OGC Op. No. 08-08-01
The Office of General Counsel issued the following opinion on August 1, 2008, representing the position of the New York State Insurance Department.
RE: Charitable Annuity Society – Special Permit and Reserve Requirements
1) Pursuant to Insurance Law § 1110(b), may a charitable annuity society1 maintain its required admitted assets in an investment account that includes non-annuity funds?
2) Pursuant to Insurance Law § 1110(d), must a charitable annuity society obtain a permit if the amount it retains in its requisite reserve on outstanding annuity agreements for New York residents is less than $500,000 when its total requisite reserve for all annuitants, wherever situated, exceeds $500,000?
1) No. Pursuant to Insurance Law § 1110(b), a charitable annuity society may not maintain its required admitted assets in an investment account that includes non-annuity funds.
2) Yes. Pursuant to Insurance Law § 1110(d), a charitable annuity society must obtain a permit if the amount it retains in its requisite reserve on outstanding annuity agreements for New York residents is less than $500,000 when its total requisite reserve for all annuitants, wherever situated, exceeds $500,000.
The inquiries made were general in nature.
When permitted by the Superintendent of Insurance, a charitable annuity society may make annuity agreements with donors, subject to the specifications of Insurance Law § 1110. Prior to 1923, organizations that paid annuities to donors in exchange for charitable contributions were not subject to regulation. To ensure public protection, and as part of legislation that also explicitly brought regulation of annuity contracts and endowment policies under the Insurance Law, then Superintendent Francis R. Stoddard, Jr. proposed prohibiting the practice entirely. A number of religious and philanthropic institutions voiced their objections to the plan, and legislation was enacted to permit the exchange but with limitations. See Insurance Law § 9 (Parker Supp. 1923), and letter from Superintendent Stoddard to James A. Parsons, Counsel to the Governor, dated April 2, 1923, Diary of Insurance Legislation 1923 (on file with the Insurance Department).
In 1939, the statute was recodified as § 45 of the Insurance Law, and was greatly expanded to require charitable annuity societies to be supervised by the Superintendent. See Insurance Law § 45 (J.B. Lyon Co. 1939). In 1984, Insurance Law § 45 was recodified as § 1110. With few exceptions, which are due to minor legislative amendments over time, the statute reads nearly the same as it did in 1939. No amendments to the statute have eroded the Department’s regulatory role, nor the statute’s purpose to ensure public protection.
Insurance Law § 1110’s specifications provide an exemption from securing a special permit and necessitate the segregation of required admitted assets. Insurance Law § 1110 states in part relevant to this inquiry:
(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. Every such corporation or association shall, before making such agreement, file with the superintendent copies of its forms of agreements with annuitants and a schedule of its maximum annuity rates, which shall be computed on the basis of the annuity standard adopted by it for calculating its reserves so as to return to it upon the annuitant's death a residue at least equal to one-half the original gift or other consideration for such annuity.
(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 set forth in 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.
(c) No such corporation or association organized under the laws of another state shall be permitted to make such annuity agreements in this state unless it complies with all requirements of this section imposed upon like domestic corporations or associations.
(d) No such corporation or association shall make or issue in this state any annuity contract before obtaining a permit issued in accordance with the provisions of this section except that if its requisite reserve on its outstanding annuity agreements computed in accordance with section four thousand two hundred seventeen of this chapter does not exceed the amount of five hundred thousand dollars, it may make gift annuity agreements in this state and shall be exempted from securing a permit provided it maintains the reserve required by section four thousand two hundred seventeen of this chapter and a surplus of at least twenty-five per centum of such reserve. If the superintendent finds, after notice and hearing, that any such corporation or association, having such a permit, has failed to comply with the requirements of this section, he may revoke or suspend such permit or order it to cease making new annuity contracts until it complies. The superintendent may, in his discretion, either dispense with the requirement of annual statements by such corporations or associations or accept a sworn statement by two or more of its principal officers, in such form as will satisfy the superintendent that the requirements of this section are being complied with.
Insurance Law § 1110(b) requires a charitable annuity society to segregate its required admitted assets from all its other assets. The statute permits a charitable annuity society to pay annuity benefits from its required admitted assets, but prohibits use of such funds for any other purpose. Additionally, required admitted assets must be invested pursuant to the “prudent investor standard” defined in N.Y. Estate Powers and Trust Law § 11-2.3. These measures are designed to ensure charitable annuity societies maintain sufficient funds to pay donors the annuities promised them.2 For these reasons, a charitable annuity society may not maintain its required admitted assets in an investment account that includes non-annuity funds.
Insurance Law § 1110(d) requires a charitable annuity society to obtain a permit before making or issuing an annuity contract in New York, unless the amount that Insurance Law § 1110(b) requires the charitable annuity society to retain as its requisite reserve is no more than $500,000. The inquiry questions whether a permit is required if the amount a charitable annuity society retains in its requisite reserve on outstanding annuity agreements for New York residents is less than $500,000 when its total requisite reserve for all annuitants, wherever situated, exceeds $500,000. Insurance Law § 1110(d) does not limit the $500,000 threshold to amounts constituting the reserve only for New York residents. The calculation of the reserves under Insurance Law § 1110(b), which is undertaken to ensure financial solvency, is based on all outstanding agreements, without regard to where the annuity agreements were issued. Moreover, Insurance Law § 1110(c) provides that a charitable annuity society organized under the laws of another state must comply with all the requirements imposed by Insurance Law § 1110 on New York domestic societies if the foreign society wishes to make annuity agreements in New York. Thus, the threshold applies to the reserve required to be maintained on behalf of all annuitants, wherever situated.
In summary, a charitable annuity society may not maintain its required admitted assets in an investment account that includes non-annuity funds, and a permit is required if a charitable annuity society’s requisite reserve on outstanding annuity agreements exceeds $500,000.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1 Based on Insurance Law § 1110(a), a “charitable annuity society” is a “duly organized domestic or foreign non-stock corporation or association conducted without profit and engaged in active operation for at least ten years . . . solely in bona fide charitable, religious, missionary, educational, or philanthropic activities.”
2 The following notation appears in the Comment section of the Department’s second proposed draft, dated May, 1937, of future Insurance Law § 45: “The requirement for maintenance of a ten per cent surplus and for segregation of assets seems necessary to protect the persons who rely upon getting annuities under these agreements.” See P.D. 2 – Art. IV – § 30.5 – May, 1937, on file with the Department.