The New York Department of Insurance has disapproved a proposed contingent annuity contract.

The contingent annuity contract proposal, submitted by a group of life insurance companies, was declined by the department’s Office of General Counsel.

The contract would constitute an illegal form of financial guaranty insurance, office officials say.

The insurers that submitted the proposal wanted to sell an annuity that would start paying benefits at a time selected by the account investor.

The amount paid would be a fixed amount, equal to a percentage of the initial account, officials write in an opinion.

Even if the value of the annuity account dropped below a certain level, whether due to bad investments or other values, the account balance would be shifted to the account holder and the payments to the annuitant would still be made.

Office of General Counsel officials objected to the provision that guaranteed that payments would be made even if the account value dropped below a certain level.

That section of the proposed annuity contract would make the product financial guaranty insurance, the officials write.

“The contract comes within this definition of financial guaranty insurance because it purports to provide indemnification for ‘financial loss’ resulting from ‘changes in the value of specific assets,’” officials write.

“Indeed, the companies here are promising to continue making regular payments only in the event that the value of the covered account declines before the annuitant dies,” officials write. “The contract essentially holds the investor harmless from declines in the value of the account, whether such declines result from market losses or insufficient market growth relative to the amounts withdrawn.

“The contract therefore meets the definition of financial guaranty insurance, in that a decline in the value of specific assets (the holdings in the investor’s account) is being indemnified via the continuation of payments that commence only when and if the decline in value occurs,” officials write.

The fact that the contract is financial guaranty insurance does not automatically make it illegal in New York, but, “under the plain terms of [New York] Insurance Law Sections 6901 and 6904, the contract, although constituting financial guaranty insurance, is not of a type that may be marketed in New York,” officials write.

“The contract protects against declines in the value of specific assets (thus qualifying under the broad definition of financial guaranty in Insurance Law Section 6901(a) (1) and not specifically excluded by Insurance Law Section 6901(a) (2)), but does not come within any of the expressly permitted kinds of financial guaranty insurance enumerated in Insurance Law Section 6904(b) (1).”

Before the contract could be approved, lawmakers would have to change some sections of the New York Insurance Law, officials write.

A copy of the opinion is available here.