Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
Unscrupulous investors are using a form of annuities fraud to target seniors and terminally ill patients in a deal similar to stranger-originated life insurance transactions, according to state regulators.
The National Association of Insurance Commissioners held a public hearing to gather information on what many regulators and industry representatives believe is a rising tide of fraud. In such transactions, victims are induced to purchase an annuity that will benefit investors or intermediaries. Such practices are known as stranger annuity transactions, stranger-originated annuities or stranger-originated life annuities.
"I do think it is a reaction to some of the limitations that have been put on life settlement transactions that would be STOLI transactions," said Ohio Insurance Director Mary Jo Hudson. "We need to do a better job as regulators to see what we can do in the market and encourage companies to do in the market to avoid these transactions. What we need to do to is make sure we don't eliminate appropriate settlement transactions."
Regulators heard testimony from Robert Mizzoni, an 83-year-old Rhode Island resident, who said he was victimized by an annuity scam. Federal prosecutors are currently investigating a Rhode Island attorney who placed ads in church newspapers offering immediate cash to individuals with terminal illness, according to an NAIC statement; the goal was to take advantage of the death benefit built into many variable annuities.
If such schemes proliferate, they could increase costs and undermine benefit features, representatives of the American Council of Life Insurers and other speakers testified. "If the practice of selling variable annuity contracts with [guaranteed minimum death benefits] to terminally ill people becomes more prevalent, companies will need to increase charges or institute underwriting ... because of the additional risks and their costs," said Cande Olsen, chairwoman of the American Academy of Actuaries' Life Products Committee.
Insurance commissioners are exploring whether new model laws or regulations need to be drafted or if existing models on annuity suitability and STOLI can be adapted with additional regulatory guidance. The suitability model revised last year includes a provision identifying the intent or purpose of an annuity contract, to help prevent misrepresentations or provide a tool for future investigations, said Connecticut Insurance Commissioner Thomas R. Sullivan, chairman of the NAIC's Life Insurance and Annuities Committee.
At the present time, it is difficult to judge the true extent of the problem, which regulators have only recently began to study, Sullivan said. "If no one reports it, what good is a data call?" he said.
(By Sean P. Carr, Washington Correspondent: email@example.com)