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able. That these elements of risk-shifting and risk-distributing are essential to a life insurance contract is agreed by courts and commentators.
The fact remains that annuity and insurance are opposites; in this combination the one neutralizes the risk customarily inherent in the other. From the company's viewpoint, insurance looks to longevity, annuity to transiency.
Here the total consideration was prepaid and exceeded the face value of the "insurance” policy. The excess financed loading and other incidental charges. Any risk that the prepayment would earn less than the amount paid to respondent as an annuity was an investment risk similar to the risk assumed by a bank; it was not an insurance risk as explained above.78
The test enunciated in the Le Gierse case seems simple. If there is no risk borne by the insurer, then there is no insurance. In Helvering v. Tyler, a similar arrangement was held not to be insurance because the "company assumed no pecuniary risk in respect to the duration of Mr. Tyler's life."79
A good example of the application of the rule that some risk must be assumed by the insurer is found in Jordan v. Group Health Ass'n.80 In holding that a nonprofit group-health association was not engaged in the business of insurance, the United States Court of Appeals for the District of Columbia Circuit stated:
Whether the contract is one of insurance or of indemnity there must be a risk of loss to which one party may be subjected by contingent or future events and an assumption of it by a legally binding arrangement by another. Even the most loosely stated conceptions of insurance and indemnity require these elements. Hazard is essential and equally so a shifting of its incidence. If there is no risk, or there being one it is not shifted to another or others, there can be neither insurance nor indemnity. 81
The court in the Jordan case went on to say that the statutes providing for regulation of life insurance were not intended to cover all organizations having some element-of-risk assumption or distribution in their operations; that the statutory provisions relating to the maintenance of reserves or "guarantee funds” and the type of regulation of investments and financial operations were intended to protect the insured against the insurer.82 These statutes assume a separateness of identity and a possible antagonism between insured and the insurer.83 In short,
78 Id. at 539-42.
there must be definite assumption of liability by the insurer. The court pointed out that insurance statutes were inappropriate where no risk was assumed and where consequently there was no danger that the company would default on its obligations. 84
The proposal of the mutual funds to use the variable annuity as a distributing device without any guarantees or assumptions of risk falls squarely within the reasoning of the Jordan case. There is no risk assumed by a company comparable to that of an insurer. Thus, no danger of default can occur. Stated differently, there is no possibility of insolvency of the insurer. The plan is wholly mutual and the control rests with the annuitants. They even control the investment policy that must be followed by the trustee. As there is no assumption of any risk whatever by the mutual fund, the trustee or the underwriter, they do not "assure" anything. They are not in the insurance business.
1. Fixed Annuities in Insurance Statutes The word "annuities” as now used in many state insurance laws means fixed-dollar annuities. This was the holding in the only variableannuity case that has yet been decided involving this point. In Spellacy v. American Life Ins. Ass'n, 85 a fraternal life insurance society proposed to sell variable endowments with a variable-annuity option. The court sustained the Insurance Commissioner's position that the sale of such contracts was not within the corporate powers of a life insurance organization, stating, "When the legislature used the word 'endowment in the defendant's charter and in § 6244, it employed a word generally used in insurance parlance as involving an undertaking to make payment of a specified sum of money.
The court pointed out that the usual insurance plan stresses protection, whereas in the variable-annuity plan the speculative element is a predominant purpose.
The sale of an interest in an investment fund from which the purchaser derives a periodic return because of his participation in the fund is a perfectly legitimate, and in recent years an increasingly common, venture. It is totally different from insurance with endowment and annuity provisions, because the element of protection which is the very nature of insurance is lacking. .. True, in a mutual benefit society such as the defendant the profit motive is absent, but in the proposed variable endowment contract the speculative feature remains a paramount
85 144 Conn. 346, 131 A.2d 834 (1957). 86 Id. at 354, 131 A.2d at 839. 87 Id. at 356, 131 A.2d at 840.
Reference was also made to the definition of Lord Coke:
We have said that an annuity is a yearly payment of a certain sum of money granted to another in fee, or for life, or for a term of years, charging the person of the grantor only. It is a stated sum, payable annually. ... Insurancewise, it has the same meaning. The policy ... to be issued under the annuity option would provide for the payment, not of a fixed amount of money, but of an uncertain sum, which is quite different from the legal concept of the word "an
It seems likely that many, if not most, states will follow the holding of the Spellacy case. This would be especially true where there is no insurer to assume any risks whatever as in the proposed United Variable Annuities program. In SEC v. Variable Annuity Life Ins. Co., Mr. Justice Douglas said:
While all the States regulate "annuities” under their "insurance” laws, traditionally and customarily they have been fixed annuities, offering the annuitant specified and definite amounts beginning with a certain year of his or her life. The standards for investment of funds underlying these annuities have been conservative.89
In the Spellacy case the Insurance Commissioner had jurisdiction of the defendant as a life insurance organization, and properly raised the questions as to his regulatory powers. It should be noted that the interpretation of the insurance commissioner's powers under state insurance laws is a matter for the courts and is not the responsibility of the insurance commissioner under his power to make rules and regulations. In Drake v. United States ex rel. Bates, the court in referring to the powers of the Superintendent of Insurance, said: “It is quite clear that no provision of the law conferred or attempted to confer on the superintendent of insurance the power to make and enforce an interpretation of the law relating to insurance companies. . . . Such power is a judicial one, that can be exercised by the courts alone."990
When VALIC sought a license to do business in South Carolina, the Attorney General of that state at the request of the Insurance Commissioner wrote an opinion holding that variable annuities, even with guarantees of mortality and expenses, did not come within the regulation of the Insurance Commissioner. The Attorney General relied on the statement in the Spellacy case that the speculative element should not be predominant in insurance, and that in insurance the company should indemnify someone. 91
88 Id. at 355, 131 A.2d at 839.
EALIC and VALIC were incorporated as life insurance companies in the District of Columbia without special legislation. However, these companies are required to issue individual annuities only in conjunction with life insurance policies, and they guarantee the mortality and expense element in their contract. As has been noted, they also issue conventional fixed-dollar term life insurance and waiver-of-premium benefits in the event of total and permanent disability.
The College Retirement Equities Fund (CREF) is a special case. It is not incorporated as an insurance company. It is a membership corporation having the status of a nonprofit educational corporation and was created by special act of the New York legislature.92 As it writes contracts only in conjunction with the Teachers Insurance and Annuity Association (TIAA), which is a life insurance company, CREF was placed under the jurisdiction of the New York State Insurance Department. All of the officers and employees of TIAA are also officers and employees of CREF and the two organizations work as part of one single system.
As a policy matter, there is no reason for state insurance commissioners to regulate variable annuities which do not charge the person of the grantor. The sale of variable-annuity contracts that do not charge the person of the grantor should be strictly regulated by the securities commissioners under laws specially designed for the regulation of investments and the protection of the public where the speculative element is a paramount purpose. Laws designed for the regulation of the insurance business are inappropriate.
Even in the case of the two District of Columbia companies which issued conventional waiver-of-premium benefits, where individual annuities were sold only in conjunction with term life insurance, and where
In this state, insurance is defined as a "contract whereby one ndertakes to indemnify another or pay a specified amount upon determinable contingencies.” It is the opinion of this office that the phrase "specified amount" was placed there in accordance with generally accepted practices in the insurance field. Annuities at common law and in general practice are considered to mean some specified sums of money.. The issuance of policies or contracts promising variable amounts are, in the opinion of this office, not in consonance with the definition of insurance as set forth in this statute.
The spirit and intendment of our insurance laws are that the speculative feature should be removed as far as possible from policy contracts. In the Connecticut case cited the Court stated that “in the proposed, variable endowment contract, the specula
tive feature remains a paramount purpose." S.C. Att'y Gen. Op. No. 549 pp. 2-3 (March 18, 1958).
92 N.Y. Sess. Laws 1952, ch. 124.
the mortality and investment elements of the variable-annuity contract were guaranteed by the company, the Supreme Court held that the contracts were essentially investment contracts and not insurance within the meaning of federal statutes. It was said that even in these contracts insurance-department regulations were largely "circular” and did not furnish the basic protection that the participants need.98 A fortiori, the insurance laws would not be effective to regulate the use of variable annuities to distribute mutual-fund shares where there are none of the insurance elements present in the contracts of VALIC and EALIC.
In the majority opinion of the Variable Annuity case, Mr. Justice Douglas alluded to the fact that the guarantee of mortality was clearly an insurance device. In this connection he said:
Each issuer assumes the risk of mortality from the moment the contract is issued. That risk is an actuarial prognostication that a certain number of annuitants will survive to specified ages. Even if a substantial number live beyond their predicted demise, the company issuing the annuity—whether it be fixed or variable -is obligated to make the annuity payments on the basis of the mortality prediction reflected in the contract. This is the mortality risk assumed both by respondents and by those who issue fixed annuities. It is this feature, common to both, that respondents stress when they urge that this is basically an insurance device.94
He said that the contracts had some aspects of insurance, but on balance the insurance features were more apparent than real; that in the absence of some fixed return there was no true risk in the insurance
The difficulty is that, absent some guarantee of fixed income, the variable annuity places all the investment risks on the company. The holder gets only a pro rata share of what the portfolio of equity interests reflects—which may be a lot, a little, or nothing. We realize that life insurance is an evolving institution. Common knowledge tells us that the forms have greatly changed even in a generation. And we would not undertake to freeze the concepts of "insurance” or "annuity” into the mold they fitted when these Federal Acts were passed. But we conclude that the concept of "insurance” involves some investment risktaking on the part of the company. The risk of mortality, assumed here, gives these variable annuities an aspect of insurance. Yet it is apparent, not real; superficial, not substantial. In hard reality the issuer of a variable annuity that has no element of a fixed return assumes no true risk in the insurance sense.
The concurring opinion of Mr. Justice Brennan traces in detail the regulatory approach that has been taken in drafting and evolving the
93 359 U.S. at 78 (concurring opinion).