Sec. 176.2. Preamble

(a) The Department is concerned that changes in economic conditions and other market variables could adversely affect domestic life insurers having a high concentration of medium grade and lower grade obligations. Accordingly, the department has concluded that a limitation on the percentage of total admitted assets that a domestic life insurer may prudently invest in such obligations, without the prior approval of the superintendent, is reasonable, necessary and required in order to carry out the department's responsibilities under relevant law.

(b) This Part is consistent with the “prudent individual” rule as set forth in section 1405(c) of the Insurance Law. The department is providing a standard which is a reasonable interpretation of the statute and which is necessary for the public's protection. The standard is supported by the actual investment practices within the life insurance industry and by the clear inability to predict the behavior of these investments in all types of economic circumstances. The actual investment practices of nearly 99 percent of New York's licensed life insurers demonstrate that this Part is a reasonable construction of the quoted statutory language pursuant to section 301(c)—empowering the superintendent to prescribe regulations interpreting provisions of the Insurance Law, and is, in all respects, appropriate.

(c) The relevant language of section 1405(c) of the Insurance Law provides:

“In addition to other requirements of law (statutory or otherwise) that affect the standard of care of directors and officers of corporations, in making investments under this section, directors and officers shall perform their duties in good faith and with that degree of care that an ordinarily prudent individual in a like position would use under similar circumstances.”

(d) With the enactment of chapter 567 of the Laws of 1983, the Legislature took specific action to insert a “prudent individual” rule in the Insurance Law, rather than rely merely on other requirements of law, statutory or otherwise. By such action, the Legislature made such provision subject to the superintendent's interpretative authority under section 301(c) of the Insurance Law. The legislative history of chapter 567 demonstrates that the “prudent individual” provision was added to the Insurance Law at the insistence of the Department of Financial Services, and that the Legislature expected that the investment operations of life insurers would be monitored closely by the Department of Financial Services in order to ensure that the boards of directors are appropriately discharging their responsibilities.

(e) The department understands that medium grade and lower grade obligations can have a place in a well-diversified portfolio. However, it is also understood that the special risks associated with these investments require a high degree of management even when they are held within an aggregate limit. While this Part will leave all domestic life insurers with authority to invest a substantial portion of their assets in medium grade and lower grade obligations, the prudent management of the attendant risks will remain an essential element of such investment.