The Office of General Counsel issued the following opinion on November 3, 2005 representing the position of the New York State Insurance Department.
Re: Financial Property Insurance.
Would the Department recognize the below-described product as a form of property insurance that is "substantially similar" to miscellaneous property insurance?
No, the Department would not recognize the below-described product as a form of property insurance that is "substantially similar" to miscellaneous property insurance.
The inquirer represents a client that would like to engage in an activity that the inquirer describes as follows:
A Bank anticipates partnering with an Insurer and a producer to sell an insurance product (the "Product") that will insure against losses to customers caused by a drop in the market value of their financial and equity mutual fund assets. For example, a customer may have a portfolio of stocks that is worth $X at a particular point in time. That customer may realize that he or she is nearing a moment in time where he or she might wish to cash in these assets, and may see value in seeking to lock-in the current market value of their equity portfolio. The proposed Product would allow the customer to pay a premium to the Insurer, and in exchange receive a promise to pay the difference between a pre-agreed reference price and the market value of the equity securities at some time in the future when and if the triggering decline in the relevant index occurs. The inquiry specifically states that the Product would operate as follows:
a. The Insurer will sell protection that will pay out to the insured in the event of the occurrence of certain defined adverse developments in the equity markets.
b. Using financial indices as a reference, the insured will be protected in the event that the relevant index (or a basket of indices) drops below a level set at the time of its purchase of the policy. For example, the insured who is invested in US equities may buy a policy that will pay out a fixed amount to him in the event the S&P 500 drops more than 10%.
c. The reference financial indices that will be used will be composed of securities or mutual fund interests similar or related to, or subject to the same market influences that affect, those owned by the customers (thus ensuring an "insurable interest" on the part of the customer).
d. The amount of premium charged will be determined in accordance with underwriting guidelines that will take into account the market price of the assets being insured, the volatility and asset mix of the insured's underlying investments, current market interest rate and the likely term, or "duration" of the policy.
e. Customers will need to have an "insurable interest" in the assets that are being protected. Because it would be difficult to actually investigate each policyholder's equity holdings as part of the underwriting process, the Insurer will make a determination that there is an insurable interest by requiring that the insured "check the box" to certify that he/she owns certain specified mutual funds or equities.
f. The Insurer will not have any significant equity market-related risk because it will enter into swaps or other arrangements with the Bank to hedge the equity risk. The Insurer will have credit exposure to the Bank, which is currently rated AA.
g. The insurance policy will be non-transferable.
The inquirer has acknowledged that no such insurance product is currently sold (or is permitted to be sold) in New York, and have requested that the Department permit the sale of the Product as constituting a type of insurance substantially similar to "miscellaneous property insurance".
The Department is of the view that the Product that the inquirer described may not be approved for sale in this state as insurance. Assuming without deciding that the Product is in fact insurance under New York law, it would clearly constitute an impermissible type of financial guaranty insurance. Financial guaranty insurance is defined under the New York Insurance Law as follows:
"Financial guaranty insurance" means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business as defined in paragraph one of subsection (b) of section one thousand one hundred one of this chapter, an indemnity contract, and any guaranty similar to the foregoing types, under which loss is payable, upon proof of occurrence of financial loss, to an insured claimant, obligee or indemnitee as a result of any of the following events:
(A) failure of any obligor on or issuer of any debt instrument or other monetary obligation (including equity securities guarantied under a surety bond, insurance policy or indemnity contract) to pay when due to be paid by the obligor or scheduled at the time insured to be received by the holder of the obligation, principal, interest, premium, dividend or purchase price of or on, or other amounts due or payable with respect to, such instrument or obligation, when such failure is the result of a financial default or insolvency or, provided that such payment source is investment grade, any other failure to make payment, regardless of whether such obligation is incurred directly or as guarantor by or on behalf of another obligor that has also defaulted;
(B) changes in the levels of interest rates, whether short or long term or the differential in interest rates between various markets or products;
(C) changes in the rate of exchange of currency;
(D) changes in the value of specific assets or commodities, financial or commodity indices, or price levels in general; or
(E) other events which the superintendent determines are substantially similar to any of the foregoing.
N.Y. Ins. Law § 6901(a)(1) (McKinney 2000) (emphasis supplied).
Assuming that the Product was insurance it would fall squarely within the scope of this definition [specifically, § 6901(a)(1)(D)] and would be considered by this Department to constitute financial guaranty insurance. Furthermore, as indicated by N.Y. Ins. Law § 6904(b)(1)(McKinney 2000), such financial guaranty insurance would not constitute a "permissible guaranty" under the law and thus could not be written in this state.
The Department does not concur with the inquirer's suggestion that the Product should be viewed as a type of insurance that is "substantially similar"1 to "miscellaneous property insurance". The New York Insurance Law defines such insurance as follows:
(5) "Miscellaneous property insurance," means loss of or damage to property resulting from: (A) lightning, smoke or smudge, windstorm, tornado, cyclone, earthquake, volcanic eruption, rain, hail, frost and freeze, weather or climatic conditions, excess or deficiency of moisture, flood, the rising of the waters of the ocean or its tributaries;
(B) insects, or blights, or disease of such property except animals;
(C) electrical disturbance causing or concomitant with a fire or an explosion in public service or public utility property;
(D) bombardment, invasion, insurrection, riot, civil war or commotion, military or usurped power, any order of a civil authority made to prevent the spread of a conflagration, epidemic or catastrophe, vandalism or malicious mischief, strike or lockout, collapse from any cause, or explosion; but excluding any kind of insurance specified in paragraph nine hereof, except insurance against loss of or damage to property resulting from: (i) explosion of pressure vessels (except steam boilers of more than fifteen pounds pressure) in buildings designed and used solely for residential purposes by not more than four families, (ii) explosion of any kind originating outside of the insured building or outside of the building containing the property insured, (iii) explosion of pressure vessels which do not contain steam or which are not operated with steam coils or steam jackets, or (iv) electrical disturbance causing or concomitant with an explosion in public service or public utility property; or
(E) lateral or vertical subsidence of the earth caused by past or present mining operations.
N.Y. Ins. Law § 1113(a)(5)(McKinney 2000).
As is readily apparent from a review of that statute, "miscellaneous property insurance" is intended to refer solely to coverage involving physical damage to tangible property assets. Nothing in any prior pronouncement of this Department supports any different interpretation. The Department is of the opinion that only coverage that addresses damage to tangible property would be regarded as possibly being "substantially similar" to "miscellaneous property insurance". Moreover, such a determination would be inappropriate since financial guaranty insurance covers the very events that the Product is intended to insure. It is moreover of a type of financial guaranty that may not be written as such, evincing a legislative intent that such coverage may not be written in New York.
Accordingly, the Product would not be viewed by the Department as a form of property insurance that is "substantially similar" to miscellaneous property insurance, and its marketing and sale as insurance would not be permitted in the State of New York.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 New York Insurance Law § 1113(a)(30) (McKinney Supp. 2005) is an alternative "catch-all" classification that allows the Superintendent to authorize the writing of insurance that, although not specifically permitted by any other provision, is nevertheless sufficiently similar to some existing kind of insurance so as to permit its writing as such.