hundred seventeen of this chapter, and a surplus of ten per centum of such reserves, or (ii) the amount of one hundred thousand dollars. In determining such reserves a deduction shall be made for all or any portion of an annuity risk which is reinsured by a life insurance company authorized to do business in this state. The required admitted assets shall be invested in accordance with the prudent investor standard as defined in section 11-2.3 of the estates, powers and trusts law and shall not be subject to the investment limitations of this chapter. Such assets shall be segregated as separate and distinct funds, independent of all other funds of such corporation or association, and shall not be applied to pay its debts and obligations or for any purpose except the aforesaid annuity benefits. (emphasis supplied)
Generally, the term "reinsurance" is defined by the National Association of Insurance Commissioners Accounting Manual, in relevant part, as:
[a]n agreement by which a reporting entity transfers all or part of its risk under a contract to another reporting entity. The entity that issued the policy is called the primary insurer, direct writer or ceding entity and the entity to which the risk is transferred is called the reinsurer or assuming entity. The process of transferring the risk from the ceding entity to the reinsurer is known as cession. A retrocession is customarily made when the amount assumed is beyond the reinsurer's limits of retention. See 1 National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as of March 2005, Statement of Statutory Accounting Principles (SSAP) No. 61, at 61-3 (2005). 2
Thus, the reinsurance of an annuity contract must involve the transfer of all or part of the risk under the annuity contract issued by the charitable annuity society from the society to the commercial insurer. In this case, however, when the society purchases a new annuity contract from a commercial life insurer, there is no transfer of all or part of the risk under the society's annuity contract to the commercial insurer. In issuing the new annuity contract, the commercial insurer is not assuming any of the risk under the annuity contract issued by the society, but is issuing its own independent annuity. The commercial insurer's obligation under its annuity contract is not dependent upon whether the society is obligated under the annuity contract issued by the society.
Consequently, while a charitable annuity society may purchase a commercial annuity from an authorized life insurer, the Department does not consider such purchase as being reinsurance for the purposes of reducing reserves. In order to qualify for the deduction under Section 1110(b), the charitable annuity society must enter into a valid reinsurance agreement with a New York authorized life insurer.
For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.
1 Notwithstanding the general requirement that a corporation or association not issue any annuity agreements until it has obtained a special annuity permit, N.Y. Ins. Law § 1110(d) (McKinney Supp. 2005) contains an exemption for small issuers. In order to take advantage of this small issuer exemption, the corporation or association must apply for a permit. The Department then ensures that the charity meets all requirements and issues a letter of exemption, with the requirement that when the charity's required reserves are approximately $500,000, it must reapply for a permit.
2 See also N.Y. Comp. Codes R. & Regs. tit. 11, 83.2-83.3 (2003) (Regulation 172), which adopt the SSAPs of the Accounting Practices and Procedures Manual subject to the conflicts and exceptions contained in § 83.4, which conflicts and exceptions are not applicable here.